2009: Good for office tenants, not so much for owners

By all accounts, 2009 won't be a banner

year for office development and leasing.

With two years of standing inventory to

lease, construction of new properties is on

hold throughout the region, says an analysis

by Grubb and Ellis|NCG.

Vacancies in the Reno-Sparks market

stand at nearly 20 percent and are greater

than 30 percent in South Meadows historic

numbers.

"It is a concern for everybody," says Don

Welsh, vice president of Grubb and Ellis."It is

going to be a slow year.We have quite a bit of

backlog with the amount of vacancies, and

there is not a lot of construction going on.

Developers and the banks have pulled back."

Tim Ruffin, senior vice president of the

office team for Colliers International, agrees

that construction of new space will be almost

non-existent this year.

"Banks won't lend money for speculative

projects," he says."The fact that we don't have

a lot of new construction is good because we

won't get any more vacancy it's probably

the only bright spot right now."

Bruce Robertson, senior advisor with

Sperry Van Ness/Gold Dust Commercial

Associates in Carson City, says there are a few

owner-occupied medical office buildings

going up in the coming year in the Capital

City. One project on GS Richards Boulevard

will have 4,000 square feet for lease, but outside

of that new development is at a standstill.

"Dayton has nothing," he adds."There are

plans for more retail and office, but everything

is on hold as far as I can tell right now."

Negative absorption held steady throughout

the region in 2008, and as businesses

either downsized or left the area they flooded

the market with vacant office space. Nowhere

was this more evident than in South

Meadows.

Welsh says in the coming year average

lease rates for class-A office space could fall to

$1.75 a square foot as cash-strapped landlords

cut deals to find tenants. In some cases,

lease rates have tumbled to 2000 prices.

"Definitely we have got a lot of companies

trying to renegotiate,"Welsh says."We are

advising landlords to keep their tenants."

Ruffin says that due to its incredible

amount of vacant class-A space, South

Meadows may become a hot item this year as

tenants dictate favorable lease terms to landlords.

"People will be able to drive the best bargains

(in South Meadows),"Ruffin says.

Garrett Hallenbeck, partner with

Hallmark Investments and Management LLC,

says most companies have been hunkering

down and waiting to make any up or downgrades

to their space due to the see-sawing

stock market and additional costs associated

with a relocation.

"Even people who could save a ton of

money on their rent are still hesitant,"

Hallenbeck says "They still have to take on the

expense of advertising and printing new

paper."

Hallenbeck anticipates an uptick in office

leases at least for class-B and -C properties

by the third quarter. The market will bottom

out this quarter, he says.

"B- and C-class properties in a down market

usually fare better," he says."We usually

have a lot of people jumping out of a class

they can barely afford, but in the market today

we are having a hard time finding anyone

making that transition."

Hallmark Investment, which lists a lot of

properties around the Reno-Tahoe International

Airport, still sees more activity in that

area,Hallenbeck says.And smaller users to

3,000 square feet also are generating more

activity than larger office users.

Ruffin doesn't expect lease rates to

rebound for at least the first three quarters.

Sperry Van Ness' Robertson says the key to a

turnaround in the soft office market only will

come from renewed consumer and business

confidence in the economy.

"That is what is required to get things

turned around," he says."Will it happen soon?

I think we are probably at least another quarter

away before we start to see a change of

attitude.

Despite the soft market, Ruffin says the

long-term outlook for the region is bullish.

"It's the same reason we heated up 10

years ago we are very attractive to firms on

the West Cost that want a presence here.

Housing is still a bargain, and there is no state

income tax. I think we will see firms start to

put offices here again."