Is now the right time to pursue a build-to-suit office building?
Over the last five years, there has been very little ground up construction of office buildings in Northern Nevada. With the “great recession” affecting so many companies in northern Nevada, companies did not have the financial confidence to commit to long-term leases, let alone the purchase of a building. Additionally, with the downsizing in office needs and the lack of demand for new leases, many companies and investors were forced to sell their office properties. This combination of rapidly growing office inventory coming onto the market along with the national and local financial uncertainties created a perfect storm that saw office property values in northern Nevada fall by upwards of 50 percent below the costs of new construction.
The good news, however, is that these economic realities for our region also forced developers to quickly stop building new office properties that limited new inventory coming onto the market and forcing values down even further. Therefore, the last five years have been spent absorbing the available inventory in the market and now, with the economy seeing a modest recovery and companies becoming more comfortable in their sustainability, the demand for more office product is beginning to rebound. Additionally, with interest rates at an all-time low for owner/user office properties, there are many more willing and able buyers looking to take advantage of the opportunities in the market. Like the residential market, now there are fewer office properties available for purchase or lease, and prices are beginning to rebound.
When a client comes into a developer’s office looking to build an office building to suit, it is typically for one of three reasons: 1) they like or need a specific location, 2) they want the benefits and appreciation potential of owning a new property, or 3) they have a specific design need that does not exist in the current market. As an example, if a company has a specific need or layout (i.e. medical office use, dense office layout, additional water requirements or excessive parking needs), there may not be a building currently on the market that facilitates these requirements. This is where a potential build-to- suit may be the best option.
Says Kevin Annis, a broker at ArchCrest Commercial Partners, “In working with two build-to-suit clients last year, neither of them were initially looking at the build-to-suit solution. However, after evaluating what was currently available in the market, it became apparent there was nothing that was move in ready per their specific needs. Therefore, our only two options were to look at either buying a second-generation building and re-tenanting the building or looking at a build-to-suit option. After evaluating the time to buy a second-generation property and pay for the tenant improvements, the costs were very similar to simply buying a brand-new, turn-key property that was built per my clients exact needs”.
While the costs to build a brand new office building will more than likely be more expensive than buying second-generation space, it may be much closer than one may think after taking into account the additional costs for demolition, potential improvements to bring the building up to current codes and the costs to re-tenant the second generation space. Additionally, until market conditions warrant prices similar to the pre-recession pricing, developers will continue to price their land at lower values and offer other incentives in an effort to make a deal on a build-to-suit transaction. Furthermore, besides the incredible opportunity today of historically low interest rates, working with a developer takes many of the headaches out of buying and designing an office building for the company’s specific needs. If you elect to acquire a 2nd generation building and rehab that building for the specific needs of your company, the process of finding and working with an architect and a builder can become very complex and very timely. When you buy a new office building from a developer, the developer helps in the design of the office layout, helps with the selections of the fixtures and finishes to be installed within the building, creates a cost budget, and walks you through the entire process. Additionally, once completed, the new property that has been custom designed specifically for your needs now has a 10-year warranty with the developer responsible to fix anything that goes wrong with the building for the first year.
So, while there may be options available on the market today for second-generation space, unless you are able to find the property with the absolute perfect location, layout, and price, the available financing, the customization of the building, and the competitive pricing makes this is a great time to look into a potential build-to-suit property for your company.
Kreg Rowe is the founder and managing partner of Tanamera. Contact him at 775-850-4200
The agreements are designed to split the costs of improvements such as traffic signals between Carson City and developers whose projects generate the traffic increases that trigger the need for improvements.