Tuesday, February 8, 2011

Fourth Quarter 2010 Office Market Update

Posted by: Dominic Brunetti, CCIM
Vice President
NAI Alliance Office Group
775 336 4600


We heard it again last week from a business colleague in the telco sector; every time it feels like the overall health of the market is improving; a national disaster, political eruption, or other news worthy event impedes momentum and causes for a retreat of attitude and the effect of hesitation to trickle back into Northern Nevada. After a surprisingly active December, do we dare hold our breath as activity continues to increase?

Ending 2009 with a record high overall vacancy rate of more than 20%, the office market is beginning to see positive activity ending 2010 at 17.84%. Most of the activity has been internally driven, with upgrades in space classification being optimized as prices continue to trade at ten-year lows. The Downtown submarket has recently seen a good deal of activity as more businesses are attracted to the revitalization of Downtown Reno and the amenities offered. Overall pricing continues to be stagnant, but this should improve as vacancy declines due to no new construction in place or planned.

The activity producing most benefit is that of local expansions and new business to our community. Notable transactions for the quarter included leases by Western Title Company (10,228 sf), Delphi Asset Management (5,524 sf), Greater Nevada Credit Union (5,400 sf) and Stifel Nicolaus & Company (5,117 sf). The quarter over quarter total office vacancy rate decreased slightly from 18.42% to 17.84%. This reflects the lowest overall vacancy rate since 2006.

Although conditions are looking more favorable, building owners are continuing to be aggressive with low rental rates and sale prices to fill buildings. The market will need to experience a few more quarters of declining vacancy before landlords firm up rents. The median asking rents for Class A office space was $1.58 per square foot, Full Service, while median asking rents for Class B and Class C office space ranged between $1.20 and $1.30, Full Service. Effective rates are negotiated 10% to 25% below asking rates.

The pattern of stabilization we are experiencing is approximately 1 year old. Yes, in its infancy, but we remain optimistic. The end of 2010 brought us into a positive net absorption of just over 1,000 square feet. The first positive within this data set since 2006. Baby steps indeed, but as no new speculative construction was built or planned and the build-to-suits for Williams Gaming and Customs Immigration Services are complete, we look to cautiously develop this trend through 2011.

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