WESTERN SNAPSHOT, FEBRUARY 2007

Boise, Idaho, Retail Market

Mickelson

While the Boise area, like the rest of the nation’s retail markets, is expected to cool a bit this year, an influx of new national retailers and continued metro-area population growth keep it among the West’s hottest tertiary markets.

With a metro retail inventory of approximately 12 million square feet, Boise currently has more than 7.5 million square feet of new retail under construction and more than 2 million square feet of proposed development. Virtually all of this activity is occurring in the western portion of the city, from Meridian out to Nampa, with Nampa — in response to exploding residential growth — emerging as not only the second largest city in the state but also an epicenter of retail opportunity with more than 600,000 square feet of new retail construction and nearly 900,000 square feet in proposed projects.

As a result, many popular national retailers are entering the Boise market for the first time and quickly filling space in major projects. Among these is Treasure Valley Marketplace, a 700,000-square-foot retail center located on land that planners have had their eyes on for nearly a decade as they waited for completion of the Karcher interchange on Interstate 84. Once timing for the completion of the interchange was announced, construction moved forward at a rapid pace as did retail interest in the submarket as a whole.

As Treasure Valley Marketplace completes construction, it welcomes tenants such as Costco, Target, Old Navy and Best Buy, as well as one of two new Kohl’s stores, a retailer that entered the Boise market for the first time in 2006 with plans for stores in Nampa and Meridian. A few miles to the east on I-84, the 850,000-square-foot, open-air Nampa Gateway shopping center at the Garrity interchange is also coming online. Developed by Developers Diversified Realty Corporation (DDR), the project is located south of a new Wal-Mart and Sam’s Club.

In more established areas of Boise, such as the mall submarket, first-time retailers include The Cheesecake Factory and Cabela’s, which opened an almost 140,000-square-foot retail store at a former Costco location within Franklin Towne Plaza. The G.I. Joe’s chain — a full-line retailer for outdoor enthusiasts in the Northwest — is also planning to open its first store in Boise in 2007.

The culmination of this activity keeps local retail fundamentals strong. In the past year, rental rates have increased from an average of $14 to nearly $16 per square foot. Overall vacancy in the Boise MSA sits at approximately 8.5 percent. Nampa posts a lower average of 7 percent. A few smaller centers located in older areas closer to the downtown core are of more concern with vacancy near 20 percent, but renewed retail confidence in Boise overall has injected strength into these properties as well. For example, the 1978-built, 155,000-square-foot Five Mile Plaza in the southwest submarket recently achieved a sales price of $13.65 million at a 6 percent cap rate. This is a significant sale considering that, while anchored by an Albertsons, the center’s co-anchor space was dark and the overall vacancy was 37 percent. Still, the property had 13 offers within 2 weeks of going to market and sold for above asking price to an institutional investor from Oregon. In comparison, a 60,000-square-foot center in the hot Eagle market in the northwest sold for approximately $12.6 million at a more than a 7 percent cap rate.

Investors ranging from institutional buyers to individuals remain drawn to Boise’s typical cap rates of between 7 and 8 percent; however, it is cap rates that might initiate a slight shift in the local investment climate. This is because, historically, Boise has offered cap rates of around 2 to 2.5 points higher than neighboring West Coast markets. As of late, that gap is closing to a lesser average of a 1 to 1.5 percent difference.

Also key to watch is new retail construction in Boise. While the current 600,000 square feet of new space in Nampa is well occupied, the additional 920,000 square feet of proposed speculative space has some concerned. Likely, developers will realize the potential for a softening market and put some of these plans on hold. At the same time, Boise’s population growth — now more than 450,000 residents — should help support a certain level of new projects.

Nonetheless, owners and investors should prepare for a slight leveling off of sales volume and pricing this year. Already, new unanchored centers that were filling quickly are taking a bit longer to do so, and while price reductions occurring in other markets have not yet hit Boise, the potential for interest rates and related adjustments in cap rates may require sellers to consider slightly less aggressive pricing strategies than they employed in 2006. As Boise finds this new balance, it will no doubt maintain its edge among other West Coast communities and remain a place that investors and retailers not only seek out but also act on.

Heidi Mickelson is a senior advisor for Sperry Van Ness in Boise.


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