Building Nevada - November 2005

Rising Costs, Steady Demand

Nevada’s Office Market Report

by Liz Gamble

Is the search for office space keeping you awake at night? Where should you look? What type of building will best meet your needs? How much can you expect to spend? Buying or leasing – which is the best option? So many questions; so many choices.

Let’s explore a few insights provided by some of Nevada’s top commercial real estate brokers.

Location: What a Difference a Beltway Makes

Experts agree, office space within a mile of the Las Vegas Valley’s I-215 Beltway is hot. "The smartest thing business owners are doing in today’s market is to provide easy access to the office for employees and, if applicable, customers," said Chuck Witters, a broker with Lee & Associates in Las Vegas. "From Henderson to the airport, on to the Southwest and Summerlin, and now more recently North Las Vegas, which is emerging as a growth submarket, the Beltway is a magnet for potential tenants."

And tenants are willing to pay the price. According to a second-quarter 2005 report by Applied Analysis, a Nevada-based firm providing a wide-range of advisory and consulting services, the average asking office lease rate continued to increase, reaching $1.99 per square foot, compared to $1.95 in the first quarter and $1.89 for the second quarter of 2004.

"The Beltway has brought office submarkets to areas previously untouched and certainly underserved," said Jayne Cayton, senior associate with CB Richard Ellis, Las Vegas. "Because of the Beltway, and developments such as the Aliante master-planned community, the north submarket, specifically North Las Vegas, is gaining a higher profile among businesses looking for new office space."

Applied Analysis’ second-quarter office space data for the North Las Vegas submarket show more than 453,000 square feet of office space is planned for the near future. If development continues as planned, the submarket’s office space should exceed a 58 percent increase in total rental square footage. Currently, the area’s total rental square footage is 772,134 square feet.

"With that said, anything along the Beltway is a hot submarket," added Cayton. Applied Analysis’ experts agreed, stating in their report, "We continue to see employers seeking office locations with close proximity to major thoroughfares, particularly the I-215 Beltway, and we are projecting future rises in vacancies in those areas where accessibility has become a challenge due to functional obsolescence and increased traffic congestion – watch for office relocations toward the Beltway as leases expire."

Overall during the second quarter of 2005, the Las Vegas Valley office market expanded its inventory, growing to 34.8 million square feet in 1,220 buildings. Unoccupied space totaled 3.8 million square feet, for an average vacancy rate of 10.8 percent, with the lowest vacancy rate in Class A space and the highest in Class B space. Office completions totaled 668,000 square feet, while net absorption totaled 572,000 square feet. During the same time period, more than 2.1 million square feet of office space was under construction and an additional 5.7 million square feet of future development was planned.

South Meadows Attracting Reno Offices

In Northern Nevada, high visibility signage is the name of the game. Off I-395 South is South Meadows, a master-planned community with more than 1 million square feet of office space. "South Meadows has become an extremely attractive location because of its accessibility from the freeway and the fact that businesses requiring a higher profile can utilize signage that is seen from I-395," said Tim Ruffin, senior vice president, Colliers International in Reno. As of the end of the second quarter of 2005, South Meadows had a total of 122,631 square feet of available space.

While more mature, Meadowood remains attractive to tenants who may require less visibility, but are drawn to an area with more immediate amenities. As an example, approximately 100 restaurants are located within a one-mile radius. As of the second quarter, Meadowood had a total inventory of 2.1 million square feet, with 272,786 square feet of available space.

Overall, the Reno market has a total inventory of more than 6.4 million square feet of office space, with a market vacancy of 843,571 square feet, or 13.13 percent.

Office Prices Rising Across the State

Whether Northern or Southern Nevada, the price of leasing and/or buying office space is rising. "This cost increase is primarily due to two factors," said Cayton. "Inflated land prices, and a tremendous increase in construction costs, specifically in regard to steel, concrete and lumber. Leasing rates will remain on the rise in order for developers to obtain a necessary return on investment."

"It’s supply and demand, " said Dominic Brunetti, vice president with Reno’s Alliance Commercial. "There’s simply not enough land. It’s estimated that construction costs have risen between 25 percent and 30 percent over the last 12 months."

"There’s an additional element to rising costs in the Reno/Sparks area," said Ruffin. "We’re seeing tenant improvement costs within existing buildings around $50 per square foot. Some have even risen as high as $70 or $80 per square foot, while the average allowance landlords provide tenants has remained steady at approximately $35."

For the Las Vegas market, tenant improvement costs average between $35 and $50 per square foot, depending on the space plan. "Overages (tenant improvement costs in excess of the allowance) are the norm in today’s market," noted Cayton. "If a company has a track record of financial stability, more often than not it will be allowed to amortize the overage costs throughout the lease term. Some landlords, however, are going to require their money up front if the potential tenant does meet certain financial criteria."

Also common to Northern and Southern Nevada is a tightening of incentives. "Landlords are still offering one or two months’ free rent, but are generally adding a couple of months onto the lease period," said Brunetti. "Incentives often depend on whether the location is an older office complex or a newer one." Tenants need to compare and contrast the advantages and disadvantages of both. One factor to consider is parking. Most older buildings have approximately three parking spaces per 1,000 square feet of building space. Many companies today won’t even look at a building with less than 4.5 spaces per 1,000 square feet, Brunetti pointed out.

Buying or Leasing?

Yet, in today’s marketplace, the first decision is not always location, nor is it such items as tenant improvement allowances or incentives. The first decision is – buying versus leasing.

"Given the increasing number of office condos, the question of whether or not to buy or lease has become a No. 1 consideration for anyone seeking office space," explained Cayton. "That decision should be based on a company’s long-term business plan, taking note of growth potential as well as risks that may result in downsizing."

"I always advise clients to explore the two options with their CPAs or tax attorneys," said Witters. "Everyone has different tax considerations. In general, however, if a company’s business plan calls for growth, it might be wise to purchase more than what is needed today and lease out the remainder of the space without giving an option to renew. Depending on each company’s financial situation, it may make sense to pursue an SBA loan with 10 percent down for purchase."

"If it’s a start-up business, I’d say no to purchasing office space," said Ruffin. "It’s too much initial capital outlay for a new company. On the other hand, if, for example, a dentist has been in practice for years, has one associate and six office staff, buying is a definite alternative. It’s the companies whose business objectives call for rapid growth that must carefully consider all aspects of purchase versus leasing. If they buy with the intent of leasing out space in preparation for growth, do they really want to be in the real estate business? What would happen if the need arises to downsize?"

All the experts agree on one thing. A company must be clear in regard to its short- and long-term business goals in order to make an educated decision on whether purchasing is the correct option to pursue.

The State of the Market

From north to south, the market is healthy. According to a second-quarter report authored by Collier’s Ruffin, location is still the dominant criteria between equivalent buildings. The single largest obstacle in the market is the high cost of tenant improvement construction.

Whether buying or leasing, added Cayton from CB Richard Ellis, Southern Nevada is one of the most dynamic commercial real estate markets in the country. And, despite the rising costs of land, fuel and rent, Nevada overall is an affordable place to work, live and do business.