Building Nevada - July 2000

OFFICE SPACE

Forecast Remains Optimistic for Both North and South

by Michael Henderson

The market for office space in Nevada has been on the rise in recent years and is currently doing extremely well. Two trends have emerged lately in Nevada, both based on availability and quality of labor, cost of living, taxes and proximity to California's Los Angeles and Bay areas. High-tech companies are moving to Reno to cut operating costs and cost of living expenses. In Las Vegas, customer service centers and call centers are renting expansive office facilities and recruiting large numbers of employees from the area. These are trends have been established over the past few years and show every sign of continuing through 2001.

LAS VEGAS

The most active office market segment in the Las Vegas Valley now is in Class C, what developers and realtors are calling Flex Space. "We're getting a tremendous amount of call centers and customer service centers that are high-parking back-office requirements," says Tom Stilley of Colliers International. Users require 20,000 to 50,000 square feet on average. Larger back-office facilities (100,000 square feet and more) are being leased by companies such as Progressive Insurance, Harrah's, Ford Motor Credit, and Avery Dennison Paper.

Class C/Flex buildings are typically constructed using stick-and-stucco or tilt-up concrete methods. These buildings are specifically designed to provide workspace for large numbers of people and also require telecommunications systems, including large packages of telephone lines and internet connections. Usually existing buildings in established areas can't accommodate these requirements, thus creating demand for newer developments.

Parking is a big issue with these companies due to the people-intensive facilities they are opening. Needs are five to ten cars per thousand square feet of office space. That requirement effectively pushes them into newer areas and developments which are built with increased parking in mind.

Companies are moving to Las Vegas because of the economic incentives it offers compared to other market areas such as Phoenix, Salt Lake City and Sacramento. "We've been able (here in southern Nevada) to attract companies that see the fact that both corporate and personal income tax is nonexistent," says Tim Snow of Thomas and Mack Developments. Lower taxes, cost of living, and rental rates provide a favorable environment for business, in contrast with California, where rent, red tape and taxation are high.

Las Vegas has an excellent and expanding labor base. "What's really the key is our labor base. Because of the hospitality industries, [Las Vegas employees] are used to dealing with the public," says Tom Stilley. Las Vegas can offer high-quality labor from local residents as well as from the influx of people moving to the area. According to Tim Snow, roughly five thousand people per month take up residence in Las Vegas. Snow is Chair of the Nevada Development Authority’s Comprehensive Labor Survey. This survey will determine the characteristics and skills of the growing labor force. "Companies have been very satisfied with the quality of labor they're able to get here," Stilley says.

The market for Class A buildings in Las Vegas is stable but not in high demand. "Class A that's built is absorbed and it does lease," says Tom Stilley. "It's just that the demand for it with the price differential is not as consistent as the demand for the back-office." Prices for Class A buildings are on average 25% higher than other building options. Often Class A is desired by large financial corporations, stock companies, and major law firms.

Class A represents around 18% to 20% of the office building inventory, according to Tim Snow. Most exists in The Hughes Center and the Pauls Corporation's new project downtown. Las Vegas Class A products are new buildings with superior architecture, construction and appointments, though not necessarily three stories or higher as would be a strict definition of Class A in other markets. In contrast, Class B buildings are usually older steel-frame structures. The Hughes Center is currently the largest and most successful master-planned Class A facility in the Las Vegas area.

RENO

Reno has recently caught the interest of fiber-optic users. In particular, the completion of the Williams Fiber Line in Reno has attracted the attention of many telecom-related companies. John Pinjuv of Grubb & Ellis/Nevada Commercial Group states, "Reno is now in the position to be connected throughout the world via the Internet because of these fiber lines." The main fiber line runs along Virginia Street including Downtown, Meadowood, and the South Meadows area. Meadowood and South Meadows are currently high-growth areas, in part because of this new technology.

Many fiber-optic users move to Reno from the Bay area and Silicon Valley. A lower cost of living, decreased rental rate and the fact that Reno has one of the best telecommunications networks in the country for a secondary city all serve to attract these companies to the area. John Pinjuv defines two main fiber-optics uses: telecom hotels and accounting/marketing divisions of fiber-optic and internet-related companies. Telecom hotels consist mainly of machinery and equipment that link companies via the Internet. The large office area required by telecom hotels provides good rental revenue.

In many cases, Bay area companies don't move their entire operation to Reno, but distribution, manufacturing, assembly and other divisions that aren't directly tied to the technological atmosphere of Silicon Valley. "They're saying we don't need to be in Silicon Valley¾our people are not high-tech necessarily¾and yet we're paying these astronomical rents," says Tim Ruffin of Colliers International of Reno. "It just doesn't make sense." Both ORACLE and SISCO have moved their finance divisions to Reno.

Larger back-office and call center companies aren't moving to Reno mainly because of the labor base. With unemployment rates among Reno's relatively small population currently below 4%, these companies are unable to recruit the large numbers of employees needed for their business operations. "We do have the call centers inquiring," says Pinjuv, "and we may end up landing a couple of those, but we won't get as many as Las Vegas." Intermediate sized call centers, usually around 25,000 to 30,000 square feet with between six-and ten-to-one parking, locate in Reno.

Class A is a larger part of the market in Reno as a result of the influx of high-tech companies from the Bay area and the relatively small price differential between building classes.

Rental rates for Class A in Reno average $1.70 to $1.80 per square foot. Comparable space in San Jose and Silicon Valley costs around $10 to $12 per square foot.

The South Meadows and Meadowood areas of Reno are currently in high demand. South Meadows consists mainly of Class A buildings, but also includes Class B and Class C space. The Meadowood area is also predominantly Class A, which Reno defines as well built two-story tilt-up concrete and steel frame buildings. Rental rates range from $1.65 to $1.80 per square foot with Meadowood properties running ten cents higher than South Meadows.

Meadowood is the choice for companies seeking business from local clients because of its proximity to restaurants, office supplies and local consumers. South Meadows is favored by companies seeking business from non-local clients. According to Tim Ruffin, almost all the companies that do business outside of Reno choose South Meadows because the advantages of the Meadowood area are not important to them.

PROJECTIONS

The market for office space in Las Vegas should remain good throughout the rest of this year and the beginning of 2001. Flex space for call center and back-office companies will continue to be in demand. According to Greg Griffin of NAI Americana Commercial, Las Vegas is characterized by an economic short-cycle which responds slowly to and recovers quickly from economic down-turns compared to the rest of the country. This is largely due to the gaming industry¾a factor that will help keep the Las Vegas market strong.

"It should be a balanced office market by the end of the year," says Tim Snow, "with vacancy rates leveling off at 8.5% to 9%." As current office inventories become occupied, build-to-suit activity will increase. "That's just going to make it a little tougher in competition with other areas," says Snow, because of the importance of speed and timelines to these companies looking to come into the area.

The vacancy rate in Reno has dropped from 13.2% at the end of 1999 to around 10.2% and dropping by June. New construction from the end of 1999 is now being occupied, and more new projects are scheduled for later this year and early next year. Most of the new construction in Reno is tilt-up concrete, 30,000 to 80,000 square feet or larger. Diamante Ranch (one exit south of the South Meadows) will expand its 45,000 square foot facility and be online by the beginning of 2001. Rents in all Reno areas may increase by five to ten cents over last year.

"[The market] continues to be strong," says Tim Ruffin, "and it'll be higher than it's ever been in the past." High-tech companies will continue to move operations to the South Meadows area while local companies are attracted to the Meadowood area. The forecast for Reno and Las Vegas markets remains bullish into next year.