Reno/Sparks saw office vacancy decrease in the second quarter of 2020, perhaps defying the expectations of some observers. Office vacancy decreased to 9.4 percent in the second quarter, from 10 percent in the first quarter of 2020. The average asking rate for office space decreased to $1.83 per square foot on a full service gross basis.
Headwinds are nothing new to office product, with technological advancements changing the way people have worked for decades. Cloud computing, smart phones and numerous other inventions connected to the digital workspace have tended to reduce demand for office space. What the market has recently experienced with the business closures ordered by governors is an intensification of the gradual move over the last couple decades of people working from home. While the experiment has not been entirely successful in terms of productivity or worker satisfaction, it has added one more headwind to office real estate product.
The second quarter of 2020 saw some decent leasing activity, and anecdotally it sounds as though most office users are paying their rent on time. What is not clear yet, is how work-from-home scenarios will change office demand moving forward. The third quarter of 2020 will see the passing of Nevada’s eviction moratorium, and the passing of the requirements for companies using Payroll Protection Program (PPP) to keep workers employed. If the Reno/Sparks market can weather those two events without a significant increase in vacancy, it is likely that the market will recover from the 2020 recession sooner rather than later.
When an office market loses more than 48,000 jobs, even if those losses are intended to be temporary, it should come as no surprise that it also suffers an increase in vacancy. Southern Nevada saw office vacancy increase to 12.5 percent, while inventory expanded by 65,000 square feet. Net absorption was 10,083 square feet.
The weighted average asking rate for office space remained stable at $2.21 per square foot on a full service gross basis. So far, southern Nevada’s office market has showed surprising resilience. While approximately 10,000 square feet of net absorption is nothing to brag about, any positive net absorption in the face of the massive job losses experienced over the past two months is remarkable.
Anecdotal evidence suggests that most office tenants continued to pay their rent over the past few months, but the eviction moratorium imposed until July makes it difficult to know how vulnerable the market is to future vacancies. The office market is expected to continue to be challenged by the job losses already experienced and the uncertainty regarding evictions, utilization of office space post-pandemic and whatever other upheavals 2020 has in store for the region.