Little new office construction foreseen this year

After a big year in 2006, construction of office buildings in Reno and Sparks is expected to slow dramatically this year.

There's plenty of vacant space available on the market especially as housing-related and real estate companies scale back and developers don't think they can get the rents they need to justify expensive new projects.

And even a noteworthy exception to the slowdown, two buildings on the drawing boards near the headquarters of Sierra Pacific Power Co. in south Reno, show the tight squeeze faced by most office developers.

Washington Capital plans to start development this spring on a 35,000-square-foot, two-story office building on Sierra Center Parkway next door to a building occupied by Blakely Johnson & Ghusn Inc. CB Richard Ellis will occupy the first floor of that building.

And Washington Capital also plans an 80,000-square-foot building next to the Intuit office in Sierra Corporate Center. That's tentatively planned for an autumn start.

Matt Riecken, a senior vice president with CB Richard Ellis, says the projects pencil out mostly because the land was purchased before prices spiked sharply.

And he says CB Richard Ellis sees a bit of demand for office space arising this year.

"It's nothing anything like it was the last two years, but we're a little bit bullish on it," Riecken says.

Other office developers, however, are headed for the sidelines.

"We're seeing some discipline in the market," says Bob Francl, senior vice president and manager of real estate lending with First Independent Bank. "The developers are not coming with proposals."

The vacancy rate in major office buildings was estimated by Colliers International to stand at 12.7 percent at the end of the year, and vacancies in smaller garden office projects was estimated at 16.5 percent.

But the reported vacancy numbers don't account for the amount of space available for sublease, Francl says. That number is growing as companies related to residential real estate put some of their space back into the market.

The amount of space available for lease means that landlords don't have much leverage to increase rents to the levels they need to justify higher costs for land and construction on new projects, says Brian Armon, an office broker with Grubb & Ellis|NCG.

"The tap has been turned off," Armon says.

This year's slowdown marks a sharp reversal from activity last year. Colliers International estimates that about 160,000 square feet of garden office space was built in 2006 along with 190,000 square feet of traditional office buildings.

Among the major buildings completed in recent months was a 60,000-square-foot NevDex building at 5390 Kietzke Lane, a 60,000-square-foot building at Reno Tahoe Tech Center and a 45,300-square-foot building at Northern Nevada Corporate Center.