Building Nevada - November 2004

Trends in Office Real Estate

Will the Heat Wave Continue?

by Jennifer Rachel Baumer

If you're looking to move into new office space any time soon, there are hot spots in metro areas across the state.

Location, Location, Location

The current hot sub-market in the Las Vegas Valley for commercial office real estate is along the I-215 corridor from Green Valley in the east to Summerlin in the west. This area has seen one-third of the absorption of available space in the last year and is continuing to expand as the Beltway moves around the Valley, bringing the southwest into play as a prime office location. In fact, of the 4.8 million square feet of office space currently proposed, 1.4 million square feet are in the southwest and 1 million square feet are in the south, according to Jeremy Aguero, principal analyst, Applied Analysis.

In addition to the I-215 corridor, new development is underway and vacancies are beginning to fill along the I-95 corridor heading northwest from the city core. The office market is also beginning to heat up in the far north of the Valley, with a groundbreaking held this fall for the first Class A office building in the master-planned community of Aliante, near the northern leg of the Beltway. Along the Cheyenne Technology Corridor, office developments and office/flex alternatives are popular choices for those desiring a lower-priced alternative to the southwest, as well as for those who find the location more convenient for their business operations.

Restrepo Consulting, LLC, is seeing a greater interest in mixed-use developments, both in the resort corridor area and along the high traffic suburban locations, particularly the I-215 corridor, where developments now typically include office, retail and mid-rise lodging along the lines of Marriott and Courtyard hotels. "An increasingly sophisticated real estate market, combined with the increasing prices of land and land scarcity, are making mixed-use developments more popular," said John Restrepo, principal.

One interesting trend occurring in the Las Vegas Valley is the development of hubs specializing in a particular industry. For example, in the southwest Valley, a medical corridor is emerging, with several hospitals, a medical distributor and a substantial amount of medical office space. "The southwest corridor as a medical hub could be an important trend in 2005," said Aguero.

In Northern Nevada, the sub-markets are holding steady. Reno has never been a huge office market, but vacancy rates are staying fairly low and new construction is moving ahead. South Meadows and Damonte Ranch continue to lead the way with Class A office space. The Mountain View Corporate Center in the Meadowood subdivision is coming online, along with several office buildings in the new areas of east Sparks and Spanish Springs. Most of the growth in Sparks is in smaller buildings in the 3,000-square-foot to 6,000-square-foot range, while the trend in south Reno is towards more tech-friendly buildings, as high-tech firms once again set their sites on Northern Nevada.

One of the chief developers in South Meadows is Tanamera Commercial Development LLC. Developers of the Reno-Tahoe Tech Center, Tanamera plans to build 350,000 square feet of office space at the center, where one 60,000-square-foot building has already been completed. The first building has been leased out and the second is in negotiations with various high-tech users. "A number of high-tech firms are looking very seriously at Northern Nevada again, and we want to be poised to service them if they decide to come here," said Kreg Rowe, principal owner/manager, Tanamera.

Interest Rates Encourage Owner/Users

Owner-occupied buildings are becoming more popular in both Southern and Northern Nevada. "For some time, there’s been a trend toward owners/users purchasing their space instead of leasing," said John Pinjuv, president, Grubb & Ellis/NCG, Reno. "It probably started 24 to 36 months ago when interest rates hit all-time lows. Because interest rates have remained low it’s still a very viable option for many office users."

The most popular square footage for owner-occupied buildings in Northern Nevada ranges from 4,000 square feet to 6,000 square feet, then jumps to the next most popular size, 6,000 square feet to 12,000 square feet. "The reason is obvious – smaller buildings can accommodate one user or maybe two, and there are a lot of businesses out there in that 4,000-square-foot to 6,000-square-foot range," said Pinjuv.

In Southern Nevada, Brad Peterson, SIOR, senior vice president, CB Richard Ellis, is seeing owner/user buildings in a range of sizes. "Anywhere from 3,000-square-foot buildings to 50,000-square-foot buildings," he said. "Developers are buying larger plots of land and selling parcels to smaller users, so sizes vary across the board." Plise Companies president Michael Townsend said his company is joining the owner/user trend with a 108,000-square-foot building under construction – Plise intends to occupy the building itself and lease out space it doesn’t immediately need.

It's not uncommon for buyers to purchase more space than they need and rent out the remainder – it gives businesses a base for future expansion and offers an investment for the future. The effect on the market of owner-occupied office space is marginal from a vacancy standpoint, but when businesses move from rental space to their own building, they have a tendency to take more space than they immediately need, anticipating business growth. "So we’re actually seeing more absorption of real estate with relation to the number of employees being added to the market," said Aguero.

Not necessarily a trend – or a surprise – but a fact: everything is becoming more expensive. The cost of raw land in Southern Nevada continues to rise and rents aren’t keeping pace. The cost of land coupled with the cost of materials may be the reason there is more planned development than actual development listed in real estate statistics, according to Aguero, who noted, "We’re approaching 5 million square feet planned, but only have 1.9 million square feet under construction."

"The quality of a development and the quality of its location are becoming increasingly more important because of the higher financial risks associated with building office space in Nevada," said Restrepo.

Rising costs have caused budget-minded business owners to seek alternatives to Class A office space, including what Michael Carroll, vice president of development for Jackson-Shaw Company, termed "value-office product." Jackson-Shaw’s Northport Business Center, on the Cheyenne Technology Corridor in North Las Vegas, was originally planned to be an office/flex development, and the company anticipated most users would be manufacturers or distributors who needed a large space for their operations, with just a small area partitioned off for an office.

Instead, said Carroll, 85 percent of the space in the first phase of the business park was leased to office users, many in defense-related industries who saw the value in being located close to Nellis Air Force Base, Indian Springs and the Nevada Test Site. Others were just seeking a way to save on office costs, which Carroll said could average anywhere from 30 cents to 75 cents per square foot compared to Class B office rates. Phase II of the project is currently 50 percent leased, and Carroll said the popularity of the location’s office product has encouraged Jackson-Shaw to include a Class A office building on the site in the final phase.

In Northern Nevada, land costs are also rising sharply – with lease rates expected to follow – as the population continues to grow. "Land costs have definitely increased," said Pinjuv, "and they will continue to increase. Zoned office land in Northern Nevada is fairly scarce, especially if it’s located close to other amenities such as restaurants, and to residential areas."

Location, Location, Location, Again

Whether they own or lease, companies are paying more attention to the space they’re in. Brad Schnepf, president, Marnell Properties, said businesses believe location to be of prime importance, but they’re also looking for amenities, nicer finishes on the buildings, campus environments, landscaping and more room.

"One of the biggest drivers is the trend for organizations to see lease space not so much about real estate, as about being able to locate well and provide a work environment their employees enjoy," said Schnepf. "I think there’s a tremendous need for businesses to offer that good environment as a way of retaining good employees. Developers who keep that in mind will be successful."

Marnell Properties is in the process of finishing Marnell Corporate Center, a project with three- and four-story buildings in a corporate setting near McCarran International Airport. It is also developing 30 acres of corporate Class A campus space located in the airport sub-market at Las Vegas Boulevard and Sunset Road.

In Reno, Lisa Sawtell, leasing manager for Magnolia Companies, is seeing the same thing: companies want to locate in a beautiful environment. "We’ve tried to take our developments to another level," said Sawtell. "We have a more upscale feeling to our properties so people have a sense of presence and belonging when they go to work. We want to be like the Four Seasons of offices."

Magnolia Companies is in the first phase of a Class A project on Double R Boulevard in south Reno. The project is 60 percent leased with prospects for the balance. The developer has also completed leasing the Magnolia Village project, a blend of retail and office space with ancillary space for restaurants.

Predicting the Future

Vacancy rates are holding steady on both ends of the state as Nevada recovers from the decline in the office market brought about by the economic downturn that started in 2001. In Southern Nevada, the second quarter ended with vacancy rates around 12.7 percent, compared to the end of second quarter 2003, when they were 13.1 percent.

CB Richard Ellis’ Peterson expects Southern Nevada to see a decline in vacancy rates in the short term, throughout the rest of 2004 and into 2005. "There’s increased activity, both with local business expansions as well as out-of-state activity," he said. "We’re in a mid-period where there aren’t a lot of buildings coming online – they’re planned for the end of 2005 and into 2006 – so I think we'll see the vacancy rate go down. After that, it will all depend on what planned buildings really get built."

Michael Townsend with Plise is seeing buildings pre-leased at least 30 percent before construction, with another 40 percent leased once the building goes vertical. He said it then takes another 12 to 18 months to lease out the remaining 30 percent. 

Vacancy rates in Northern Nevada are up a little, due more to new construction than to the absorption rate, according to Tim Ruffin, CCIM SIOR, senior vice president, Colliers International. "Vacancies since the beginning of the year were up to about 11.1 percent, which is still a very healthy number – a balanced market would be considered 10 percent, so we’re still in fairly good shape. The difference between this year and last is a tremendous amount of expansion by local businesses taking more space. As the population grew, businesses had to grow to handle the increased demand for their services."

Vacancy rates in Northern Nevada are expected to creep up to somewhere near 13 percent to 14 percent by the end of the year, partly because of the owner/user trend and partly because developers are still building even without a big influx of tenants. Office construction on both ends of the state is expected to slow in early 2005.