Reno-Tahoe area office market should maintain healthy, mild growth

RENO, Nev. — With Reno’s industrial, retail and housing markets on an upswing, office properties should be ready to follow along, right?

Nope.

Not that the office market is struggling the way it was near the end of the previous decade, when the vacancy rate hit 20 percent after the financial bust of 2008. But it’s not going gung-ho, either.

Just a few new office buildings are going up, only one of which — a four-story Class A facility at the south end of Kietzke Lane in Reno, which broke ground June 6 — with space that hasn’t been claimed by a future tenant.

Builder McKenzie Properties has been advertising the 40,286-square-foot building as Reno’s first speculative office project since 2008.

On the other hand, there have been enough companies coming into the area in the past year or so to absorb most of the space that stayed vacant after 2010.

It took two years to empty out those spaces, and their ongoing vacancy brought new office construction to a halt, said Steve Shanks and Dominic Brunetti, principals of Dickson Commercial Group.

“It’s taken roughly five years to absorb it and to improve the market to what’s now 11 percent growth,” Shanks said.

All things considered, the office market can be seen as healthy, though not robust.

“I’ve been accused of being an optimist, but the phrase I like to use — and I’ve used it throughout the past year — is, ‛we’re manageable,” said Melissa Molyneaux, an executive vice president and managing director of Colliers International’s Northern Nevada office.

In today’s Reno office market, “manageable” translates into a vacancy rate roughly similar to that of the days before the Great Recession.

“Our vacancy rate continues to improve, albeit slowly — between 2 and 3 percent of the total market share,” said Dominic Brunetti, principal with the Dickson Commercial Group. “Depending on what report you read, last quarter we grew at 0.8 percent.

“Annualized, we’d be at just over a 2 percent growth rate in our market for office space.”

In a recent survey of the area, national real estate analysis and marketing firm CoStar Group pegged the all-over vacancy rate at 9.2 percent for the last quarter of 2017.

Office buildings in CoStar’s Four- and Five-Star categories hit a vacancy rate of 8.4 percent.

Rents for top-tier offices set an average of $24.51 per square foot, with the overall market registering $19.52 — all of which means good and mild business at the same time.

“I think we’re ahead, but not as much as everybody would think,” said Scott Shanks, Brunetti’s fellow principal at Dickson.

New buildings are coming out of the ground, but mostly in small ways, not like the McKenzie property.

“If you were to dissect them by class, that would be the only Class A office building under construction,” Brunetti said. “The rest would be primarily garden office — which is your single-story, stick-frame building — and a lot of owner/user facilities.”

Instead of new construction, redevelopment is the focus these days, now that building owners and developers have more money to put into their properties thanks to the number of new tenants.

“In buildings that are 10 to 20 years old, we are seeing a ton on lobby updates,” she said.

To the three commercial Realtors, the growing health of the market does not mean it is ready for new construction at a faster clip.

Developer Todd McKenzie, owner of McKenzie Properties, disagrees, though he sees new construction hampered by the nuts and bolts aspects of real estate today.

“I think the market is ready for new product. The challenges are the current state of lease rates versus the cost of land and the cost of construction,” he said. “For most folks who want to start looking for a project today, unless you can get land at an unbelievable price, given where construction costs are, it doesn’t pencil out right now.”

For one thing, the cost of steel has gone up more than 20 percent over the last year, most likely to the surge of ecommerce-fueled distribution warehouse construction, he said.

Then there is the shortage of skilled construction workers, given that the Great Recession drove many tradesmen and tradeswomen out of the field and into other careers.

“That’s definitely a problem in building,” McKenzie said. “That’s an availability issues, and that affects time, which is money. We are nowhere near where we were or where we need to be.”

“One thing that could be an impetus for new growth is the new tax policy,” said Brunetti, referring to the federal tax reform package that eliminated deductions for state and local income tax payments, a non-factor for Nevadans. “It’s definitely going to affect California, so you could see a push populace-wise from people who say it was the straw that broke the camel’s back.”