Quality office space grows more scarce

While economic-development executives worry that new companies will have find trouble finding top-quality industrial space to lease in northern Nevada, commercial realty brokers say vacancy is beginning to tighten, too, in quality office buildings.

Bigger office spaces — 20,000 square feet or more — in top buildings are nearly impossible to find, office brokers said last week.

That’s opening the door for build-to-suit construction this year for companies that can’t meet their needs in existing space.

And it also sets the stage for the first speculative construction of office buildings in the Reno-Sparks area since before the onset of the recession.

Brokers who specialize in office space were among the commercial realty experts who projected the future of the realty market last week as part of an annual competition sponsored by the Northern Nevada Chapter of CCIM, a commercial realty group.

Scott Shanks, a principal and senior vice president of NAI Alliance, won the office-space forecasting competition last year.

He said two large transactions in the third quarter of 2013 — the lease of 50,000 square feet in South Meadows by CustomInk and the lease of 22,000 square feet by LP Insurance at Park Center Tower at 300 E. 2nd St. — took large bites out of the region’s vacant office space.

Matt Grimes, a senior associate with CBRE, said only four office spaces providing more than 20,000 square feet are available, and none are available over 30,000 square feet.

“Large office tenants will have greater difficulty finding office space in 2014,” Grimes wrote in his CCIM forecast.

The NevDex complex along South Kietzke is completely occupied, Grimes noted, and Shanks said the LP Insurance lease nearly fills Park Center Tower across Second Street from Aces Ballpark.

Two office specialists with Avison Young — Reed Simmons and Bram Buckley — said that they expect much of the leasing activity this year to be centered in South Meadows, where vacancy rates remain relatively high despite the arrival of new tenants during 2013.

“All of the easy deals in the downtown and Meadowood markets have been done,” Simmons wrote.

One sign that activity is beginning to pick up: Tenants, who usually take a holiday break from shopping for office space, continued their leasing activity through the fourth quarter.

“This is a tremendous positive sign for our community,” wrote Kevin Annis and Mike Van Blaricom of ArchCrest Commercial Partners LLC.

Driving some of the leasing activity, Grimes said, has been the recovery of companies related to the residential realty market — real estate agents, mortgage brokers and such. Their exodus during the recession drove vacancy rates up during the recession.

But brokers said the office market is more diversified today than it was before the recession as companies in a wide variety of sectors either expand existing operations in Reno and Sparks or relocate to the area from other states.

The recovery in office spaces isn’t yet raising all ships.

“It’s a flight-to-quality market,” said Tom Fennell of Dickson Commercial, who said office users in older, less attractive buildings continue to move up as their leases expire.

Fennell forecasts, for instance, that vacancy rates will continue to creep upward and lease rates will drift downward in the older office buildings near the airport during 2014.

But as lease rates continue to rise in top buildings — Shanks noted that $2 a square foot is now a mainstream monthly rent in better buildings — brokers said tenants will give a fresh look to older, less expensive space.

Brokers are split, however, in their opinions about the likelihood that the tightening market will bring new speculative construction.

Van Blaricom and Annis at ArchCrest Commercial believe that lease rates and sales prices still haven’t recovered sufficiently that new office buildings will pencil out for developers.

But others note that a couple of developers — McKenzie Properties and KCI Properties — are beginning to sketch speculative office projects in the Rancharrah area along South Kietzke.

The improved occupancy in office buildings may provide a little breathing space, Grimes said, to the owners of buildings whose loans are coming due in the next four years.

He said lenders are likely to require capital infusions as part of new financing packages, but improved fundamentals in the market might prevent some foreclosures.