Office space for sublease gives upper hand to tenants

When it cratered, the hot housing market of recent years took down with it a range of supporting service industries.

Major mortgage and title companies dumped acres of office space onto the sublease market amounting to over a three-year supply in the south Reno market, say brokerage firms.

And until that sublease space is reabsorbed, the challenge brokers face in 2008 is negotiating deals on behalf of those sublessors, says Kevin Annis, senior associate at Colliers International.

Everything points to a buyers market.

"It's a great time to be a tenant," says Brian Armon, principal at Trinity Commercial. But tenants aren't playing hopscotch in the wide open market. Rather, they're staying put and still negotiating savings, he says.

Savings extend even to free rent. And while that's most often achieved through negotiation, he adds, some landlords are taking the initiative in offering a few months gratis to secure a long-term lease.

California companies coming over the hill have long driven growth here.

While that traffic continues, says Annis, the majority of increased office demand is organic. Meanwhile, the difficulty of selling a home in any market this year will put the brakes on relocation, as companies encounter resistance to moving white-collar employees.

But brokers find a silver lining in the gloomy forecast.

"The slowdown on the residential side allowed for other business sectors to rise to the top," says Dominic Brunetti, vice president office properties group at NAI Alliance.

Troubled economic times drive tenants in droves to CPA firms, he says. "CPAs are busier than ever due to the credit crunch." Banking tenants also are doing well, as are accounting firms.

Demand remains strong in the medical office space category, says Brunetti. It's a segment that continues to thrive nationally and locally due to the continued influx of residents. Demand runs the gamut, he says, from pediatricians to neurologists. And riding on their coattails comes a host of non-medical support offices such as imaging and billing services.

Education is yet another healthy office market.

Private colleges and vocational schools thrive regardless of overall economic conditions, Brunetti says.

But don't look any longer for tilt ups to pop up like tulips. Coupled with moribund housing demand, high construction costs dealt a one-two punch to developers.

Construction costs will remain steady, predicts Armon, citing a survey his company did of contractors. Some commercial developers were counting on the softening demand from residential builders to translate into cost savings. "But commercial builders don't use the same supplies," says Armon. Instead of wood and stone they seek steel and concrete.

Among the battered submarkets, leasing brokers agree that Reno's downtown district has emerged as the reigning contender, thanks to redevelopment efforts.

"We feel this market will continue to perform well as the buzz about downtown continues to catch the ears of tenants," says Armon. Employers like their employees to have access to the amenities of entertainment and culture that have taken root downtown.

Despite the downtown renaissance, area brokerages agree that the huge amount of space now on the sublease market means the overall vacancy could still soar substantially.

Many projects may simply be cancelled; square footage planned or in construction now looks unlikely to be built, says Armon.

Meanwhile, some projects already completed sit empty. He points to the two-story office complex situated off Highway 395 at Clearacre, still vacant after two years. Still more dramatic are projects stalled in mid-build such as University Hills situated at the top of Sutro Street where two concrete pads sit empty.

"Expect more difficulty ahead before it gets better," Armon adds.

Still, wild cards can waylay the best of predictions.

For instance, says Armon, following the dot.com boom and the housing boom, there could be "A next big thing."

The economy itself presents a wild card, says Brunetti. The influx of new companies from California, long a driver of the northern Nevada economy, could slow if the national economy grows too dismal.

A worst-case scenario: Companies could find they can't afford to make the move to Nevada's more attractive business climate.

However, the worst of times can also be seen as the best of times, says Annis.

"Five years ago before the housing boom, we had several advantages over competing markets, namely tax advantages, low residential prices, and low commercial real estate rents.

"During the boom we lost the housing price and commercial real estate costs advantages, and were down to simply tax advantages.

"Now with the average house prices dropping and commercial office space now more affordable than other markets, we still have the fundamental quality of life advantages combined with economic advantages as well."