Let me begin by reiterating what everyone already seems to know. Yes, office building vacancy rates in the Greater Reno Tahoe area are at 10-year highs. Yes, lease rates and sales prices are as low as they were in the early 2000s. So when it comes to looking for office space, it a tenant should just go purchase or lease up a property that is currently available, right? Not exactly.
With a vacancy lingering around the 20 percent level for the past year, why would a tenant choose to take the time and effort in designing a turn-key suite when they could find a serviceable suite currently on the market as opposed to pursuing a build-to-suit option. For those who are unfamiliar with a build-to-suit, it is when a company (tenant) hires someone to build their building, or a suite within a building, completely turn-key with the office laid out specifically to suit the tenant's needs as well as giving the individual tenant the opportunity to choose the fixtures, finishes, color scheme and such that they want.
For tenants that are looking for a short-term solution, then a second-generation space may be serviceable for the time being. However, a more sophisticated tenant that realizes that real estate is cyclical and that this window of opportunity is not open forever will look to take advantage of today's commercial market and lock in today's low lease rates for a long period of time or purchase a building outright. If the tenant chooses to sign a longer-term lease or purchase a building, than a build-to-suit option may be a better opportunity.
First, by specifically designing a floor plan to fit a company's specific needs, a company can improve efficiencies and work flow. By strategically planning and locating employees, and efficiently laying out a floor plan, a 5,000- square-foot office user can easily reduce their size to 4,500 square feet or less, leading to a 10 percent savings or more on their rent or mortgage.
From a cost standpoint, you can save money through the efficiencies mentioned above. In addition, with the costs of construction material dropping as they have recently combined with contractors aggressively looking for work, the costs of tenant improvements have decreased substantially, in some cases as much as 25 percent. Therefore the costs to design build an office suite may not be the enormous barrier that it was two years ago.
Finally, a quick comparison of a recent transaction. A company purchased a second-generation building thinking that they were getting a great deal at about $170 per square foot. On the surface that seemed as though it was a sound investment. However, the property needed to be remodeled, which in most cases will cost at least an additional $20 per square foot. In addition, they had to purchase additional water rights because they added sinks in the unit. Also, due to the change in use, they had to purchase additional parking spaces to accommodate their new use and additional Regional Transportation Commission credits. By the time they occupy the unit they will be substantially more than the $170 per square foot as originally purchased.
Had they done a build-to-suit option, they could have designed the space with the exact layout and all of the finishes and fixtures exactly as they wanted, could have encompassed the water and parking stalls into the purchase price, and could have had a warranty on the building for one year all for about the same price as the remodel.
If you were looking at buying or leasing a car and I said, "you can get either a used car that probably is not to your exact specifications, or you can get a brand-new car with every option you desire, and the costs may be the same," then the choice would be simple. Why is your commercial real estate decision any different?
Yes there are multiple options available on the market today, and there are owners and landlords willing to make deals happen. However, with the current opportunities in today's marketplace with tenants being in the driver's seat, it is time to take advantage of the situation and create the ideal layout and exact colors and finishes you want. In the long term, you will be glad you did!
Kevin Annis works in commercial real estate sales, leasing and development with TD Realty Advisors of Reno. Contact him at 850-4200 or kannis@tdnev.com.
