In November 2011, Michael Ballantyne, managing member at Thornton Oliver Keller, wrote an article for the Idaho Business Review. Below is that article in its entirety.
First, the good news about commercial real estate…
As 2011 draws to a close, it’s a good time to assess the state of the commercial real estate industry in Idaho. First, the good news – leasing activity is returning to pre-recession levels. The bad news: Rents are still down an average of 30 percent from 2007. Sales activity is improving but values are off an average of 40 percent from the peak of the market. Here’s a breakdown of the various sectors in the commercial market.
Vacancy peaked at over 16 percent at the end of 2010 and has steadily declined to 14.1 percent this year. Vacancy in multi-tenant buildings has decreased from 21.4 percent to 19.4 percent this year. Transaction volume is up 20 percent from 2010 and there has been over 400,000 square feet of positive office absorption year-to-date. In addition, absorption has increased quarter-by-quarter throughout 2011.
The largest deals have occurred in the Boise Research Center, located at Chinden & Cloverdale. This business park had a vacancy rate of over 30 percent at the start of the year, but this has declined to only 10 percent today. Education is another growing sector with Concordia University and Broadview University both occupying 30,000+ square foot buildings this year. Various charter schools have also expanded.
Downtown and Meridian are the most active submarkets and have relatively healthy vacancy rates. Meridian has the strongest absorption due to its central location. Downtown has its lowest vacancy since 2009, spurring the first major Downtown development in years. A 15-story office building with ground level retail is planned at the corner of 8th & Main Street (the infamous “Boise hole”). Construction is slated to begin in 2012.
Industrial absorption has been strong (450,000 square feet) but leasing activity has been erratic. Unlike Office absorption, which is spread throughout the Boise MSA, most of the positive absorption in the Industrial sector has occurred in Meridian. Furthermore, most of the absorption can be attributed to a single business as Scentsy has occupied two new buildings this year totaling nearly 300,000 square feet.
Total industrial vacancy has declined from 11 percent to 10.4 percent this year and from 21 percent to 20 percent in multi-tenant buildings. Lease rates continue to decline with the average asking rate at $0.42 per square foot (monthly NNN rate) and the average actual rent at $0.35. It is still a tenant’s market, but tenants with very specific requirements are often surprised to find a limited pool of options.
Total vacancy has declined from 12.9 percent to 10.9 percent as a number of vacant anchor spaces have been filled in 2011. Unanchored vacancy has declined less significantly from 21 percent to 20.4 percent. Retail absorption is currently 360,000 square feet and is on pace for its best year since 2007.
Most of the large spaces that have been occupied this year are the same spaces in and around Boise Towne Square Mall that were vacated in 2009. Kohl’s leased the former Mervyn’s space at Boise Towne Square, Tai Pan leased 30,000 square feet on Milwaukee, DSW Shoes leased 25,000 square feet at Franklin Towne Plaza, and Nordstrom Rack will open a 37,000 square foot store on Milwaukee in Spring 2012. Another significant deal in 2011 was the sale of the former Sam’s Club in Nampa. College of Western Idaho plans to occupy the 138,000 square foot building.
Even aside from these significant transactions, retail activity has steadily improved, increasing 5 percent from a year ago. Restaurant activity has been a bright spot. There is only one year of projected restaurant space on the market compared to three years for the overall market. Restaurants that are expanding include Chipotle Grill, Jimmy John’s, Five Guys Burgers, and Texas Roadhouse.
Average lease rates are still declining. On the surface, retailers are paying less rent, but in many cases an increase in triple nets has offset a decrease in base rent. Despite the downward trend in lease rates, there are still pockets of the market, such as the Eagle & Ustick intersection, where rents are higher due to a healthy balance of supply and demand.
If you are a buyer or a tenant, now is the time to finalize that new lease or buy your new headquarters (Rates are incredible, by the way…). If you are an owner, fear not, the market is getting better. If you are a contractor, it will still be some time before excess supply is absorbed and rental rates justify new construction.
The bright side… every day that goes by gets us closer to “recovery.”