Businesses continue search for better, less-expensive spaces

Bad times have been good times for companies that rent offices, manufacturing facilities and warehouses across northern Nevada.

They've been able to rent top-quality space for the same amount often less than they were paying for older, lower-quality offices and industrial buildings.

Now retailers, who often are loath to move, are beginning to get into the act.

And some sophisticated companies are taking the flight to quality a step further making sure that the building to which they are moving is owned by a quality, financially stable landlord.

The trend developed first among office users they generally can move most easily and it shows few signs of slowing during 2011, says Matt Grimes, an associate in the office properties group of CB Richard Ellis in Reno.

With more than 20 percent of the region's office space standing vacant, Grimes says hungry landlords have cut rents in some newer buildings in South Meadows as low as $1 a square foot prices that were more common a couple of years ago in older buildings such as those near the Reno-Tahoe International Airport.

And even rents of $1.75 a square foot in South Meadows often are viewed as a bargain by renters who are accustomed to prices well above $2 in south Reno.

"The flight to quality trend is apparent and will likely continue through 2011," Grimes said in a forecast prepared this month for the Northern Nevada Chapter of CCIM, a commercial real estate group.

Industrial and distribution companies, too, are looking to upgrade their space or get similar space at a lower cost as rents come down, says Chris Fairchild, an industrial associate with Grubb & Ellis | NCG in Reno.

Not that moving an industrial operation is inexpensive, particularly once managers factor in the costs of business interruption.

"At the same time, if a tenant believes the timing is good, they won't hesitate to pull the trigger and take advantage of the current rates. In addition, provided a tenant is financially strong and is willing to sign a term lease (three to 10 years), a landlord may provide for abated rent that could cover a significant portion of the moving costs," Fairchild says.

And in some instances, a move into better space without an increase in rent may allow a distribution or industrial company to take on new lines of business that will boost revenues, he says.

Retailers, who put a lot of work into teaching their customers to find them at a specific location, have been less eager to move to lower-priced space.

But a growing number are giving it a closer look, says Kelly Bland, a retail specialist with NAI Alliance, a commercial brokerage in Reno.

Some retailers, Bland says, figure that a much better location and a much lower monthly rent will more than offset the problems of moving.

With more than 22 percent of the smaller shop spaces in the region vacant, Bland says landlords are giving retailers plenty of reasons to move, whether it's lower rents or larger allowances to get buildings ready for business.

The flight to quality pressures the owners of lower-quality buildings, who find themselves squeezed between the rock-bottom rents they need to stay in business and the competitive pressures of high-quality space offered at lowering rent.

The basic operating costs of most office buildings, Grimes says, run about 50 cents to 70 cents a square foot close to the rents that some landlords are having to offer to stay competitive.

"When you're doing deals at $1 a square foot, there's very little there to cover a mortgage," Grimes says. "They've got a tough road ahead."

Savvy tenants, he says, recognize a need to protect themselves from a property owner who is pushed too far to the wall by low rents.

Before they sign a lease, more tenants want legal assurance that they won't be disturbed by any foreclosure proceedings that might arise.

And increasingly, Grimes says, tenants are digging through whatever data they can to make sure that the landlord has the financial wherewithal to maintain and improve a building.

SIDEBAR

Apartments, too

Just like managers who rent offices and big industrial spaces, folks who rent apartments are doing their own version of a flight to quality.

Brian Egan of Egan Commercial Real Estate in Reno says better-quality apartment complexes those with lots of amenities and those with good professional management appear to be doing relatively well.

"They definitely have demand. They are staying occupied," Egan says.

Apartment rents in the area fell by an average of nearly 3 percent during 2010, and the vacancy rate has been running about 7 percent in the larger complexes tracked by Johnson-Perkins and Associates.

SIDEBAR

What's ahead for commercial landlords

A few days ago, members of Northern Nevada Chapter of CCIM, a commercial real estate group, gathered to make the predictions about 2011. Here are the predictions they heard, with estimates of year-end 2010 vacancy rates in parentheses.

Retail

* Kelly Bland, NAI Alliance: 17.04 percent (17.88 percent)

* Chris Waizmann, CB Richard Ellis: 16.6 percent (15.75 percent)

Industrial

* Chris Fairchild, Grubb & Ellis|NCG: 15 percent (15.55 percent)

* Dave Simonsen, NAI Alliance: 13.8 percent (15.1 percent)

Office

* Matt Grimes, CB Richard Ellis: 19.4 percent (21 percent)

* Scott Shanks, NAI Alliance: 17.75 (17.72 percent)

Multi-family

* Todd Blonsley, Marcus & Millichap: 7.25 percent, (7.16 percent)

* Brian Egan, Egan Commercial Real Estate: 7.2 percent (7.16 percent)