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The new look of the office market

Tim Ruffin, Dominic Brunetti, Kevin Annis

The face of the Reno/Sparks office market is changing.

Landlords are finding it necessary to entice some smaller tenants with lease rate discounts, free rent, and tenant improvement concessions to overcome a growing trend: the demand from small-business owners to own their own real estate.

Traditionally the small business owner has leased space: however, now it is possible for them to leverage their working capital to buy a building for their own use.

This segment in the commercial office market, commonly referred to as the garden office market, characteristically contains several 10,000 square foot or smaller stand alone, stick-frame office buildings which are available for sale or lease.

This trend does not appear to be localized to Northern Nevada, as sales of buildings less than 10,000 square feet across the United States have increased every year since 1999.

Construction companies nationwide are increasingly focusing on this submarket and constructing small garden office buildings as opposed to constructing larger Class A style office buildings.

Local examples of these projects are Tanamera’s Sierra Vista Office Complex and Longley Professional Plaza and Ribeiro’s Sierra Rose, Quail Country and Quail Northwest Complexes.

Builders, land owners, and commercial brokers alike realize that low interest rates and readily available financing are driving this rush of small building investments.

Buyers are taking full advantage of the historic lows in the 10-year Treasury and the ability to amortize loans for longer than the usual 10 to 15 years.

Local banks now offer Small Business Administration (SBA) loans that qualified buyers can obtain 90 percent financing and the ability to amortize loans 20 years, which means lower monthly payments for the buyer.

In addition to the great financial benefits of owner usage, buyers are also opting for purchase to gain increased control of the property, better layout of the building, and cost stability.

Real estate owners find it appealing to lay out an office space to his or her liking; and from a management perspective, operations people report achieving greater operating efficiencies in their space.

Owners want the ability to control the building so the money they spend modifying the space for their use is not lost upon the expiration of the lease.

Ownership may provide peace of mind from the potential worries of an unreasonable landlord’s requirements or seemingly constant rent escalations.

Another reason for the preponderance of buyers is that small office projects are beginning to be viewed as sound investment opportunities.

Now more than ever, investors see value in purchasing smaller buildings as an investment vehicle with the intent of occupying them for a short period then moving on to new space while still retaining ownership and drawing recurring income.

There is also merit to being an owner/user of a portion of the building while leasing the remaining square footage.

This gives the owner the ability to own his or her own property, and have the opportunity to have an income stream, as well as the rare opportunity to choose their own neighbor.

Finally, the last benefit of ownership is that it may present a great exit strategy.

Upon the end of a lease, the lessor simply evacuates the space.

When an owner/user evacuates a space, he has the option to either lease the space or sell it outright to another prospective investor.

What does all this mean for Reno? Through 1999, there was so little demand for garden projects that it was not tracked as a market segment.

Now, there are over 30 garden office parks in the area, totaling over 1 million square feet of garden office inventory, with almost another

million square feet planned for construction.

We expect to see continued growth in this market segment in all corners of the Truckee Meadows: from Mount Rose highway to Spanish Springs, from Robb Drive to Vista Boulevard The sales rates for these garden projects differ from project to project: predicated on quality the of building and mainly location of project.

Asking prices for buildings range from $165 per square foot with no allowance for tenant improvements to $225 per square foot with a $30 allowance.

While there is still a great deal of construction in the Truckee Meadows of Class A office space (especially in the South Reno submarkets), Reno is mirroring the national trend to construct more garden office projects.

Tim Ruffin is senior vice president of the Colliers International office properties group in Reno.

Dominic Brunetti and Kevin Annis are associates in the group.