Overhead view of the 95,000-square-foot building at 645 E. Plumb Lane in Reno (seen in the foreground), which will house a new campus for Panasonic Energy of North America.
The repositioning of the old AT&T and Nevada Bell building on East Plumb Lane is a huge win for the Northern Nevada office market.
In fact, the lease of the nearly 95,000-square-foot building is the largest true office lease ever inked in Northern Nevada, said Chase Houston, vice president and principal of the office team at NAI Alliance.
Constructed in 1964, the building was by all accounts functionally obsolete and could potentially have sat dark for years.
However, Panasonic Energy of North America will expand its footprint in the Truckee Meadows by creating a divisional campus featuring engineering labs, training facilities and other support functions for its battery-making operations at Tesla’s Gigafactory at Tahoe Reno Industrial Center.
The office building is owned by Los Angeles-based Industrial Realty Group LLC, which will redevelop the property to meet Panasonic’s needs, said Brian Armon, vice president of the industrial group at NAI Alliance, who worked with PENA to find a property in Northern Nevada.
Due to a lack of available space, Panasonic originally looked at leasing an industrial facility and creating a lab within, but after examining a number of industrial properties and weighing the costs associated with creating a modular lab, that vision changed, Armon said.
“We began looking at buildings that had the opportunity and infrastructure where we could convert a lab, and this building had substantial infrastructure from a power and battery backup perspective,” he said. “There’s already a generator onsite, and there’s a large module for battery backup.”
IRG specializes in repositioning older assets around the nation that have been left by the wayside and turning them into viable and modernized properties, Armon said.
IRG purchased the building several years ago, but it had been sitting vacant. Group West Construction, Inc. will handle the physical renovations for IRG, said Justin Lichter, vice president of Industrial Realty Group.
Lichter said IRG published extensive marketing materials on the property that helped show its potential. Developers don’t really build structures like this anymore, Lichter added. The building has a ton of windows, several outdoor courtyards, and even some underground parking.
“We have been excited about this building since we acquired it,” Lichter said. “We knew that it was just a matter of time that somebody would see what we see (in it). When you see it as-is it’s hard to visualize, but this is what we do.
“We knew it could work either as a single-tenant campus for some of these larger tech companies that are looking into Reno, or as a multi-tenant building. We had some interest, and we thought it would be leased sooner, but COVID hit and that put a hold on the office market. This (building) is great for Panasonic and for the City of Reno to reposition a property in this location with all the gentrification that’s moving out from Midtown.”
Panasonic will occupy the building in phases as renovations continue and is expected to move in this summer, Lichter said. Armon represented the tenant in the lease negotiations, while Houston represented the landlord. Houston said an important secondary win is the large number of high-paying jobs that will be located in the heart of Reno.
“You hear of (high-paying) jobs out at TRIC and where Tesla is, but you rarely have big companies taking office space with high-paying engineering jobs (in town),” he said. “A lot of big companies pass on Reno because we don’t have the giant spaces and tech campuses ready to go that they need.”
In other regional office news, the pandemic continues to create uncertainty in the market, but small tenants leasing office space have offset any losses to larger corporate clients who still have not returned to their offices, said Patrick Riggs, office specialist with Dickson Commercial Group.
Last year was drastically different from 2020, Riggs added, but the future of the regional office market remains cloudy as new COVID variants continue to emerge — omicron muddies the outlook since masks and other restrictions clearly aren’t going away anytime soon.
The primary drivers in the rebound in 2021 were tenants under 5,000 square feet. Those businesses in a large part helped the Northern Nevada office market realize positive absorption in 2021, Riggs said.
“They have really taken the torch and run with it,” he said. “We have definitely seen an increase of companies coming into the area, but those are still companies under 5,000 square feet.
“There is still some corporate overhang — they have been reluctant to come back, especially as more (COVID) variants come about. It’s the smaller users who have been able to come back more efficiently.”
The third quarter of last year ended with around 68,000 square feet of positive net absorption, and vacancy was just under 11 percent. Vacancy is expected to continue its downward trajectory as we navigate the new year, Riggs said.
Office landlords also are changing their strategies as the market rebounds, Riggs noted. Landlords remain aggressive in their pursuit of new tenants, but they are beginning to limit terms as they draw in new tenants.
“Smart landlords are going after deals and tenants that were looking at this market in 2020 and 2021,” Riggs said. “Those landlords were very aggressive in getting tenants and occupancy, but we are starting to see a shift away from that, especially in sizes under 5,000 square feet.
“Landlords are now pressing lease rates a bit and not giving out as many concessions,” Riggs added. “That’s something to keep an eye on in 2022, but it all depends on where we go with COVID. We have so much (investment) money and 1031 (exchange) money coming over the hill (from California) that our market is strong. Office rebounded in 2021 and we will continue to see that strength in 2022.”
NAI Alliance’s Houston said the office market in the third quarter of 2021 bounced back to pre-co vid levels and remains positioned for even greater gains in 2022. The biggest change he’s noted is tenants requesting more flexibility during lease negotiations.
“Instead of a five- or 10-year lease, they are asking for shorter terms,” he said. “But we are getting higher premiums for landlords for lease rates by offering that flexibility.”
Another trend that’s surfacing for tenants operating under the hybrid model of splitting time between the office and work-from-home is that they are requesting more collaborative space in their offices, Houston added.
“They want collaboration rooms, auditoriums and larger conference rooms,” he said. “The ‘put-your-head-down’ work is done at home, and you come into the office to collaborate.”
According to a fourth-quarter office market report published by Colliers International, net absorption in the fourth quarter was 73,954 feet, the highest number seen since 2019. Net absorption for the year was 132,519 square feet.
Investor demand led to $56 million in office sales in the fourth quarter, a 50-percent year-over-year increase, and annual sales of $222.8 million was the highest volume notched since 2018. Average asking rates of $1.84 per square foot, meanwhile, represented a modest 4 percent gain across the year.