Although the office market in Nevada has been battered by rising construction costs and a high interest-rate environment, experts agree that Class A properties offering the right combination of lifestyle amenities and desirable locations can be successful in this challenging market.
Defying the odds by adjusting to market conditions is what successful office developers have learned to do, whether they’re faced with an uncertain economy, rising costs, tight-fisted lenders, or tenant companies transitioning from work-from-home to in-office work. The bottom line for developers is discovering what the tenants need and want, and then being flexible enough to adapt their business model to fit those demands.
The Fallout from Work-From-Home
In 2019, just 5.7 percent of working Americans worked from home. When offices were shut down during the pandemic, technology made it fairly easy to pivot office workers to a work-from-home (WFH) situation, and by 2021, nearly 18 percent were working from home. According to Forbes, 12.7 percent of full-time employees still work from home in 2023, while 28.2 percent work in a hybrid model.
Both employers and employees weren’t sure how WFH would affect productivity and office morale, and there were mixed results in both areas. Now that the pandemic crisis is over, employers are trying to convince employees to return to the office, but they often experience pushback from team members who became used to working in sweatpants and slippers.
“A tech center needs synergies, a real estate company needs in-person conversations, and medical researchers work side-by-side, not from home,” said Frank Maretti, founder of commercial property developer G2 Capital Development. “National surveys show that most companies are mandating back-to-work, and some are saying, ‘Come back to the office or get another job.’ Companies that need to have people in the office want to give them an environment that’s even better than home and give them a reason to be around the water cooler instead of in their living room. We’re seeing those kinds of tenants sign new leases.”
Andrew Ciarrocchi, SVP management & operations for Howard Hughes, developer of Summerlin, agreed, saying, “Today, more than ever, quality of the work environment is a deciding factor for retaining talent. While some industries are continuing a full-time remote work environment, more and more companies are opting for a hybrid arrangement, including our own. This means the office is set up for traditional business and collaborative meeting space paired with days working remotely, which is critical for employee satisfaction and retention.”
To help their office tenants attract and retain employees, developers are designing spaces that compete with WFH by offering amenities like natural light, walking trails, and communal areas for gathering and conversing. Projects based in locations that offer the convenience of walking to restaurants, retail stores, daycare, and gyms are enjoying success, and mixed-use projects, which combine all these conveniences in one location, are seen as a workable and popular solution to the WFH dilemma.
Flight to Quality
The dominant trend in the Nevada office market today has been labeled “flight to quality.” According to Jeff LaPour, president & CEO of real estate development company LaPour, “Flight to quality is the number one driver we see when meeting with prospective companies. Now, more than ever, they are looking for spaces that promote employee wellness and offer flexibility. Premium spaces with modern amenities, tech integrations, and sustainable features are in high demand.” He noted that older properties continue to struggle with occupancy, even at substantially lower rents.
Maretti stated that the flight to quality in the office market is stronger than it’s ever been. “It’s similar to the high-end housing market,” he explained. “In residential real estate, those who can afford it locate in a new, trendy area. Then two years later, they move to a newer area that’s more upscale. In the Class A office market, when it’s time to move, companies want to move up to a better-quality building with newer amenities.”
According to Matt Grimes, senior vice president of CBRE in Reno, “High-end professional companies, such as law firms, are willing to pay for a Class A property with the amenities and location they want. However, many Class B and Class C properties are sitting vacant.” He explained that employers with large, open-space buildings must not only compete with employers offering WFH options, but also with new, more modern products coming online with the amenities that tenants are now demanding.
Amenities and Mixed-Use
What kind of amenities are involved in this flight to quality? One example is 1700 Pavilion, a new 10-story building by Howard Hughes in Summerlin. It offers bike storage and showers to encourage cycle-to-work options, a shared common area within the first-floor lobby, and LEED Silver Certification. “Walkability and ease of access are key for office development,” stated Hughes’ Ciarrocchi.
The Narrative project, located just off the 215 Beltway and South Durango Drive in Las Vegas, was developed by LaPour and G2 Development and completed in December 2022. The four-story tower with nearly 103,000 square feet of office space features amenities that include bike lockers and racks, showers, a fitness room, “quiet” work rooms, a private terrace and a quarter-mile walking path around the property.
LaPour CEO Jeff LaPour said Narrative’s amenities have allowed it to lease quickly in a post-pandemic environment. “Lifestyle offerings are redefining what tenants expect from office spaces,” he said. “Walkable, mixed-use developments allow employees to have multiple amenities like gyms, dining, retail, and entertainment, making the work environment more attractive and convenient. We are also seeing an increase in wellness-focused design that enables tenants to have natural light, outdoor environments, and communal gathering areas. For a developer, it’s critical to implement these new offerings into your designs to stay competitive and create a modern development.”
Mixed-use projects that include retail and food options will be prevalent for the foreseeable future, according to Maretti. “You can eat where you work, get your hair done, drop the kids off at the sports park. It’s especially important to provide convenient ingress and egress, and parking is critical to make a mixed-use project work.”
One such large, mixed-use project is underway in Reno, where CBRE is currently representing Skypointe, a six-story tower scheduled to break ground in 2024 at the intersection of South McCarran Boulevard and South Virginia Street. The development will offer a mix of 171,500 square feet of office space and up to 36,772 square feet of retail, coffee shops and restaurants, all with convenient on-site parking.
Making a Project Pencil
How can developers afford to offer all the amenities and lifestyle offerings tenants need to attract their people back to the office? They are faced with rising interest rates, skyrocketing construction costs, high prices for land, and an uncertain economy.
While one obvious solution to making a project pencil would be to raise lease rates, Maretti noted that rising interest rates have not only affected the office industry, but also its tenants, whose bottom lines are already challenged by inflation. “There’s a trickle-down effect on everyone involved, from developers to end users to subcontractors,” he said. “You can only charge so much rent because tenants can only pay so much.”
Thoughtful design is required to help developers cut costs while still offering the amenities tenants want, according to LaPour. In addition, most developers are requiring tenants to pay for their own tenant improvements (TIs). “Requiring tenants to contribute to office finish-outs has become universal this past cycle,” he stated. “It’s a market condition that’s not expected to change anytime soon.”
Grimes added, “Construction costs [for TI’s] are through the roof and many are double what they previously were. Tenants aren’t used to coming out of pocket for TI’s and many are looking for Class A offices that already have nice TI’s, versus spaces that need to be overhauled.”
The bottom line? Maretti admitted, “We don’t have a magic answer for this situation.”
What’s the Future for Office in Nevada?
In the short-term, Nevada’s office market faces significant obstacles, as developers of office properties face the challenge of high interest rates. Besides affecting their ability to borrow money, the interest-rate environment also makes it more expensive to pencil a project.
“Multiple interest rate hikes in a relatively short period of time have impacted new construction,” noted LaPour. “Banks have also pulled back on construction lending, so we are seeing projects delayed and several placed on hold indefinitely. It will prevent overbuilding, but may also drive rents higher as demand continues.”
Because they need financing for their projects, private developers are facing more obstacles in getting projects to market than public companies with their own funding. “Developing Class A office is very challenging today,” said Maretti. “Larger, publicly traded companies will continue to develop as they see fit, but I don’t think we’ll see any new Class A office projects from private developers in the next 3 to 5 years, or until interest rates and construction costs come back in line.”
LaPour agreed, stating, “I foresee no new construction for at least two years by private developers.” However, LaPour pointed out that demand for properties that fit the “flight to quality” criteria is strong, even under current conditions. “In Las Vegas now, demand has never been this strong for brand-new, modern projects, and it’s never been this bad for older, obsolete projects. If the location is great, you can reimagine your building to take advantage of demand, but if the location is bad, it might be time to rethink it as something else – hospitality, a sports complex, or something completely different.”
Grimes noted, “There’s been no significant office construction in northern Nevada for some time. Construction costs are so high that you need a best-in-class project in order to pencil. Your standard, average-size suburban project probably won’t. Tenants are willing to pay, and it’s still possible for some new developments to pencil. Tech companies moving here from northern California see that our rates are still better than what they’re used to there. Obtaining financing is possible, but you need pre-leasing.”
Despite the current challenges, developers agree that the office market will eventually bounce back as it always has in the past. Ciarrocchi is optimistic about the long-term outlook for southern Nevada’s office market. “In Las Vegas, we believe we are bucking the national trend for office development, given the lower vacancy rate here than the rest of the country,” he said. “There are many reasons for this, including our state’s business-friendly, low- and no-tax environment, and the growth of professional sports and the tech industry.”
CBRE’s office market report for southern Nevada for Q3 2023 stated, “The Las Vegas market remains optimistic and is expected to overcome current economic trials and tribulations, given the number of planned office projects in the pipeline and continued tenant interest from outside the market. This, with projected return-to-office mandates, will boost demand, push net absorption on a positive trajectory and drive down vacancy.”
LaPour stated, “Nevada, particularly Las Vegas, is poised for growth. We have strong in-migration from California and other markets and businesses looking for favorable tax conditions and business environment. Areas beyond Las Vegas, such as Reno, are also witnessing growth due to tech companies and other industries seeking alternatives to pricier West Coast locations. Short-term could be choppy with financial markets, but the long-term outlook for the Nevada office market is promising.”
