2008 End of Year Office Market Report

Press Release: Office Group

775 336 4600

ACTIVITY AND ABSORPTION:
The global economic slide continues, and its affect on our local office market is more and more apparent. Many local and national businesses, large and small, are downsizing or closing their doors all together. For the last six consecutive quarters, the Northern Nevada Office Market has lost businesses to attrition. However, the negative net absorption of office space is becoming smaller, approximately (21,000) SF in 2008 compared (92,000) SF in 2007, which may be a signal that we are close to the bottom. Although this may be true, we believe vacancy rates will remain relatively high and lease rates will remain relatively low throughout 2009.

Net Absorption 2006: 145,000
Net Absorption 2007: (92,000)
Net Absorption 2008: (21,000)

SIGNIFICANT TRANSACTIONS:
Meadowood Submarket
American Institute of Health Technology: 14,700 SF at 5580 Kietzke Lane
Wachovia Securities: 16,082 SF at 5470 Kietzke Lane

South Meadows Submarket
Spec-TIR: 13,056 SF at 9390 Gateway Drive (sublease)
University of Phoenix: 28,000 SF at 10315 Professional Circle
Greater Nevada Credit Union: 14,032 SF at 10509 Professional Circle (sublease)

VACANCY:
Office vacancy rates have reached all time highs in nearly every Northern Nevada submarket. Many businesses are looking for lower cost office space with more flexible terms to help weather this storm, making the Airport submarket the exception with a vacancy rate hovering at 14.98%. On the other hand, the South Meadows submarket has been the hardest hit by the economic downturn with vacancy rates exceeding 29.90% when sublease space is included. Landlords in the South Meadows submarket continue to become more and more aggressive as they battle for the few tenants searching in this submarket. Tenant’s willing to relocate during this time will be able to secure rates and terms that meet their requirements. Landlords are very willing to sign short term leases in this submarket; however tenants should see the value in a long term lease at these reduced rates.

Market Vacancy 2006: 15.6%
Market Vacancy 2007: 18.2%
Market Vacancy 2008: 19.2%

CONSTRUCTION:
As history proves, a national economic rebound will occur. Without significant pre leasing and greater equity participation by the developer-borrower, financial institutions will look to avoid their previous mistakes by making it very difficult for developers to achieve financing for speculative office construction. In this scenario, the market will have to vastly improve before new construction can take place, which will result in a lag of new supply coming on the market, and a rise in demand for this limited supply. We do not foresee new speculative construction until the vacancy rate decreases to below 15%. This decrease in vacancy will account for a required absorption of approximately 350,000 square feet; a two to three year supply.

New Construction 2006: 230,000 square feet
New Construction 2007: 92,000 square feet
New Construction 2008: 114,000 square feet (including 80,000 SF of build-to-suit)

ASKING LEASE RATES:
The aforementioned have had their obvious impacts on lease rates and the tenant’s ability for pre-termination renewals at discounts that rival the asking rates of 2000 – 2002. The inundation of new sublease space at significantly reduced rates has driven average asking rates down by a minimum of 15%. A recent ‘plug and play’ midsize transaction completed at $1.70 per square foot full service gross in the Northern Nevada Corporate Center, the most recent Class A South Meadows office park providing freeway visibility, renders the rate relief tenants are taking advantage of. The landlord concession of choice is free rent. While trying to retain the anticipated long term income, landlords are faced with offering up to one month rent free per every year of the lease term. This is what it takes to retain and attract tenants.

Average Asking Gross Lease Rate 2006: $2.05
Average Asking Gross Lease Rate 2007: $1.78
Average Asking Gross Lease Rate 2008: $1.62

OUTLOOK:
The current economic woes have created hesitancy in every market, resulting in a reluctance of tenants, landlords, buyers, sellers, developers and financiers to, as we say in Nevada, ‘play a hand’. The enduring hope is that the Northern Nevada Office Market will settle at its low by mid 2009 and begin to strengthen at the core as we roll into 2010. The underlying precipitance for this core strengthening will be the correction of the cost of living, namely the housing market, and the reminding celebration, once again, of Northern Nevada’s quality of life and advantageous tax-friendly business climate.