Despite Northern NV’s tech boom, office market development lagging

RENO, Nev. — Although office development has lagged during Northern Nevada’s extended and white-hot boom cycle, two new speculative office buildings are going up in one of Reno’s hottest markets.

McKenzie Properties is erecting a 41,000-square-foot building at the south end of Kietzke Lane, and Charles Schwab is erecting a two-story 20,000-square-foot building near the east entrance of the new Rancharrah development.

Charles Schwab plans to occupy the second floor and lease out about half the building’s space on the ground floor. Tolles Development Company also plans to construct a roughly 25,000-square-foot office building at Rancharrah, and Nevada Urology recently erected a new medical office building next to the McKenzie site.

Despite the region-wide building boom in residential, multifamily, retail and industrial properties, there’s just a handful of new office spaces going vertical because of stagnant office rental rates and high construction costs that are stifling both new construction and remodel efforts, developers and Realtors told the NNBV.

Businesses move in, but others move out

According to Dickson Commercial Group’s first-quarter office market report, overall Reno-Sparks office vacancy is just under 12 percent.

Scott Shanks, principal with Dickson Commercial Group, says overall office vacancy is likely to remain there throughout 2018. There’s absorption in the market with new companies coming to town, Shanks notes, but absorption continues to be offset by existing space coming back on market.

“Over the last year, year and a half, we have floated around 12 percent with overall vacancy,” Shanks says. “Office is healthy; the problem is that there is not as much activity as most people believe. Yes the tech sector is booming, and there are a lot of Bay Area firms moving into town, but they are bite-sized tenants of about 2,000 to 5,000 square feet.

“We are starting to fill up some buildings and see some absorption, but we also are seeing people move out of town at the same time — as much as we are filling space, we are getting back space. That seems to be the continued march over the last year.”

Much of the recent absorption stems from existing tenants in the market expanding their office space, Shanks notes.

Although the new product being erected is speculative development, there are tenants for more nearly three-quarters of the space.

For example, Colliers International has relocated to the south Kietzke area from its former downtown digs at the Museum Tower at 100 W. Liberty St. in downtown and will take space in the new McKenzie property once it’s completed in October. Industrial logistics company Prologis also will take space in the building, as will McKenzie Properties itself.

The importance of preleasing property

Having tenants in tow is likely the new model for any future speculative office development in Greater Reno-Sparks, Shanks says.

“With the current market, (preleasing) is critical,” he says. “We don’t have enough overall net absorption to truly build a spec building out of the ground. Preleasing is critical for any new development that will go up for office space.”

Todd McKenzie, president of McKenzie Properties Management Inc., says that securing preleases was a crucial factor in getting the Kietzke project financed through Umpqua Bank. The new building is 70 percent leased, and McKenzie says several different companies are looking at the remaining space.

“I expect it to be 100 percent (leased) soon,” he says.

Both the new McKenzie building and the Charles Schwab offices represent a more modern style of office development for Reno-Sparks. And that’s important since there’s been little in the way of new office product built over the past decade.

“The last spec office building was over 10 years ago, and most of the building stock is 10, 20 or even 30 years old,” McKenzie says. “We need new product, and we need to update the product we have.”

More capacity attracts larger companies

In additional to updating existing office product in Greater Reno-Sparks, developers direly need to add more square footage, McKenzie adds.

“Demand is coming, and we have to augment what we have. If we don’t have capacity we will just get overlooked,” he says. “If there is a company out there that needs 50,000 square feet, they won’t even look at us because it just doesn’t exist. We need more capacity if we want to attract companies that provide higher paying jobs and benefit the community.”

Across the region, Downtown Reno remains the hottest office submarket, followed by Meadowood and South Meadows. Notable recent sales include the 79,552-square foot building at 10375 Professional Circle that houses Employers, and S3 Development purchased a nearly 40,000-square-foot building at the corners of Wells and Ryland avenues. S3 Development plans a mix of office, medical and retail at the site.

The high costs for new construction are also affecting the remodel market. Shanks says building owners and developers are struggling to find contractors willing to take on smaller tenant improvement projects in older submarkets, which is pushing up costs for tenant improvement work.

“The dynamics of office layouts are changing to more open and collaborative spaces, and when you have old prototypical offices changing there is a lot of demo work and revamping of spaces,” Shanks says. “Finding contractors has been tough — they have an appetite for larger deals, but for smaller deals there’s just a handful of contractors.”