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Analysis
The Economy; What it Means for Northern Nevada’s Office Market
by NAI Alliance Office Property Group
The story in 2007 was about the dampening effect the residential downturn created on the commercial real estate market. In 2008, credit markets began to suffer and the effects have spread not just locally, but globally. The spillover from the credit crises in real estate has resulted in a slow-down in economic growth which is leading to a lack in demand for commercial space, as well as a wave of sublet property. The current result is downward pressure on rents as well as investment values moving downward due to the effect of changing rental streams and lack of financing.
Given the lack of new office construction and no development pipeline, we see this window changing over the next 18 to 24 months. While the slowing economy may force more companies to re-evaluate their requirements and perhaps consolidate their operations, there is an argument that this may, over time, benefit the Northern Nevada market. Over the next 18 months, we should see an increase in out-of-state companies relocating to Northern Nevada, not only for the business-friendly climate, but also for the re-adjusted residential and commercial real estate values. During their peak in 2006, the values limited the argument that Northern Nevada was a more cost effective location than neighboring states.
Over the next year, tenants will have the opportunity to position themselves to take advantage of this slow-down by locking in long-term leases at reduced rates. The market is seeing significant free rent and tenant improvement allowances as part of deals, although in many cases these concessions are being offered to sustain face rents.
Class-A buildings (loosely defined in Northern Nevada as newer, multi-story buildings) have been hit the hardest by this real estate slow-down. Landlords with vacant space in shell condition will have a difficult time finding a tenant given the abundance of second generation space available at more affordable rates. We have seen a number of instances where landlords are offering short-term leases at significantly reduced rents simply to generate cash flow to help weather the storm. Most of this activity is occurring in the South Meadows area where vacancy rates have risen the last six consecutive quarters to approximately 22.03%; and 25.8% with sub-lease space. While Class-A office space is suffering the worst, Class-B space is holding its ground as tenants take a more cost conscience approach when choosing their location.
Sales of vacant shell space will be largely limited to owner-users as traditional investor financing for current non-income producing assets, without a substantial equity contribution (50% +/-), no longer exists. On a more positive note, there are a number of excellent financing options available to owner-users with strong financial history, including 100% financing for professionals. With continued suppression of vacant building prices and excellent interest rates, there hasn’t been a better time in nearly a decade for owner-users with long-term hold intentions to purchase.
In the long run, this economic correction will assist Northern Nevada in its diversification from a gaming, warehousing and mining economy to other industries such as bio-med, alternative energy, mineral excavation and technology. As we wait in anticipation for the change in the national and international political economy, the tendency is to wait and see. But it is this point in history that has the ability to create value or savings depending on your perspective outlook as an investor or tenant.
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