Demand for medical space increases
The northern Nevada office market has not seen any new development exceeding 10,000 square feet in nearly a decade.
With a steady increase in vacancy rates from 2006 through 2010, building owners were forced to drop their lease rates to be competitive. Continuing through most of 2012, lease rates continued to drop in northern Nevada and developers could not construct a building and lease it for the costs of development, which limited options for tenants to pre-existing buildings.
While vacancy rates began to drop in 2010, lease rates did not see an increase until the fourth quarter of 2012. As lease rates begin to approach the level to warrant new construction, larger tenants (specifically medical users) could begin to see more options as demand continues to grow and developers respond.
The beginning of 2015 has seen an extremely high demand for medical office space, as medical office users are stepping away from the hospitals and leasing or purchasing buildings on their own. However, there is a significant lack of inventory in the market to fulfill this need, which provides the medical office users with few options.
According to statistics from Kevin Annis, broker and principal of ArchCrest Commercial Partners, there are around 250 office properties that have vacancy in Reno-Sparks; of which less than 2 percent can accommodate medical use.
Not including vacancies at the hospitals, there are only 11 locations that can accommodate a medical tenant looking for more than 5,000 square feet and only four that can accommodate a 10,000-square-foot user.
The fact is, there are few options for medical office users to occupy in the market right now either for lease or for purchase.
The majority of space that is available in the market is less than 5,000 square feet, leaving users currently looking for more than 10,000 square feet with little or no option.
The primary reasons behind the lack of available properties for large medical users is the additional parking requirements for medical office space and the cost of the construction to build a medical office project, both of which are well-above standard office spaces.
Medical office space requires 50 percent more parking than general office space (six spaces per 1,000 versus four per 1,000). Therefore, developers are required to dedicate more land to the project to build a medical office building than general office.
In addition, between the additional cost to deliver a quality medical office building, the cost of the interior tenant improvements for medical use, the added road impact fees and additional water rights needed for sinks etc., the overall development costs are significantly more expensive.
One example of a well- suited location for medical use is Mountain View Corporate Center, which is located past the roundabout at the south end of Kietzke Lane.
The Kietzke corridor has seen consistently lower vacancy rates than competing sub markets over time. The site has freeway visibility, the space to accommodate the additional parking needed and the surrounding buildings (all Class A) are of the quality expected for medical office.
Because of the amenities available in the center and the lack of inventory for this type of space, McKenzie Properties expects to break ground on the 5.5-acre parcel next to the City National Bank building in 2015.
Future plans for the land are still in development; however, the site can accommodate up to 60,000 square feet of medical office space. With the addition of the expected commercial and residential development of the Rancharrah property, the Kietzke corridor will continue to be one of the most desirable sub markets in town.
There are several other sites in South Meadows and Meadowood that are rumored to be considering development as well, and with current market activity, both in general office space and medical office space, 2015 should be the first year in a decade that the northern Nevada office market sees a new addition to the inventory.
Todd McKenzie is a principal with McKenzie Properties, a third-generation, northern Nevada developer and construction company. For more information, visit http://www.mckenzieproperties.com or call 775-329-5181.
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