New office space construction slowdown expected

The vacancy rate in Reno's office buildings ran around 13 or 14 percent at the start of the year, three brokerage firms reported in recent days, but they expect the rate to drop during 2006.

It's likely, the brokerage companies said, that construction of new offices space will slow.

"Only projects with substantial pre-leasing and healthy prospects will get the go-ahead from developers and bankers," reported office brokers

at Grubb & Ellis|NCG in Reno.

The company estimated the vacancy rate in office buildings at 12.8 percent at the start of the year.

Also worrisome to development companies, Grubb & Ellis|NCG said, is the lack of tenants outside the home construction and mortgage finance business.

Existing tenants in older buildings, meanwhile, are encouraged to renew their leases because of the high costs of tenant improvements if they move, said Tim Ruffin, a senior vice president with Colliers International in Reno.

Those costs, which typically ran $35 a square foot a couple of years ago, now can be well over $50.

And the cost of construction of a new office building during 2005 rose 23.6 percent from year-earlier figures, said Scott Shanks and Dominic Brunetti of the office properties group of Alliance Commercial Real Estate Services.

Those construction costs, they said, have driven rents in new top-drawer office space to an average of $2.20 a square foot.

Asks Ruffin,"When faced with 20 percent higher rent to move to a new building and the equivalent of one year's rent to pay for tenant improvement overages, is it any wonder more tenants are renewing?"

Also up, Ruffin said,were utilities and other operating costs.

His firm estimated the year-end vacancy rate at 14.11 percent in buildings of 10,000 square feet or more.

Grubb & Ellis said,meanwhile, that investors continue to submit multiple bids on high-profile office properties especially downtown buildings that come on the market.

"Look for these new owners to attempt to reap the rewards of city redevelopment efforts and the multitude of residential development downtown," the company said.