Mixed bag for office real estate market

Two recent office building sales offer a glimmer of hope for Northern Nevada’s struggling office market, although some sub-sectors – mainly, South Meadows – continue to vastly underperform.

Chase Houston, senior vice president at Logic Commercial Real Estate, represented the buyer at 275 Hill St., a mixed–use building that’s home to Washoe Public House restaurant. It was the buyer’s third acquisition in Northern Nevada, Houston told NNBW.

“They have acquired quite a few properties in San Francisco, and they are making a move into Reno,” Houston said. “They see the growth and the potential.

“Office nationally looks like it is in meltdown right now, but Reno is different,” Houston added. “We don’t have as many tech workers where everyone is now working from home. Our market has more front-facing businesses – lawyers, CPAs, trust companies – that need to have an office, need to be close to the courthouse, or need a secured office.”

Size was a key factor in the sale of 275 Hill St., Houston noted. The 16,878 multi-story building sold for $6 million. The building was formerly acquired in 2017 by Tolles Development Co., as part of a larger acquisition of commercial assets assembled by AMH Properties.

Chase Houston

 

Logic Commercial Real Estate was trying to divest two additional properties acquired by TDC — 241 Ridge St. and 201 Liberty St. — but the buyer was unable to take down the whole portfolio, Houston said.

“They like this building (275 Hill St.) because it was 100 percent leased, and it’s a beautiful building that’s been really well maintained,” Houston said. “It’s right in the path of growth for downtown Reno – if we had a financial district, this would be right in it.”

Capitalization rate also was a key factor in the sale, Houston noted. The property at 275 Hill St. sold at a 6.5 percent cap rate, which translates into an approximate return of 6.5 percent on investment capital for the first year.

Melissa Molyneaux, executive vice president for the Reno office of Colliers, represented the buyer in the purchase of 6884 Sierra Center Parkway. The 45,231 square-foot Class A office building in the coveted Meadowood submarket was constructed in 2001 and sold to geothermal developer and operator Ormat Technologies in a $9.9 million off-market deal, Molyneaux said.

The building was formerly occupied by Intuit, which vacated one of its two properties on Sierra Center Parkway in March of this year. Prospective leasing on the building was flat, Molyneaux added, which prompted the owner to divest the asset when an offer came to the table.

Ormat is expected to take its time building out the facility and fully occupying the space, Molyneaux told NNBW. Ormat currently occupies office space at 6140 Plumas St.

“They see a lot of value in being together and working under one roof to keep up collaboration and culture,” Molyneaux said.

While office space in the Meadowood submarket continues to perform well – vacancy was at 5.8 percent in the second quarter, Colliers reports – the south Reno submarket, home to some of the region’s largest Class A office properties, continues to struggle mightily as companies leave tens of thousands of square feet dark and unused.

According to Colliers, total office vacancy in the South Meadows submarket stood at 17.6 percent last quarter. However, vacancy among Class A properties — which comprise just under 520,000 square feet in that submarket — was just shy of 30 percent.

“I call it a bifurcation of the market,” Molyneaux said. “There are a big block of properties in South Meadows that have vacancy or it’s coming, and there are really no prospects to backfill it. Meadowood, where you do have a lot of forward-facing industries, we are seeing vacancy and rental rates holding steady. But if (a property) is more back-office, we are seeing a lot of downsizing.”

Notable vacancies in the South Meadows submarket include IGT, Legal Match, Custom Ink, and Employers, which occupied 80,000 square feet among three stories at 9790 Gateway Drive before moving to a much smaller space at 5340 Kietzke Lane.

“South Meadows is definitely taking the brunt of it right now,” Molyneaux said.

The vacancy situation in South Meadows isn't expected to clear up anytime soon, Molyneux added, partly because multi-story office buildings really aren’t designed for secondary uses, such as residential or industrial.

“It’s a tough road ahead for bigger office spaces,” she said. “At least until people do decide they want to come back to work (in the office). Companies are cutting costs, and the easiest place is on the office line item.”

Logic’s Houston agrees that Northern Nevada’s office market is a mixed bag – and it could worsen overall as commercial office leases expire in coming years.

“Right now is an odd time,” Houston said. “Our market is vastly different. We have some big vacant office buildings, but tenants are still paying rent because they still have lease commitments.

“Investors don’t want to hop in because they are waiting for a crash, and sellers don’t want to sell because they have no real need to. There is so much cash at hand … We are in purgatory.”