Reno-Sparks real estate: Despite brisk pace of sales, office vacancy rates trending up

RENO, Nev. — In what's been a relatively unremarkable year for the regional commercial office market, there were a remarkable number of sales transactions that took place across various Reno submarkets.

Last year ended with a slight uptick in vacancy due to several large buildings coming back on the market, but any negativity in the market was countered by the brisk pace of sales occurring throughout the year.

Among the most significant sales were 5190 Neil Road, a 106,130-square-foot building at the corners of Neil and McCarran Boulevard that sold for $14.87 million; and 10375 Professional Circle, a nearly 80,000-square-foot building that sold for $25.3 million.

Although the Neil Road building is significantly larger, it's an older building that wasn't fully occupied and therefore commanded just $140 a square foot. The building at Professional Circle was fully leased and sold for $318 a square foot.

Other top sales included:

1575 Delucchi Lane, a 78,204-square foot building that sold for $7.3 million ($93.35 per square foot)

885 Trademark Drive, a 77,132-square-foot building that sold for $20.4 million ($264 per square foot)

745 W. Moana Ave., a 60,011-square-foot building that sold for $9 million, ($149 per square foot)

328 S. Wells Ave., a 39,816-square-foot building that sold for $4.4 million, ($110 per square foot)

Melissa Molyneaux, senior vice president of office services and executive vice president of the Reno offices of Colliers International, says buildings were bought and sold for a variety of reasons. Some investors, such as the purchaser of 10375 Professional Circle, want strong rental income properties. The buyer of the building on Neil Road, meanwhile, likely will reinvest in the building to bring amenities up to current standards and attract new tenants.

“We have seen a lot of buildings change hands so that developers can find solutions for tenants,” Molyneaux says.

2018 closed with an increase in vacancy

Sales were perhaps the lone highlight of 2018 for office brokers. The year ended with a modest rise in vacancy, closing at 11.8 percent after dipping to 11 percent at the end of the third quarter. The uptick was primarily due to AT&T leaving its longtime space at 645 E. Plumb Lane for newer — and significantly smaller — digs at Corporate Point at 5250 S. Virginia St.

“Throughout 2018, at least up until the fourth quarter, we definitely were on an upward trajectory,” Molyneaux says. “We had a drop in vacancy and positive absorption, but in the fourth quarter we had more than 80,000 square feet of space put back on the market, and that pushed vacancy up to 11.8 percent, which is the highest of all classes of industrial real estate.”

Relocating tenants into the old AT&T building poses numerous challenges for both brokers and developers. The 86,471-square-foot building was constructed in 1964 and is quite removed from the primary regional office submarkets of South Meadows, Meadowood or downtown.

Molyneaux says that while those pockets of the office market typically get the most inquiries from tenants seeking larger blocks of space, the site on E. Plumb Lane offers opportunities for a variety of tenant types.

“The building is actually really cool; it's just old, and AT&T had been there forever,” she says. “It's very well built, and it's basically three buildings connected by one long hallway so you get a lot of window line and there's lots of land. But it will take some time to backfill.

“It could be another headquarters, or someone could turn into a multi-tenant building, but that takes time, money and imagination,” Molyneaux adds.

Vacancy could potentially rise in the first quarter of 2019 as well due to another large building coming back on the market. Wells Fargo vacated its 100,000-square-foot call center at 2445 Vassar St., and the space had not been calculated into year-end regional vacancy statistics. The building was constructed in 1969 and also requires some vision and reinvestment to repurpose, Molyneaux says.

New office construction lagging

While investors have been frothing over Northern Nevada's sizzling multi-family and industrial markets — both of which have record lows in single-digit vacancy — new office construction has lagged. Thousands of new doors have been added in the multi-family sector, and regional developers are pouring vast amounts of concrete for new tilt-up warehouses, but there's been just a handful of new office buildings constructed in recent years.

McKenzie Properties is nearing completion on a new 40,000-square-foot four-story office building at Mountain View Corporate Center at the south end of Keitzke Lane that's the first speculative office project in the region since 2008. Much of the building is already leased, demonstrating strong tenant demand for new class A office space.

David Woods, vice president with the office services group at CBRE, says the lack of higher-end professional office space above 10,000 square feet likely will lead to some new construction in 2019.

“Freeway-fronting class A properties are few and far between,” Woods says. “It's not going to take much to sway the needs in our market — the entire office market (in Reno-Sparks) is only 12 million square feet. If we get a few more big tenants, someone is going to have to start building.”

Woods says any new office construction in the region would be in the most desirable submarkets. Buildings likely will be constructed to house users seeking contiguous office space greater than 20,000 square feet.

“There are a large handful of tenants (in this market) who are not rate-sensitive who want the best product, and Reno does not have a lot of it,” Woods says. “Some of the best tenants in our market are in some very old buildings, and I expect those tenants to continue to want to relocate to brand new buildings.

“Reno has been gangbusters on industrial, and multi-tenant has crazy-low vacancy and unreal rental rate growth, but no one has been paying attention to office,” Woods adds. “I think 2019 will force some new construction to happen near the end of year, especially when some of these larger users come to the market.”

Rob Sabo is a Reno-based freelance writer and former reporter for the Northern Nevada Business View.


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