RENO, Nev. — Although office development has lagged during Northern Nevada’s extended and white-hot boom cycle, two new speculative office buildings are going up in one of Reno’s hottest markets.
McKenzie Properties is erecting a 41,000-square-foot building at the south end of Kietzke Lane, and Charles Schwab is erecting a two-story 20,000-square-foot building near the east entrance of the new Rancharrah development.
Charles Schwab plans to occupy the second floor and lease out about half the building’s space on the ground floor. Tolles Development Company also plans to construct a roughly 25,000-square-foot office building at Rancharrah, and Nevada Urology recently erected a new medical office building next to the McKenzie site.
Despite the region-wide building boom in residential, multifamily, retail and industrial properties, there’s just a handful of new office spaces going vertical because of stagnant office rental rates and high construction costs that are stifling both new construction and remodel efforts, developers and Realtors told the NNBV.
BUSINESSES MOVE IN, BUT OTHERS MOVE OUT
According to Dickson Commercial Group’s first-quarter office market report, overall Reno-Sparks office vacancy is just under 12 percent. Scott Shanks, principal with Dickson Commercial Group, says overall office vacancy is likely to remain there throughout 2018. There’s absorption in the market with new companies coming to town, Shanks notes, but absorption continues to be offset by existing space coming back on market.
“Over the last year, year and a half, we have floated around 12 percent with overall vacancy,” Shanks says. “Office is healthy; the problem is that there is not as much activity as most people believe. Yes the tech sector is booming, and there are a lot of Bay Area firms moving into town, but they are bite-sized tenants of about 2,000 to 5,000 square feet.
“We are starting to fill up some buildings and see some absorption, but we also are seeing people move out of town at the same time — as much as we are filling space, we are getting back space. That seems to be the continued march over the last year.”
Much of the recent absorption stems from existing tenants in the market expanding their office space, Shanks notes.
Although the new product being erected is speculative development, there are tenants for more nearly three-quarters of the space.
For example, Colliers International has relocated to the south Kietzke area from its former downtown digs at the Museum Tower at 100 W. Liberty St. in downtown and will take space in the new McKenzie property once it’s completed in October. Industrial logistics company Prologis also will take space in the building, as will McKenzie Properties itself.
THE IMPORTANCE OF PRELEASING PROPERTY
Having tenants in tow is likely the new model for any future speculative office development in Greater Reno-Sparks, Shanks says.
“With the current market, (preleasing) is critical,” he says. “We don’t have enough overall net absorption to truly build a spec building out of the ground. Preleasing is critical for any new development that will go up for office space.”
Todd McKenzie, president of McKenzie Properties Management Inc., says that securing preleases was a crucial factor in getting the Kietzke project financed through Umpqua Bank. The new building is 70 percent leased, and McKenzie says several different companies are looking at the remaining space.
“I expect it to be 100 percent (leased) soon,” he says.
Both the new McKenzie building and the Charles Schwab offices represent a more modern style of office development for Reno-Sparks. And that’s important since there’s been little in the way of new office product built over the past decade.
“The last spec office building was over 10 years ago, and most of the building stock is 10, 20 or even 30 years old,” McKenzie says. “We need new product, and we need to update the product we have.”
MORE CAPACITY ATTRACTS LARGER COMPANIES
In additional to updating existing office product in Greater Reno-Sparks, developers direly need to add more square footage, McKenzie adds.
“Demand is coming, and we have to augment what we have. If we don’t have capacity we will just get overlooked,” he says. “If there is a company out there that needs 50,000 square feet, they won’t even look at us because it just doesn’t exist. We need more capacity if we want to attract companies that provide higher paying jobs and benefit the community.”
Across the region, Downtown Reno remains the hottest office submarket, followed by Meadowood and South Meadows. Notable recent sales include the 79,552-square foot building at 10375 Professional Circle that houses Employers, and S3 Development purchased a nearly 40,000-square-foot building at the corners of Wells and Ryland avenues. S3 Development plans a mix of office, medical and retail at the site.
The high costs for new construction are also affecting the remodel market. Shanks says building owners and developers are struggling to find contractors willing to take on smaller tenant improvement projects in older submarkets, which is pushing up costs for tenant improvement work.
“The dynamics of office layouts are changing to more open and collaborative spaces, and when you have old prototypical offices changing there is a lot of demo work and revamping of spaces,” Shanks says. “Finding contractors has been tough — they have an appetite for larger deals, but for smaller deals there’s just a handful of contractors.”

RENO, Nev. — Todd McKenzie recently was asked why now was the right time for his company to develop the first speculative office project the Reno-Sparks region has seen in a decade.
McKenzie, who owns McKenzie Properties, explained that the inventory of available office space, while not a dire situation, does need to be replenished.
He also pointed out existing office space is rapidly being absorbed; some of the existing buildings are 10, 20 or 30 years old; and because of limited supply, lease rates are on the rise.
“I think if you have someone who’s looking at the current stock (of office properties), we just have a lot of old buildings,” McKenzie said at the Feb. 22 NAIOP Northern Nevada Chapter’s “HOWsing & Development” Forum. “… We have about 350,000 square feet of Class A office space, and that’s basically 1,400 new jobs … so if that many new jobs came here, that (office space) would be basically be wiped out.”
McKenzie was among several panelists at the NAIOP (Commercial Real Estate Development Association) forum.
Other panelists included: Chris Askin of the Community Foundation of Western Nevada; Jim Pfrommer of Pfrommer & McCune Ltd.; Par Tolles of Tolles Development; Aaron West of the Nevada Builders Alliance; Doug Roberts of Panattoni Development Company; Joel Grace of Reno Land Inc.; and Paul Andronico.
McKenzie’s project, the 40,826-square-foot Mountain View Corporate Center business park located just off of South Kietzke Lane in South Reno, should be completed this spring.
While there appears to be a need for more office space in the Reno-Sparks area, panelists said, no other large-scale projects are on the immediate horizon.
The massive Park Lane Mall project in Reno, for instance, was originally intended to have around 40,000 square feet of office space, but developers Reno Land Inc. decided to nix the office portion of the project.
“When we started out with Park Lane, the biggest challenge is finding the right mix,” said Grace, who is vice president of development for Reno Land Inc. “We started out with a mix of residential, retail and office space. We ended up upping the retail space and eliminating office.”
The developers agreed that locations for retail often are not always great locations for office space, considering such factors as ample parking.
While there may not be other large-scale projects in the works, some redevelopments in the region are focusing on adding or refurbishing office space.
For instance, S3 Development recently purchased a 39,816-square-foot building on the southeast corner of Wells Avenue and Ryland Street in Reno, with plans to redevelop the site for mixed-use purposes — including office and medical practices.
KPS3 Marketing, a veteran Reno firm, also recently acquired a three-story, 15,657-square-foot office building at 500 Ryland St. in Reno. The company has intentions of remodeling the top and bottom floors of the building.
McKenzie and others, however, remain bullish on the office market in Reno-Sparks, even if new construction is slow to come.
“We need more development,” he said. “At some point, it’s going to happen, even if it’s slower than, say, the industrial market.”

RENO, Nev. — With Reno’s industrial, retail and housing markets on an upswing, office properties should be ready to follow along, right?
Nope.
Not that the office market is struggling the way it was near the end of the previous decade, when the vacancy rate hit 20 percent after the financial bust of 2008. But it’s not going gung-ho, either.
Just a few new office buildings are going up, only one of which — a four-story Class A facility at the south end of Kietzke Lane in Reno, which broke ground June 6 — with space that hasn’t been claimed by a future tenant.
Builder McKenzie Properties has been advertising the 40,286-square-foot building as Reno’s first speculative office project since 2008.
On the other hand, there have been enough companies coming into the area in the past year or so to absorb most of the space that stayed vacant after 2010.
It took two years to empty out those spaces, and their ongoing vacancy brought new office construction to a halt, said Steve Shanks and Dominic Brunetti, principals of Dickson Commercial Group.
“It’s taken roughly five years to absorb it and to improve the market to what’s now 11 percent growth,” Shanks said.
All things considered, the office market can be seen as healthy, though not robust.
“I’ve been accused of being an optimist, but the phrase I like to use — and I’ve used it throughout the past year — is, ‛we’re manageable,” said Melissa Molyneaux, an executive vice president and managing director of Colliers International’s Northern Nevada office.
In today’s Reno office market, “manageable” translates into a vacancy rate roughly similar to that of the days before the Great Recession.
“Our vacancy rate continues to improve, albeit slowly — between 2 and 3 percent of the total market share,” said Dominic Brunetti, principal with the Dickson Commercial Group. “Depending on what report you read, last quarter we grew at 0.8 percent.
“Annualized, we’d be at just over a 2 percent growth rate in our market for office space.”
In a recent survey of the area, national real estate analysis and marketing firm CoStar Group pegged the all-over vacancy rate at 9.2 percent for the last quarter of 2017.
Office buildings in CoStar’s Four- and Five-Star categories hit a vacancy rate of 8.4 percent.
Rents for top-tier offices set an average of $24.51 per square foot, with the overall market registering $19.52 — all of which means good and mild business at the same time.
“I think we’re ahead, but not as much as everybody would think,” said Scott Shanks, Brunetti’s fellow principal at Dickson.
New buildings are coming out of the ground, but mostly in small ways, not like the McKenzie property.
“If you were to dissect them by class, that would be the only Class A office building under construction,” Brunetti said. “The rest would be primarily garden office — which is your single-story, stick-frame building — and a lot of owner/user facilities.”
Instead of new construction, redevelopment is the focus these days, now that building owners and developers have more money to put into their properties thanks to the number of new tenants.
“In buildings that are 10 to 20 years old, we are seeing a ton on lobby updates,” she said.
To the three commercial Realtors, the growing health of the market does not mean it is ready for new construction at a faster clip.
Developer Todd McKenzie, owner of McKenzie Properties, disagrees, though he sees new construction hampered by the nuts and bolts aspects of real estate today.
“I think the market is ready for new product. The challenges are the current state of lease rates versus the cost of land and the cost of construction,” he said. “For most folks who want to start looking for a project today, unless you can get land at an unbelievable price, given where construction costs are, it doesn’t pencil out right now.”
For one thing, the cost of steel has gone up more than 20 percent over the last year, most likely to the surge of ecommerce-fueled distribution warehouse construction, he said.
Then there is the shortage of skilled construction workers, given that the Great Recession drove many tradesmen and tradeswomen out of the field and into other careers.
“That’s definitely a problem in building,” McKenzie said. “That’s an availability issues, and that affects time, which is money. We are nowhere near where we were or where we need to be.”
“One thing that could be an impetus for new growth is the new tax policy,” said Brunetti, referring to the federal tax reform package that eliminated deductions for state and local income tax payments, a non-factor for Nevadans. “It’s definitely going to affect California, so you could see a push populace-wise from people who say it was the straw that broke the camel’s back.”

Northern Nevada is growing quickly and many companies moving here are looking for new, 2017 Class A office space. Class A office space represents the newest buildings in the market, with the highest quality construction, finishes and infrastructure.  Tenant benefits associated with class A buildings include that they are conveniently located, have good access, and are professionally managed. Because of the higher end advantages, class A buildings attract high quality tenants and also remain in the top tier of rental rates. Reno is experiencing a shortage in class A office space and an increase in new speculative office buildings are needed to accommodate the many businesses looking to call northern Nevada home.
Mountain View Corporate Center is the first speculative office building to break ground since 2008. The building has customized floor plans, generous tenant improvement allowances, balconies and much more. Mountain View Corporate Center is centrally located, with many amenities offered nearby.  There are 78 restaurants and drinking establishments within a 5-minute drive, making client work meetings and luncheons very convenient.  Mountain View Corporate Center offers access to nearby hotels, shopping and easy freeway access. We are looking forward to accommodating our tenants with a luxurious view and welcoming feeling.
Although the market shows we will continue to see a shortage of Class A office space into mid-2017, our goal is to remain strong and to continue to be attentive and accommodating to our current and future tenants needs and maintain successful relationships. We also look forward to growing and developing more spaces as the northern Nevada market continues to thrive.
This article discusses fluctuation of our local market and the short supply of Class A lease space.   Take a look here.
http://www.nnbw.com/news/real-estate/reno-office-market-on-slow-steady-climb/

We are pleased to announce we have broken ground on 5520 Kietzke Lane. This is the first speculative office project to be built since 2008. More details to come!

Northern Nevada continues to recover and expand and we are excited to continue to be apart of it. We will be breaking ground on the newest addition to the Mountain View Corporate Center in spring of 2017. Expected delivery is Q4 2017. The new building is a 40,826 square feet Class A office space with four stories. The third and fourth floors will be completed with two balconies and the building will feature high end finishes. McKenzie Construction is the builder for the project and the architect is Tectonics. This is the first speculative office building to break ground in northern Nevada since 2008. 
McKenzie Properties acquired the land in February 2015. The purchase included 5470 Kietzke Lane and the adjoining 5-acre parcel. The existing building has three stories and totals 56,589 square feet of Class A office space located on a 3.37 acre parcel.
Mountain View Corporate Center is a 30-acre, master-planned business park situated between Evans Creek and Anderson Park in South Reno. Mountain View Corporate Center is home to a variety of businesses, such as Holland & Hart, HD Retina Eye Center, City National Bank and Sun West Bank. The new building will soon be home to similar businesses, part of a thriving commercial community in the Kietzke area. The Meadowood submarket continues to have great demand and the Kietzke Lane corridor is particularly strong.

 
The northern Nevada office market has not seen any new development exceeding 10,000 square feet in nearly a decade. What has been built has been build-to-suit product with tenants already in place before dirt is moved. Speculative construction in the office market has been halted for some time. In fact, northern Nevada has not seen a speculative office project since 2008.
Between 2006 and 2010, the market experienced a steady increase in vacancy rates. From 2010 through most of 2012, lease rates continued to drop. Developers could not construct a building and lease it for the costs of development. The result was that tenants were limited to pre-existing buildings, though rents were lower. While vacancy rates began to drop in 2010, lease rates did not see an increase until nearly the end of 2012.
Now that we are past one of the most significant economic downturns in our history, lease rates have begun to approach the level to warrant new construction. Tenants are going to begin to see more options as demand continues to grow and ground up projects are now feasible for developers and tenants alike.
As always, some submarkets in the area are stronger than others and speculative building is beginning to pencil for property owners and investors. The Kietzke corridor has continued to be one of the most dominant submarkets for office users. This area continues to have lower vacancy rates over time, in good market conditions and not so good market conditions.
In fact, plans are moving forward on the first speculative office product to be built in northern Nevada in more than 7 years in the Mountain View Corporate Center. The center is located past the roundabout at the south end of Kietzke Lane. The site has freeway visibility, the space to accommodate needed parking and the surrounding buildings (all Class A) are some of the best quality in the market.
McKenzie Properties will break ground late summer on a 40,000 square foot speculative office building on the 5.5-acre parcel next to the City National Bank building. This area will remain one of the most desirable sub markets in town and we believe there will be significant tenant demand in Mountain View Corporate.
The new Class A building is scheduled to be complete in July of 2016. It will be four stories with a view of Evans Creek and the surrounding mountains. Finishes will reflect the same high quality as the surrounding product.
Not only can we expect to see more and more additions to the inventory in the office market, it is truly a market signifier to see speculative development begin. Confidence in the northern Nevada commercial real estate market is higher than it has been in a decade and the result will be more and more movement and construction in 2015 and 2016.