How Our Reno Office Responded to the New COVID Workplace

McDonald Carano and Matt Addison, Managing Partner of our Reno office, are featured in a Reno Gazette Journal article that reports on the impact the COVID pandemic continues to have on the real estate office market, causing some businesses to close, downsize, or modify their workspaces. The pandemic has significantly changed office life. Matt describes the workplace considerations that led to McDonald Carano’s decision to decrease our physical footprint and modernize our Reno office, which includes a variety of changes such as reducing the number of individual offices, increasing open settings, adding a relaxation room, and creating a virtual courtroom. As Matt explains, “You need a base of operations, a place where people can come in, be comfortable, meet clients and see co-workers. It is important to have the ability for collaboration and group thinking even if you are not there all the time.”

Matt’s interview in the Reno Gazette Journal article is available here and highlighted throughout the article below.

“COVID-19 hammered offices nationwide. Here’s how it’s changing Reno’s workplaces,” Reno Gazette Journal, 4/25/2022

Wearing a baseball cap and gripping a sledgehammer with both hands, Chris Ellington channeled his inner Babe Ruth. He wound up his swing and smashed a baseball-sized hole in the wall of his employer’s downtown Reno office. No, Ellington is not a disgruntled employee. He’s a development manager for ITS Logistics, and he looked quite jubilant as he joined several co-workers in hitting walls, desks and other inanimate targets during a February “sledgehammer party.” Behind the apparent madness was a purpose. Like many supply chain companies, the pandemic was a boon for ITS Logistics. The company just announced it was doubling office space, kicking off a remodeling project inside the 50 West Liberty building. Eight miles away in south Reno, International Game Technology has struggled to fill the office portion of its 1.25-million-square-foot campus on Prototype Drive. While IGT has enjoyed success in courting industrial tenants, office tenants are a different story. The property has yet to get a client for its open office spaces since it listed the campus for sublease more than a year ago. The varying fortunes between both office spaces reflect a dichotomy in the Reno-Sparks office market after COVID-19. At the same time, the area is also bucking trends seen in larger cities across the nation.

As companies adopted work-at-home and hybrid workplace arrangements in the name of employee safety, the pandemic triggered a seismic shift in the foundations of the real estate office market. The impact was brutal in large metropolitan areas such as San Francisco and New York City, where large swaths of office space suddenly went empty. In the Biggest Little City, however, the impact hasn’t quite followed the same template.  While certain parts of the office market are struggling, others are thriving — a reflection of not just the realities of a world after COVID but Reno’s own economics as well.

Home vs. office: Which work arrangement will prevail?

Just across the street from ITS Logistics’ sledgehammer party, one law firm already finished its own office transformation inside downtown Reno’s Museum Tower. Instead of doubling its office space, however, the McDonald Carano law firm’s Reno branch went the opposite route by trading the entire 12th floor and about two-thirds of the 11th floor of the former Porsche building to Caesars Entertainment and downsizing to occupy the 10th floor instead. It’s a move that makes Managing Partner Matt Addison seem like Nostradamus. As more companies transition toward a reduced office footprint after the pandemic, McDonald Carano proved to be ahead of the curve.  Addison, however, joked that it’s better to be lucky than good sometimes. The change was decided before the pandemic, he said.

Matt Addison, Managing Partner at McDonald Carano, stands in the conference room of the Reno law office on Jan. 20, 2022. Offices have changed since the pandemic and the McDonald Carano law office has downsized and modernized their Reno office by adopting more open settings, a relaxation room and a virtual court room.

 

For starters, a switch to electronic file keeping meant the law firm no longer needed as much space for records and books. The firm also wanted to soften its image to clients. “We decided that we didn’t want our clients walking into a palatial setup and assuming, ‘Oh my God, we paid too much in legal fees,’” Addison said. “We also wanted to get away from the stereotype of the old, white guy with dark panel offices and wanted to be more progressive.”  “We did it for different reasons but it turned out the timing couldn’t be more perfect,” Addison added.

Lawyers still needed offices, but paralegals, secretaries and corporate staff now work in cubicles that fit together like puzzle pieces. That bullpen layout means lawyers can reserve an office for a couple of hours, plug in to do their work and then leave once they’re done. The result is added flexibility for a hybrid work arrangement.

One of the surprises from COVID was how employees became even more productive when working from home. Billable hours, a key source of revenue for law firms, actually increased by 10% across the entire company, including its Las Vegas office. Addison credited the success to the increased efficiency and better work-life balance a hybrid work schedule allows. “You can only charge so much per hour, but you can only work so many hours as well,” Addison said. “Now you can start early and sit there in your jammies, knock out stuff, take a shower and feel refreshed, then knock out more work, have a nice lunch and watch some TV, then knock out some more hours. Our productivity went up during COVID and we had the best year in the company as a result.”

Firms such as McDonald Carano exemplify the types of decisions that will affect the office sector moving forward. Will companies return to full-time office work? Or will more adopt a work-from-home strategy? As employers weigh the benefits and drawbacks of both sides, the answer will likely be a mix of both, said Matt Grimes, first vice president of commercial real estate services and investment firm CBRE’s Reno office. According to Grimes, the vacancy rates in Reno tell two stories in the market.  “Each company and their approach to office space is different,” Grimes said. “Some companies recognize that work from home is not a long-term solution and there are some companies where work from home is just working out fine.” “You will see a lot more hybrid work taking place allowing employees to work partially at the office and partially at home as we go forward,” Grimes added.

Reno’s office sector is still facing some challenges

Although Reno’s office market has done surprisingly well amid the pandemic, there are some concerns, including long-standing issues that the area had been grappling with before COVID-19. Reno’s situation also shows the differences in how the pandemic has impacted various markets differently. Nationwide, office occupancy was down for five straight quarters before the sector finally posted positive absorption numbers for the fourth quarter of 2021. The impact of the pandemic on the office market is especially being felt in large cities. San Francisco, for example, has seen vacancy rates nearly quadruple at the end of last year compared to the same period prior to the arrival of COVID-19, according to commercial real estate services firm Cushman & Wakefield. Value of the New York City office market, however, plummeted by $28.6 billion for the 2022 fiscal year, causing the state comptroller to describe the future of the sector as “largely uncertain.”

While many U.S. office markets saw occupancy losses last year, Reno’s net absorption rate for 2021 remained positive throughout the year, according to Melissa Molyneaux, executive vice president at Colliers International in Reno. The area posted occupancy gains of 133,000 square feet last year. Office vacancy rates also improved to 11.6%. Although the number is still higher than the 10.1% vacancy rate seen at the end of 2019 prior to the pandemic, it is also lower than the 11.8% vacancy rate seen during the close of 2018.  “If you look at vacancies in our market, we’re still at that 10-12% range, which is where we’ve been the last few years,” said Tom Fennell, a principal with Dickson Realty. “Then you have South Meadows with a vacancy rate of 5%, which is the lowest (in the area) by far.” Fennell added that the overall vacancy rate is about half of what it was during the last major economic event in recent memory — the Great Recession of 2008. In the two years that followed, office vacancies in Reno hit 20%.

At the same time, Reno’s vacancy rate — while not as bad as other markets — isn’t exactly excellent, according to Evan Meyer, a vice president specializing in the office sector for Kidder Mathews. “I don’t think it’s unhealthy but it’s not healthy either,” Meyer said. “We’d like it to be lower.” Although Reno has relatively ample supply, a lot of it involves older buildings. Ironically, one reason the office market was able to weather the COVID-19 storm can be tied to a lack of new supply in the market. In 2021, for example, about 24,000 square feet of new construction happened in Reno all year, Meyer said. Yet the average price per square foot for office space rose by 20% year over year at the end of last year. Reno also saw $203.7 million in sales volume for 2021 — the highest in three years, according to Molyneaux.

Lack of new offices a choke point in Reno

The situation of the Reno office sector during the pandemic is also different from what was seen during the Great Recession, which was driven by the collapse of an overheated real estate bubble. At the time, many companies either went bankrupt and were unable to pay rent or just gave up all their office space altogether. The pandemic, however, did not see the same sudden change in the office market in Reno.  “There’s not a car in these parking lots but everyone was still paying their rent,” Molyneaux said. “Some asked for deferrals in rents (at the start of the pandemic) and have that tacked on to the end of the term but barely anybody packed up and closed shop, so that really helped.”

While the lack of excess inventory proved to be a blessing during the pandemic, the shortage in new office buildings — particularly the high-quality “Class A” spaces in desirable neighborhoods sought by employers — is proving to be a choke point in the area’s attempts to continue to bring companies and jobs to the area. There will be times when a company will reach out to express interest in the area and ask about office space, Meyer said. But while space might be available, it isn’t the kind of space that the company wants.  “If you’re a tenant looking for Class A space between 5,000 to 10,000 square feet in Reno, good luck because there isn’t much available,” Meyer said. “My biggest concern, really, is a lack of inventory. Every once in a while, I’ll talk to executives from a large firm looking if they could bring their business to this town and we literally just don’t have the space available.”

The shortage in newer office space is fueling strong interest in several projects that aim to bring more Class A spaces to the market. One such project is Skypointe Reno, a mixed-used commercial project by McKenzie Properties that will bring 37,000 square feet of retail space plus 171,500 square feet of office space near Meadowood Mall. The six-story tower is the first speculative office building — meaning it isn’t built for a specific tenant — higher than three stories to be built in Reno-Sparks in 30 years, according to the developer. The last two speculative office projects to fit the description are the US Bank building on Neil Road and the Museum Tower that houses the McDonald Carano law firm. Both were built in 1989 and 1987 respectively.

Projects such as Skypointe should help Reno better compete with cities such as Boise and Salt Lake City to attract quality companies to the area, said Todd McKenzie, president of McKenzie Properties Management. “There are zero Class A spaces 20,000 square feet and above,” McKenzie said. “We are losing companies to other cities that have this type of product.”

Las Vegas-based CAI Investments is also banking on increased demand for office space, this time in the downtown area. The company is undertaking a major remodel of the former Harrah’s hotel-casino building into the Reno City Center, which will include 160,000 square feet of office space. The project already received a commitment from real estate technology Clear Capital to lease nearly 70,000 square feet of office space for its headquarters. CAI is also constructing a new Kimpton hotel just a few blocks away, which was planned to include 60,000 square feet of office space when it was first announced. CAI Investments CEO Chris Beavor says he is often approached by companies looking for office space downtown. “What we found is that companies coming from California that would look into Reno … needed high-quality office space,” Beavor told the Reno Gazette Journal when first announcing the Kimpton project. “When you’re trying to attract tech jobs, you need that availability of space.”

Matt Addison walks on the patio at the McDonald Carano law office on Jan. 20, 2022. The pandemic had changed office life and the McDonald Carano law office has downsized and modernized their Reno office to make it more efficient and more comfortable for employees. In addition to getting rid of several offices and adopting a more open setting, they also added a relaxation room and even a virtual court.

 

Old office space vs. new office space

While office insiders in Reno are bullish about the prospects for new office buildings, older buildings are expected to face more significant challenges. Such properties, especially buildings that are considered obsolete or in need of major upgrades, will be most vulnerable to the changing demand for office space.  Once again, it reflects a tale of two markets in Reno, according to Grimes. “The office market is relatively healthy and we’re seeing lease rates increase at the higher end,” Grimes said. “The category that might suffer more as a result of the pandemic are the lower-end spaces, and employers in your Class C and Class D buildings might have a little more trouble convincing employees to come back to the office.”

The one advantage lower-class spaces have would be cost as newer buildings are expected to charge higher rents due to how expensive it is to build these days. There’s also concerns about larger properties that could upend the market should they get in trouble. The IGT building, for example, has been the subject of much speculation following the gaming company’s difficulties in recent years, which were further exacerbated by COVID-19. With more than a million square feet of space, the property could significantly impact the local office sector, depending on which direction it goes.

IGT has put the property up for lease as a way to keep the property in use. Since then, the property has had a lease signed with an industrial user for 88,000 square feet, according to Molyneaux, who serves as a broker for the building. It also has interest from another potential client for 220,000 square feet of industrial space. Filling the property’s office space, however, remains a tough sell. “The office market is still so busy but mostly with clients (for) 20,000 square feet and under,” Molyneaux said. “The (IGT) office has been challenging because the smallest we can do there is 50,000 square feet.”  Ultimately, those who specialize in the office market expect to see several trends as companies deal with the new realities of the workplace. One is the closure of existing offices as certain companies move to a remote work environment. Another is downsizing, whether by giving up existing space or moving to a smaller space. Then there are companies that will modify existing spaces, not just to better accommodate a hybrid workplace environment but also give workers an incentive to come to the office.

McDonald Carano’s Reno office, for example, has a virtual courtroom for remote trials, a relaxation room, a pumping station for breastfeeding employees and an outdoor balcony with an eye-popping view that one typically can’t get from home. For a workplace that has seen success with remote work, including virtual wine tastings where employees get together via zoom and share their experiences, having a physical office where you can meet clients or see co-workers face to face remains crucial. “You’ve got to have a base of operations,” Addison said. “You’ve got to have a space where people can come in and be comfortable and have the ability for group thinking, even if you’re not there all the time.”

Media Contact

Mark Buckovich

mbuckovich@mcdonaldcarano.com
702.257.4559