Vacant office space is becoming more difficult to find in Reno, and that's usually a signal to developers to gear up for a new round of construction.
Things may be different this time around as higher costs are likely to keep many developers on the sideline until vacancies drop enough that demand pushes rents upward.
As the first half of the year came to a close, Tim Ruffin of Colliers International in Reno estimated the vacancy rate in offices at 13.1 percent. Scott Shanks and Dominic Brunetti of Alliance Commercial Real Estate, meanwhile, estimate the vacancy rate at 11.4 percent.
Either figure marks a dramatic drop from a vacancy rate estimated by Ruffin at 14.7 percent and Alliance at nearly 14 percent just 90 days earlier.
Vacant space was soaked up all over town.
Matt Riecken, senior vice president at Trammell Crow Co., notes that his company negotiated a lease of 60,000 square feet with Microsoft in south Reno, a lease of 29,000 square feet with CLP Resources in Northern Nevada Corporate Center in South Meadows, and leases with the law firm of Parsons Behle and Latimer as well as YMCA of the Sierra in the Bank of America Plaza at 50 W. Liberty.
Other brokers were just as busy.
"It was a real busy second quarter," says Scott Borgia of CB Richard Ellis, who estimates that more than 200,000 square feet of vacant space was absorbed in the area during the 90-day period.
But it's debatable whether this will translate into more construction for a while.
Ordinarily, developers begin stirring when the office vacancy rate is in the area of 12 percent, and they get gung-ho about new projects when the vacancy rate is at 10 percent.
On the face of it, says Riecken, rising demand for existing office space should hint at more construction.
"The Reno office vacancy rate is tightening to the point that new construction makes sense," he says.
And new construction is coming on line. NevDex Properties, a development company based in the Bay Area, has started development of a 66,000-square-foot, two-story office building at Kietzke Lane and Neil Road.
Another 45,000 square feet of office space is set for construction at Northern Nevada Corporate Center in South Meadows.
Tanamera, meanwhile, continues to develop office space in south Reno.
Borgia notes, however, that the office projects currently under construction generally are on land purchased several years ago, before land prices escalated sharply in northern Nevada.
Developers of those projects may face the challenges of higher construction costs, but they're not dealing with the double whammy presented by higher land costs as well as higher construction costs.
For a developer who bought land at current prices, office projects simply don't pencil out, says Ruffin.
And they won't pencil out until rents rise enough to support the higher costs.
Big vacancies in the downtown area may have kept office rents from rising in recent months, but the cap may be ready to be lifted.
At the start of the year, Brunetti and Shanks estimated downtown vacancies at nearly 18 percent. At mid-year, they say, the vacancy rate fell to 12.5 percent.
Brokers at Trammell Crow, which is leasing the Bank of America Plaza Building, have noted that the costs of leasing downtown even with some modest improvements to upgrade existing space often are below the uth Reno.
But the cost advantage may lessen as space grows tighter downtown.
The market already is very tight, Brunetti and Shanks said, in the Meadowood area, which is the city's largest office submarket. In that area, home to about 2.2 million square feet of space, the vacancy rate was 8.8 percent at mid-yearcosts of leasing new space in so.
