Brokers

New year optimism: Commercial real estate moving to modern office spaces

Commercial real estate brokers in the office and multifamily sectors are glad 2023 is in the rearview.

A new year usually brings a fresh outlook, and regional office brokers are in dire need of a breath of fresh air. Dust has finally settled from the cultural and workforce shift that saw thousands of employees leave big office buildings for cozy home workspaces, and the heavy lifting can begin to try and reposition or fill those vacant spaces.

Nowhere is that radical shift felt more than in south Reno. Boasting more than 1.4 million square feet of office space (trailing the downtown Reno submarket by just a few thousand square feet), overall vacancy in south Reno currently sits at more than 21 percent, according to a recent office market summary by CBRE. Vacancy in South Meadow’s once-coveted Class A office properties, meanwhile, is nearly 27 percent, with no signs of relief on the horizon for multiple office building owners.

“Those buildings have big floor plates and open spaces that were used to accommodate secondary and regional offices for larger companies,” said Dominic Brunetti, principal and office specialist with Dickson Commercial Group. “That cultural and workstyle change has made those types of office spaces in our market obsolete.

“It was such a strong movement, and it’s been a much slower recovery,” he added. “There has been to some extent a recovery, but it’s not ever going to go back to what it was prior to the pandemic. The market is going to have to adjust and get creative with some of those spaces.”

Vacancy in certain submarkets near the end of the year was much more positive, though. Downtown Reno stood at just under 11 percent, the always-strong Meadowood submarket was at 9.6 percent, and Sparks was just north of 7 percent.

A predominant trend in 2023 that’s expected to roll over into 2024 is building owners’ push to create lux office spaces in an effort to lure new tenants, Brunetti noted. Proactive building owners and developers have combated the workstyle change by creating ultra-modern office spaces across many submarkets.

“They recognized two things: Companies that want to work from an office want the highest-quality Class A space available, and they are willing to pay for it because they usually are reducing their overall occupancy costs,” Brunetti said. “They may be going down from 10,000 square feet to 5,000 square feet, and they are able to pay a premium rate in order to enjoy the best office space in town.”

That approach works well for smaller office spaces that are easily divisible, but it may not be applicable for the many vacant multistory buildings in south Reno that were constructed as office space for larger tenants, Brunetti noted.

Dominic Brunetti

 “Those large floor plates of 15,000, 25,000 and 30,000 square feet are very difficult to demise into spaces that would be attractive to office tenants in Northern Nevada,” he said.

Landlord flexibility on lease terms is the final piece of the puzzle for 2024, Brunetti added. Prior to the pandemic, lease terms for office spaces were generally inked for five or more years. Today, two- and three-year lease agreements are more common.

“Landlords who are flexible and are partners with tenants in their businesses are the ones that are winning tenancy and occupancy,” Brunetti said.

For multifamily investment properties, the trends established in 2023 are likely to continue throughout 2024, said Ken Blomsterberg, senior managing director of investments with Marcus & Millichap. Multifamily properties often change hands as new investors seek entry into the Reno-Sparks market or existing property owners seek more fertile ground for their investment capital. However, transaction volume was significantly reduced last year, mainly due to the cost of capital, Blomsterberg said.

In 2022, the Blomsterberg-Rife group brokered more than $763 million in apartment transactions in Northern Nevada. In 2023, that number tumbled to $325 million, an 80-percent reduction in sales volume.

“This isn’t like it was during the recession back in 2008-2012, when you could get 100-percent financing if you could fog a mirror,” Blomsterberg said. “(Back then), a lot of property owners got overleveraged and were turning keys back to lenders. In this case, the interest rate is causing the slowdown and lack of velocity.

“Most owners are just sitting on their hands if they are 95 percent occupied,” he added. “They are keeping their properties full of tenants, keeping a good eye on expenses, and waiting for the market to get better because they are not ready to take a 14- to 18- percent hit on (property) values.”

Unless owners need to sell – such as having loans come due and reset at today’s interest rates – they are more comfortable sitting out than marketing their properties, Blomsterberg added. The stagnation in sales volume is a trend affecting the entire western region and much larger markets, he said.

Deals that are being done are often from new property owners who feel Reno remains a strong market for investment capital, or from existing property owners seeking to expand their holdings in the Reno-Sparks market, Blomsterberg said. Regardless, Blomsterberg said 2024 will likely be a slightly better year for multifamily investment transactions than last year.

“Some property owners realize where the market is and what’s going on,” he said. “Years ago, we were doing deals where buyers wanted fresh debt because the interest rate was like 3 or 4 percent. Now, unless it’s an existing buyer, people want assumable debt because that’s much better than trying to get a new loan on a property that’s north of 5 or 5.5 percent.”

Coming next week in NNBW: Industrial real estate outlook for 2024.

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