Nov 15th Issue
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Analysis - Nov 15th, 2009
 Reno Commercial Office Market Third Quarter 2009 Market Update by Tim Ruffin The overall vacancy rate dropped from 21.2% to 21.1%, which is probably not statistically significant since it is less than a half of one percent difference. The good news is that it did not jump up significantly. Because of the rapid deterioration of our local economy, most of the surplus office space was given back to the market in the first quarter of 2009. The market did continue to see the trend of tenants in older buildings move into nicer and newer buildings in Meadowood and the South Reno Corridor. This will put pressure on landlords of older buildings. If they drop rents much more, they will not cover operating expenses. Brokers are just beginning to be contacted by banks needing to sell foreclosed office buildings. Most office building buyers in the last three years that took out mortgages in the 75% loan to value range are probably upside down. With many small businesses closing up or downsizing, expect to see more buildings sold out of foreclosure in the next twelve to eighteen months.
Where is the Market Heading?With office occupancy being a lagging indicator, and unemployment in Northern Nevada rising, expect to see a slight up-tick in vacancy between now and next summer. Hopefully, vacancy will start falling a year from now. Rents won’t fall much further, as to do so would force most landlords to lose their buildings to their lenders. Construction will cease except for the occasional build-to-suit. Land sales will be very slow with little demand for ground up building.
RentsRents overall are down between 10% and 30% depending on the submarket. Rents in the South Reno Corridor have been hit the hardest. There is simply too much competing space for the few tenants in this submarket. Some select buildings in high demand areas are fairing well with rents only down about 10%. The lack of new buildings will help keep rents from falling further.
VacancyAs stated above, the overall vacancy rates decreased from 21.2% to 21.1%. The amount of sublease space in the market remained constant at 2.8%. We expect the amount of sublease space to start dropping as leases expire and the space becomes a direct lease.There was very little adjustment in the various submarkets. As a general rule, the older submarkets had a 1% increase in vacancy and the newer submarkets had a 1% decrease in vacancy.
ConstructionThe new two story 16,000 square foot mixed use building downtown on State Street was completed in the third quarter. This could easily be the last spec building for the next five years. Some build-to-suit buildings for the GSA were expected, but they appear to be focusing on existing structures for the time being.
AbsorptionNet absorption was positive for the second consecutive quarter, but was only 2,614 square feet which, like the change in vacancy, is not significant. For the year the office market is still down 112,000 square feet. The fourth quarter should look much like the second and third quarter with the only activity being tenants moving between existing buildings. 
Tim Ruffin |