The year of 2012 came and went, and for most of us in the real estate industry, provided us with a glimmer of hope for northern Nevada's future. Last year at this time, I made 10 bold predictions for the northern Nevada office market for 2012. We were very accurate in predicting many of the events that transpired over the past year, including predicting a large California-based company taking foot in northern Nevada. Therefore, I thought it appropriate to come back with...
Ten even bolder predictions for the office market in 2013:
10. Sales of office space will continue their positive trend from 2009, but will not hit 2012 numbers: We have seen an increase in the annual number of office building sales since a low in 2009 of only 33. In 2010 we had 37 office sales, in 2011 we had 43, and in 2012 we had an amazing 80 office building sales! This is even more that the 77 and 75 we had in the "boom" years of 2004 and 2006 respectively. One reason we saw just an increase in office sales in 2012 was the foreclosure activity. I anticipate that this number will decrease in 2013 as the majority of assets that were upside down have either been worked out with the bank or foreclosed on. We will not see the shadow market of properties that potentially may come online in the residential market. Therefore, I do anticipate a drop off in this number back into the 55-65 property range.
9. Interest rates will rise, but will stay in the 5 percent range: One reason why I expect sales to be active is due to the continued attempts to keep commercial real estate affordable for owner users. Interest rates will stay low. They will not maintain their low 4 percent level, but I do anticipate them staying low in the 5-percent range.
8. At least one major California company will follow Apple's lead. I have no real reason or gut feel behind this like I did last year, other than the fact that Apple is a trendsetter, and I am sure that there are many, many Bay Area companies that have taken notice of northern Nevada following Apple's announcement.
7. There will be a significant commercial land purchase, as developers prepare for future development: While I do recognize that speculative construction is at least 18 months away, commercial office space is trending in the right direction, with rents and sales pricing rising while vacancy levels drop. Simultaneously, there have been no sales of commercial office land over the better part of the last decade, therefore pricing for commercial land has continued its downward trend. Therefore, I predict that a developer with enough foresight and carrying ability will purchase land in the greater Reno/Sparks submarkets at today's low basis in anticipation of the continued lease rates and sales prices rising to build in the next couple years.
6. Little speculative construction: That being said, we are still 18 months away from vacancy rates, lease rates and sales pricing being to a point to need new construction. Therefore, I predict that we will see less than 7,500 square feet of spec construction in 2013.
5. Housing's "rebound" will create an early 2000 boom for related industries: I anticipate that there will be a push for office space for residential-related companies. This includes real estate companies, builders, mortgage, title companies and the like. Residential has seemed to have hit somewhat of a reset button that we are hoping to hit in commercial this year. I look for housing-related industries to expand and take on more office space. However, I think and hope that they will do a better job monitoring their five-year projections and take conservative approaches to the future, unlike the early 2000s, so we can avoid another bubble burst.
4. Housing "rebound" will come back down to earth and will create a small bubble burst: I am putting "rebound" in quotes because while it is very clear that there is great demand for residential property, one reason we have seen this price increase in 2012 was due to the lack of demand that has been created by the legislation making it significantly more difficult for a bank to foreclose on a property owner. This has created a shadow market of people that currently live in the house, but haven't yet been foreclosed on or short sold. These houses are not on the market currently, but many of them the bank will be taking possession of in 2013. It will be very interesting to see what happens to this shadow inventory moving forward and may have a huge impact on both residential and commercial markets.
3. Class-A office rates will average $2 full service: This is quite a jump from the average rates of only two years ago, but with demand rising and available Class A property decreasing, you don't have to be an economics major to recognize that pricing will go up. To what extent is the question, and I believe that we will see it jump 8-10 percent to average $2 per square foot full service.
2. South Meadows will continue its recovery, with vacancies dropping below 15 percent for the first time since 2005: This will once again be like the housing boom of 2003-2005. The majority of tenants that occupied space in South Meadows were related to the housing industry, and I expect that to continue. We already saw it in 2012 with several of the larger leases being completed with residential real estate-related companies. In addition, there will still be a price advantage between South Meadows over Meadowood and downtown submarkets, so companies looking for higher-end office space that are willing to be more south will find some more attractive options in South Reno.
1. Overall office vacancy will drop: The majority of this outlook is positive, so a vacancy drop shouldn't be too bold or surprising, but with increased demand and the lack of construction, I predict we see a vacancy drop of well over 1 percent, down from 17.6 percent to 16.5 percent overall vacancy.
Kevin Annis is a broker/principal at ArchCrest Commercial Partners in Reno. Contact him at kannis@archcrestnv.com or 775-742-2539.
