Brokers: Reno-Sparks office market faring better than once feared

Sales for modest-sized owner-user office properties are on the rise as office users ditch multi-tenant buildings in favor of singular space, such 305 Stewart St. in central Reno.

Sales for modest-sized owner-user office properties are on the rise as office users ditch multi-tenant buildings in favor of singular space, such 305 Stewart St. in central Reno. Courtesy: NAI Alliance

By Rob Sabo

Friday, April 30, 2021

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Reno office broker Chase Houston has fielded a bunch of calls over the past several months from eager investors seeking to buy distressed office properties.

The thing is, Houston said, there really aren’t any in the Reno-Sparks market.

Houston, vice president and principal at NAI Alliance, said the pre-COVID vacancy rate among all classes of office properties was around 8%. It’s only gone up roughly 1% since, despite the well-documented work-from-home shift brought about by shelter-in-place mandates and recommendations enacted last year.

“Our average vacancy rate is below the national average,” Houston told the NNBW. “That is a healthy vacancy rate.

“We had a very successful 2020,” Houston added, “but it came on slow. Last spring, I went from getting 100 emails a day to just one — if that. But it slowly ramped up by the end of the year.”

NAI Alliance represents about 70 office tenants, mostly in the downtown submarket. There were zero defaults, and leases that were negotiated often were for slightly higher rental rates but shorter terms, Houston said.

Instead of signing typical three- to five-year leases, many tenants renewed shorter-term one-year leases with a modest bump in lease rates due to uncertainty brought about by the pandemic.

Regardless of the many ups-and-downs of 2020 and the unknown risk factors brought on by COVID-19, the Reno-Sparks office market wasn’t pummeled as hard as some expected.

Evan Meyer, senior office specialist with the Reno office of Kidder Mathews, says the regional office market remains desirable, with numerous tenants actively looking to lease space. Average rents in the fourth quarter of last year were $1.79, but they ticked up to $1.85 in the first quarter — which is higher than pre-COVID levels, Meyer said.

All signs lead to a full economic recovery for the regional office market as it shakes off the aftereffects of pandemic-related shutdowns.

“Landlords are confident they can get more in rent now than they could before COVID,” Meyer said. “Vacancy is decreasing, and all things are pointing toward positive economic growth in regard to office. We are finally seeing some consistent trends.”

Another example of small owner-user office space at 777 Forest St. in Midtown. Courtesy: NAI Alliance

 

Matt Grimes, first vice president of office services with the Reno branch of CBRE, said the Reno office market was strong coming into the pandemic, with record low vacancy rates in a number of submarkets.

At the same time, Grimes added, there has been very little office space under construction in recent years. Those trends have helped buoy the market.

“We didn’t get caught like a lot of cities with big office projects coming online,” Grimes said.

“We really had a shortage of office space. The pandemic corrected some of that, but many office users weren’t necessarily negatively impacted in a significant way. Most office users weathered the storm and are continuing to pay rents.”

Regional office experts agree Northern Nevada was spared carnage in the office sector because so many office users in Reno-Sparks are white-collar professionals who require brick-and-mortar space to see their clients.

“Reno is somewhat isolated because we have mostly white-collar (office) jobs and less tech companies,” Houston said. “The tech companies we work with went straight to work-from-home and have yet to come back to their offices. But CPAs, lawyers, doctors — they are back in the office. They might not have had clients in during COVID, but they were still in their offices working.”

According to CBRE, the two largest leases inked in the first quarter of this year include Harley Davidson taking down just under 29,000 square feet on Double R Boulevard and Ridgeline taking down just under 17,000 square feet of office space on Gateway Drive in South Meadows.

The South Reno submarket, second only to Meadowwood for total square footage, remains the most desirable office location. Total vacancy there was 2.4%, with asking rental rates at $1.92 a square foot, CBRE reports.

There were two significant headquarter relocations in the first quarter of 2021 as well. StemExpress and Paycertify announced in March they would relocate their headquarters to Reno; StemExpress purchased 52,100 square feet of office and warehouse space on Sandhill Road in South Meadows.

Another significant acquisition was Eat Snacs LLC’s purchase of just under 17,000 square feet on Fox Avenue in Stead.

Sales of vacant owner-user office buildings also are on the rise — Houston recently brokered deals on three such properties as local owner-users opt out of multi-tenant office buildings in favor of their own buildings.

Interest rates, especially for SBA loans, are at their lowest in the history of that program, Houston added, making it easier for office tenants to purchase their own facilities.

Despite solid fundamentals, there is opportunity for change, Kidder Mathews’ Meyer noted. Some companies may choose to downsize as work-from-home becomes part of their business model. Others, however, might increase their office space.

“Companies are figuring out they can do a lot of work from home, so their footprints may decrease,” he said. “But at the same time, the elimination of office space is not viable. A downsizing trend may continue throughout the rest of the year, but every business has different needs. Many still need brick and mortar; they still need somewhere to operate.

“Downsizing is happening, but some are expanding too — it works differently for every business.”

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