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You are here: Home / Features / Building Nevada / The Return of Office 2019

The Return of Office 2019Nevada’s CRE Office Industry

February 1, 2019 By Jennifer Rachel Baumer Leave a Comment

Nevada’s commercial real estate office market is healthy, but not considered robust. There’s been very little new product built in the last decade.

Nevada’s commercial real estate office market is healthy, but not considered robust. Hit hard during the 2008 recession, it’s good to see vacancy rates dropping and rents increasing, but there’s been very little new product built in the last decade, which accounts for at least some of the continuing drop in vacancy rates.

“The office market is not where we’d like it to be, but not where it was during the recession,” said John Restrepo, principal, RCG Economics. “Things have gotten better, but we’re still struggling compared to, say, industrial.”

In the third quarter of 2018 the Las Vegas office market saw about 450,000 square feet of office space absorption and a vacancy rate of about 15 percent, going down but still elevated compared to a stabilized 10 percent. In Reno, vacancy rates are right around 10 percent, and with almost no new product in either metro market, they’re expected to continue to drop.

“It’s a healthy environment for the office market in the Reno Sparks Washoe County area,” said Scott Shanks, principal, Dickson Commercial. “Overall it’s not a super robust market as far as absorption goes, but it’s pretty steady. We’re not seeing giant highs and lows.”

The Market

There’s approximately 46 million square feet of commercial real estate office space in Southern Nevada. There’s approximately 7 million square feet of commercial real estate office space in Northern Nevada. That’s a significant difference in the size of the market, but the similarities between the markets include steadily dropping vacancy rates, lack of new product, and a healthy market that might be looking for new product to come out of the ground for the first time in about a decade.

The Great Recession of 2008 proved to Nevada that our hospitality and mining based economy wasn’t actually bulletproof.

“Vegas never really felt the recessions pre-2007,” said Larry Singer, senior managing director, Newmark Knight Frank. “We were always able to weather the storms until 2007 came and we obviously felt that one. Now, the way the market is going, I think it is poised to move along like we did in the early 2000s. We’re seeing that in the multifamily front, industrial front, retail’s really picking up, and now we’re starting to see office poised to start that development process again and move ahead.”

After years of heading to the outskirts of town, in Reno the office market is seeing a return to downtown, with the market there heating up. The other in-demand area is near Meadowood in south Reno, where the new Rancharrah residential community is located.

“That’s pretty much the epicenter of Reno,” said Shanks. “If you had a dart board, that’s pretty much the middle, so it’s easily accessible. I’d say the downtown and Meadowood submarkets are the two highest.”

There hasn’t been any new development in downtown; everything there is second generation space that’s being absorbed.

“There are a handful of Class A spaces downtown that will always continue to be occupied and in demand for virtue that they’re the only buildings in downtown and there is no new development,” said Shanks. “I think in the next five years we could see a new development downtown with a high-rise office building, but at this point, there’s nothing on the books.”

In Las Vegas, Class B and Class A properties are in demand, driven by location so product along the 215 Beltway in Henderson and in the Southwest and Summerlin are in demand.

“People want to work closer to home. All those offices are doing well and more in the Southwest and the halfway point between Green Valley and Summerlin,” said Singer. “For most executives, there’s a good chance they live in Green Valley or Summerlin, it’s easier for them to get there.”

One of the newest additions to Southern Nevada is Two Summerlin, a 6-story Class A office building approximately 150,000 square feet, from the Howard Hughes Corporation. The property was 80 to 85 percent leased by the time it received the certificate of occupancy in August 2018, with only 3,000 square feet available.

“Southern Nevada’s [office market] is at about 14 percent vacancy, but if you look at the prime locations and look at Class A, the vacancy rate is in the 6 percent area along the 215 Beltway which circles I-15 and 95 to all points in Southern Nevada,” said Kevin Orrock, president of Summerlin. “We’ve created an environment that is a prime target for folks wanting to relocate their offices out of the central core and near the 215.”

The largest office markets in Southern Nevada are the Northwest, Southwest and West Central, said Restrepo. In Q3 2018, those geographic markets saw absorption of 200,000 in the Northwest, 275,000 in the Southwest, and 240,000 to 245,000 in the West Central market.

As well as location, the type of tenants often dictate office location. There’s an uptick of space going to the service sector. Added to that is the traditional demand for space from professionals, such as lawyers and doctors, many of whom often locate downtown or central. But the market isn’t as robust as it’s sometimes presented, said Shanks. Tech companies moving into Northern Nevada have an effect, but the office spaces they take aren’t huge, typically in the 5,000 square foot area. “We’re not seeing big campus style tech companies coming to town just yet.”

Where vacancy rates are dropping, it’s often as not because the existing buildings are 90 percent leased or higher, and nothing new is coming up. In 2018, Reno saw some of the first development in the office market in about a decade, and speculative building at that.

“But when I say speculative development, it’s pre-leased speculative,” said Shanks. “It probably has to be 50 or 60 percent pre-leased for the building to go up vertical.”

With Las Vegas welcoming the NFL and the NHL and Reno seeing local warehouse data centers like Apple, Switch and Tesla, locating in business parks, it seems like there should be a component of users coming behind those companies that need office space. So far, Shanks said, we haven’t really seen that. It may happen eventually, but for now the major driver of office space remains professional services.

“Another thing that’s critical in all this is the size of the users,” said Restrepo. “Approximately 60 percent of our users in the office market are under 2,500 square feet or less of space.” There aren’t large scale corporate headquarters in the casino industry, so the expansions on The Strip aren’t leading a surge in demand for office space. A handful of companies like Caesars and MGM do have offsite offices, but most casinos have executive offices onsite.

Reno’s relatively small commercial real estate office market had a 12 percent vacancy rate Q3 with the lowest rate at 10 percent for Class B, said Restrepo. While Class B is the biggest sector in Reno’s market, it’s at 2.5 million square feet; in Las Vegas it’s 19 million. Reno’s absorption for that quarter was around 80,000 square feet, with approximately 33,000 square feet Class B.

The Effect of Outside Forces

Construction costs, from the ongoing rise of the price of materials to the costs due to the labor shortage, continue to affect the office market. Construction costs as well as lack of product are behind rents for office space going up in Reno to right around $1.80 to $2.15 a square foot and in Las Vegas $2.16 to $2.17 a square foot. Those numbers are picking up as vacancy rates drop and product becomes harder to find.

“Rents are ticking up a bit on existing product and on the speculative developments that are going up,” said Shanks. “Typically they’re a dollar a square foot or so in the Class A sector but that’s not due to anything other than the fact that construction costs are up so for someone to get the yield on their development and to match the construction costs, they have to be at that level.”

Location is always the watchword in real estate and for Nevada’s office market, being located in Nevada is a plus as businesses continue to immigrate from California.

“There’s between 4,000 and 5,000 people a month relocating to Vegas from various parts of the country,” said Singer. “As that happens there’s a stronger demand for service companies – law firms, accounting firms, etc., who expand or open new offices here.”

The same holds true of the influx of technology firms looking at Southern Nevada, and businesses coming from Southern California.

“A lot of companies that are tied into gaming, because of the industry’s expansion, are also expanding to service their clients,” said Singer.

Looking Ahead

The Las Vegas economy is doing well, and office users are returning to office spaces. What can the commercial real estate office market expect?

“I think you have to look at the macro situation in Southern Nevada,” said Orrock. “It was one of the fastest growing job growth and population areas last year, the second strongest job growth sector was professional businesses and services, and that’s our prime target here in Summerlin.”

When it comes to the market, nothing is certain. There are political factors both nationally and regionally to take into account, and economists are predicting a recession in 2019. But with the Southern Nevada population continuing to grow, it’s likely the vacancy rate will continue to drop lower, indicating more demand.

“I think given the strength of the economy you’ll continue to see the office market increase,” said Orrock. “The other issue is there’s not any product coming out of the ground. There’s maybe one commercial office building that’s in development now and that’s just along the 215. Other than that, there’s not a lot of options, no competition, so I think you’re going to see – we’re certainly going to develop into that market given the future strength of this economy.”

In Reno, the population is continuing to grow and there are expansion efforts underway at the University of Nevada, Reno. One prediction is for vacancy rates to remain around 10 percent in Reno, maybe dipping to around 8.5 due to the fact there’s not much product going up.

“I think we’ll stay healthy, though I don’t think [the market] is going to change much,” said Shanks.

There’s currently a flight to quality in both metro areas, with tenants right-sizing their office spaces and some limited building going on. In Reno it involves second generation space that’s changed in design and function, where office design is trending to more open, collaborative spaces rather than the traditional design of individual offices with doors that close for privacy.

“Usually a flight to quality comes in a down market when you see companies fold and those that survive can go from a C to a B and a B to an A. Right now, with 10 percent vacancy rates, it’s hard to find existing product,” said Shanks.

Class B is generally the most popular office product, according to Restrepo. Of the 900,000 square feet absorption in Las Vegas in Q3, about 600,000 was Class B.

“I’m very positive on the future of all of Nevada based on what’s going on in our neighboring states,” said Orrock. “People are leaving California and coming here, that’s still the biggest state in terms of people moving out and coming to Nevada. So I don’t see that shrinking in any capacity. I think it’s going to grow in terms of people wanting to relocate to Nevada. Vegas has changed dramatically over the years, and Summerlin is a very good example of why we’re the number four master planned community in the country.” It’s a nice accolade to have.

Filed Under: Building Nevada Tagged With: John Restrepo, Larry Singer, Las Vegas commercial real estate, Nevada commercial real estate, Newmark Knight Frank, RCG Economics, Reno commercial real estate, Scott Shanks, Summerlin

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