Overhead view of some of the office property at the Village at Rancharrah in South Reno.
Photo: Dickson Commercial Group
Small business owners are doing all the heavy lifting when it comes to stabilizing office property occupancy rates in Greater Reno-Sparks.
Regional office brokers tell the NNBW the office sector is nearing a semblance of normalcy, although some companies are still navigating the aftereffects of work from home trends.
Overall vacancy in the second quarter was unchanged from the previous quarter and held at 12.6%, Colliers International reported. Overall asking rates for full service gross leases, meanwhile, held firm at $1.85.
Dominic Brunetti, principal with the office team at Dickson Commercial Group, said that small businesses have composed the bulk of tenants signing new leases in the area.
“Leasing activity for the first half of the year was primarily small companies,” Brunetti said. “Business owners that typically occupy under 5,000 square feet have been the No. 1 returners to the office.
“They are active and are looking for space,” he added. “Those are the companies that are getting back after it sooner rather than later and want to be in the office.”
Many of those smaller operations are consumer-facing businesses that must interact with customers in public settings — think title companies and the like — as well as attorneys, engineering, architectural and construction companies, and other businesses in the professional services space.
Smaller tech firms and some creative services businesses, meanwhile, continue to operate effectively with home-based workforces and medical office users are another group that’s been leasing office space, Brunetti noted.
“We haven’t seen a slowdown in the healthcare industry at all,” he said.
‘IT’S JUST ALL OVER THE PLACE’
A handful of larger companies, meanwhile, such as Clear Capital and Scientific Games, continue to leave their large office spaces dark. Further, several companies that had multiple office locations are still trying to figure out what a company-wide return to the office looks like, Brunetti added.
Melissa Molyneaux, executive vice president of the Colliers International office in Reno, told the NNBW that leasing for her team has truly been a mixed bag and depends upon the tenant’s line of business, employee headcount and other factors.
Many new leases are from businesses that simply can’t operate from home, or they require a lot of collaboration and need to be in an office, she said.
“It’s wild. We have firms moving here and it’s just all over the place,” Molyneaux said. “A lot of businesses are leaving it up to their employees. We have a lot of tech companies, and I do see a trend for those folks to stay at home when it’s not super collaborative, and those employees like to be in their own space.
“But when you have a financial firm or doctor’s office with customers coming in to have meetings or see people face-to-face, those people are fully in the office or are working on some type of hybrid (schedule).”
Office leasing started picking back up once COVID-19 mask restrictions eased. During the pandemic, many tenants re-examined their office space needs, whether it’s adding space or downsizing, Molyneaux said.
Sales prices remain strong, and with the scarcity of quality investment properties in the market, most sales are being done off market, Brunetti said. The largest sale in the second quarter was the newly constructed offices of Fennemore Craig at Rancharrah, which sold for $535 a square foot.
“It is incredible what investors are willing to pay,” Brunetti said. “That is top of the market right there.”
SHORT-TERM LEASE NEGOTIATIONS
Another new wrinkle brought about in the wake of office vacancy is a wave of short-term lease negotiations, Brunetti added. Landlords who can offer tenants two- or three-year terms while still providing concessions for tenant improvements are the ones winning deals, he said.
Those reduced terms can bring about some additional risk and expense for landlords since shorter-term leases provide a smaller window for landlords to recoup the costs of tenant improvements. But those who can afford those terms are the ones winning deals, Brunetti said.
Tenant improvements may eventually lead to an escalation in rents, Collier’s Molyneaux noted, since materials costs have skyrocketed.
“Costs have gone up, and for owners to do tenant improvements like replacing carpet or paint, it’s just more expensive right now,” she said. “Those (costs) might be getting passed on to tenants.”
Short-term leases, however, are proving attractive to some companies. DCG’s primary office listing portfolio includes Basin Street’s extensive downtown office holdings. Basin Street was quick to implement incentives for one-year lease terms, and the move has attracted a handful of new deals to their buildings, Brunetti said.
Construction of new office properties continues to be slow. Mayberry Gardens Business Park at Mayberry Drive and McCarran Avenue is nearing completion of five professional and medical office buildings totaling just under 22,000 square feet. Spaces run anywhere from 416 square feet to as much as 8,144 square feet.
Despite a regional vacancy rate of 12.6%, some submarkets have much lower vacancy rates. South Meadows had the lowest overall vacancy of all submarkets at 6.1%, Colliers International reported. Sparks continues to be the most affordable submarket, meanwhile, with overall rental rates at just $1.19.