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You are here: Home / Features / Building Nevada / Post Pandemic Downsize

Post Pandemic DownsizeOffice Projects in Nevada

February 1, 2021 By John Seelmeyer Leave a Comment

Tom van Betten, vice president of strategic partnerships for Matter Real Estate Group, worries about the problems he sees just over the horizon for the office-development market — problems that are directly linked to the uncertainties that have troubled the sector for the past year. Matter is the developer of the $400 million UnCommons mixed-use project in southwest Las Vegas.

In Reno, meanwhile, Todd McKenzie, president of longtime developer McKenzie Properties Management, Inc., is concerned that sparse development of new office projects, especially larger ones, may be hampering the region’s economic growth.

As the recovery from the COVID-19 pandemic gains some momentum, developers who specialize in office projects across the state are edging forward with new projects. But their work is even more fraught with uncertainties than usual.

Too Many Questions

When things settle down again, many companies looking to expand or upgrade will find themselves competing for a relatively small pool of available spaces, especially because development of new office projects has slowed. “I see a real train wreck coming for Las Vegas,” said Van Betten.

Meanwhile, in Reno, McKenzie said tight supplies of top-quality office space for larger users have created a chicken-and-egg conundrum for the region’s economic growth. On one hand, the lack of large-size office space sometimes has limited the ability of economic developers to attract bigger office users to Reno and Sparks.

“We simply can’t attract bigger companies, particularly tech companies, because we don’t have the space,” McKenzie says.

But, unless those companies are undeniably waiting in the wings to lease big new spaces, developers have been unwilling — or unable — to take on larger speculative developments.

New Projects

Despite the challenges, developers are moving forward with a handful of major office projects across the state. Sansone Companies, for one, expects space will be ready for tenants this autumn in Axiom, an office complex under construction at South Rainbow Boulevard and the I-215 Beltway, but that schedule may be accelerated, said Neil Sansone, manager of the development company’s transaction and risk management departments.

The Las Vegas-based real estate company broke ground on the first of AXIOM’s two 80,000-square-foot buildings along with a multi-level parking garage last February — just weeks before the pandemic disrupted business. The company redesigned air-filtration systems and other safety measures even as it continued to build. It expects that a second 80,000-square-foot tower will be completed in the third quarter of 2022. Newly developing restaurants, shopping, banks, and fitness clubs in the neighborhood provide further area support to the project.

Meanwhile, in October, Stable Development broke ground on The Village, a 300,000-square-foot project near St. Rose Parkway and Seven Hills Drive in Henderson. The seven-story project — 250,000 square feet of medical and professional offices, 50,000 square feet of retail — will be the tallest building in the area when it’s completed in mid-2022, said Sal Guy, managing director of operations for Stable Development. “Nothing is going to look like this,” he added.

The company’s purchase of about eight acres from the City of Henderson in 2018 (it already owned four contiguous acres) set the wheels in motion for the development.

Medical-related office space today accounts for about 65 percent of the portfolio of Stable Development, which is one of the largest developers of Class A medical space in the Las Vegas market. When the Village is complete, medical space will represent more than 72 percent of its portfolio. That remains an attractive market, Guy said, despite the challenges that medical providers have faced as hospitals have been forced to limit elective surgeries so they can handle surges of COVID-19 patients.

Stable Development’s recent work also includes revitalization of an 11-building office and retail complex known as Westcliff Plaza at Summerlin Parkway and North Buffalo. The company purchased the 25-year-old properties in late 2019. The 131,000-square-foot complex had 15 vacant spaces at the start of 2020; after renovations a year later, only four spaces remained available.

The company also plans a major medical facility to be built in the Southwest submarket. Details, including the identity of the lead tenant, remain under wraps, but the project is expected to be under construction by late 2021, Guy says.

Matter Real Estate, meanwhile, is ready to go vertical with construction of UnCommons, a mixed-use project at Interstate 215 and Durango drive in southwest Las Vegas that includes a major office component. The first two office buildings at the project, totaling 155,000 square feet, are scheduled for completion in early 2022. Ultimately, 500,000 square feet of office space is planned. CBRE is its first tenant, having leased 17,000 square feet.

“We’re pleased and cautiously optimistic about the pre-leasing activity we have right now,” Van Betten said.

UnCommons also incorporates 830 residential units along art and performance spaces, retail, restaurants and health and fitness studios.

In Reno, McKenzie Properties is nearing start of construction on Skypointe, an office and retail project at the high-traffic corner of McCarran Boulevard and South Virginia Street in the Meadowood submarket. A six-story, 180,000-square-foot office building is the anchor of the project, which also will include 50,000 square feet of retail and restaurant spaces as well as underground parking.

“This will give tenants an urban feel in a suburban location,” said McKenzie.

Remarkably, McKenzie notes, Skypointe will be the first office building taller than four stories built in Reno for more than 30 years. Scheduled for completion in late 2022, Skypointe will target larger office users such as the Bay Area technology companies that increasingly are setting up shop in Reno and Sparks. McKenzie notes Skypointe can provide up to 30,000 square feet on a single floor, a size that’s seldom been available for new or expanding companies in northern Nevada.

Another 150,000 square feet of new office space is coming online in downtown Reno, where Las Vegas-based CAI Investments is converting a former Harrah’s hotel and casino property into a mixed-used development that includes retail and 530 apartments along with the office space.

Predicting Trends

Developers of office buildings are making their bets even though there’s no certainty of what sorts of office buildings users will want in a post-pandemic world. Brad Peterson, a senior vice president with CBRE’s Advisory & Transaction Services in Las Vegas, said companies are taking a hard look at how much space they’ll need in the future. Many expect a hybrid work model that involves a mix of office and work-from-home models.

And different types of companies will respond differently to the post-pandemic era, said Melissa Molyneaux, senior vice president and executive managing director for Colliers International in northern Nevada. A few organizations in the Reno-Sparks market, for instance, already have decided to move from downtown high-rise, multitenant buildings to single-tenant buildings in the suburbs where they don’t share restrooms, ventilation systems and elevators with other users.

Some companies feel a strong need to have everyone in the office; others, particularly those that provide back-office services, adapted more easily to work-from-home models.

“With that said, we do not feel the overwhelming majority of office users will opt to have a full, or even permanent, work-from-home option,” Molyneaux said. “Office space fosters culture, innovation and sharing of ideas as well as employee oversight and motivation.”

Another big question is whether or not tenants want more hard-walled, private offices to provide physical separation for workers. Open floor plans have become popular in the last several years. Peterson doesn’t expect new buildings will revert to the once-common interconnecting private offices.

“Today’s office user is looking for flexible space with open areas and natural light creating a bright, clean environment for the employees,” he said. “Today’s office users desire high or open ceilings, more interior glass, upgraded LED lighting, and lighter colored flooring, paint and millwork finishes.”

Open, attractive design, Peterson said, is an important selling tool for companies that seek to recruit and retain top talent. McKenzie, however, is less certain about the continued allure of open offices even as the pandemic wanes. He expects that executives will want less density — a shift from the trend of recent years — along with more private offices.

Lower densities and the spread of workers across more space is good news for owners of office buildings and may counterbalance some of the reduced use of offices by work-from-home employees.

Looking Forward

Given the changing desires of office tenants even before the pandemic upset the market, Matter Real Estate Group invested heavily in market research before it started the design of UnCommons. Van Betten said the project began with the assumption that a major theme in the economy for years to come will be the competition of top companies for the best talent — talent that doesn’t necessarily respond to the same motivations as previous generations.

Matter executives and their consultants brought together multiple workshops involving everyone from young office workers to savvy executives to talk about the office amenities that will help recruit and retain talented employees. From 500 suggestions, the developer identified themes that informed the project: A desire for elevated levels of experience that provides concierges and coaches. A strong emphasis on wellness. A workplace that’s part of a community. Inspiring spaces with lots of art. “Then,” said Van Betten, “COVID came.”

Matter Real Estate brought wellness into focus at UnCommons. The project was redesigned to incorporate standards established by the International WELL Building Institute. It is expected to be the first in Nevada to earn the institute’s designation after the incorporation of HVAC systems that are nearly hospital quality, windows and patio doors that can be opened, touch-free access and interior finishes that limit the spread of bacteria. Still to be determined is whether tenants are willing to pay for a health-safe building.

“People are used to negotiating for every nickel. Safety has never been part of the lease negotiation before,” said Van Betten.

The availability of financing, too, presents a challenge for developers. While interest rates remain near historic lows, observers say lenders are tightening some requirements for borrowers — demanding, for instance, more signed leases in hand before construction begins.

On the other hand, office vacancies around the state remain slightly below the national average of about 14 percent. Analysts from CBRE found the office vacancy rate in Las Vegas stood at 12.5 percent this fall, ticking upward a bit from the summer. The vacancy rate in Reno stood at 11 percent, up from 8.8 percent at mid-year.

Equally important for lenders, office rents have mostly held their ground even in the face of rising vacancies, CBRE reported. Rents in Las Vegas have averaged $2.20 a square foot; in Reno, they average $1.80. But, while interest rates remain low, other construction costs are rising. That starts with the dirt itself.

“The challenge is finding good land,” McKenzie said. “Quality parcels for office development are difficult to find.”

He noted, meanwhile, that steel costs rose 40 percent in just a couple of months this winter. Lumber prices soared last summer, although they started giving back their gains during the autumn. The costs of skilled construction workers continue to rise. At the same time, Sansone said pandemic-related closures have created numerous challenges in construction management and the permitting process — adding delays that translate into higher costs.

Those worries aside, Guy said the steady flow of moving trucks bringing new residents to Nevada also delivers good news for office developers.

“All those new residents,” he said, “are going to need places to work.”

Filed Under: Building Nevada Tagged With: Brad Peterson, CBRE’s Advisory & Transaction Services in Las Vegas, Colliers International, commercial real estate, COVID-19, Las Vegas real estate, Matter Real Estate Group, McKenzie Properties Management Inc., Melissa Molyneaux, Reno real estate, Sal Guy, Sansone Companies, Stable Development, Todd McKenzie, Tom van Betten

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