FEATURE ARTICLE, MAY 2005

MIDDLE MARKET MOVES
Real estate players could find what they’re looking for in secondary markets. 
Michael Baron, Bob Crisell, Jackson Cooper, Heidi Mickelson and Brian Heffernan

Commercial real estate visionaries know their way around obstacles in the well-worn paths through major markets, but they also know that opening doors today in secondary sectors could lead to tomorrow’s new success stories. With that in mind, Western Real Estate Business checked in with market specialists in Bend/Redmond, Oregon; Boise, Idaho; and Temecula Valley and Stockton, California to see what market conditions are like and what commercial real estate opportunities may lie ahead.

Bend/Redmond, Oregon

Over the past 5 years, Bend/Redmond — referred to as the Aspen of the Northwest — has been the fastest growing region in the state. Developers, 1031-exchange buyers and retiring baby boomers are driving the unprecedented growth across all real estate sectors.

Increased airline access and the launching of five new destination resorts mean more people will be seeing what Bend, Oregon, has to offer. Photo courtesy of Bend Chamber of Commerce.

Another catalyst for growth in this region is the launching of five new destination resorts, following the lead of the Jack Nicklaus-designed Pronghorn Golf Resort. With 300 days of sunshine a year in the area, these resorts are attractive to residents, business people and vacationers. A $140 million expansion to St. Charles Medical Center was a key factor for Money magazine naming Bend/Redmond one of the best places to live, work and retire in the United States.

These positive market factors have resulted in strong dynamics in all real estate product types. In the retail sector, 1031-exchange demand has driven cap rates below 7 percent. The development of the Golden Triangle and the trendy Old Mill District has attracted national tenants such as American Eagle, Best Buy, Bed Bath & Beyond, PetsMart, Borders Books & Music, Lowes Home Improvement Warehouse, Sportsman Warehouse, Banana Republic, Gap and a Wal-Mart Supercenter.

Bend/Redmond’s industrial market experienced net absorption of approximately 335,000 square feet in 2004. Prices for industrial land rose more than 20 percent in 12 months, and the occupancy is holding at 95 percent.

The office sector saw 100,000 square feet of net absorption, a 300 percent increase over the previous year. Additionally, the demand for land for development of office properties has steadily increased, placing upward pressure on lease rates and escalating the cost of new construction.

In the multifamily sector, property values have increased more than 12 percent in each of the past 4 years. With 600 units coming on line in 2004, the occupancy rate has stabilized at 94 percent. Rising “system development charges” for infrastructure and increases in land prices elevated new construction to more than $80,000 per unit.

— Michael Baron is a senior investment advisor for Sperry Van Ness in Bend/Redmond, Oregon.

Temecula Valley, California

Temecula and Murrieta, which comprise the Temecula Valley region of California’s Riverside County, have become a red-hot center of growth in one of the nation’s hottest real estate regions: Southern California. Since 1980, the Valley has experienced a population boom of more than 400 percent, going from 10,000 people to more than 250,000 today. Escalating population levels have meant explosive growth in the multifamily, retail, office and industrial markets.

The engine fueling this record growth has been the demand for affordable housing located along Temecula Valley’s I-15 and I-215 corridors. Low prices for entry-level homes, combined with the Valley’s family-friendly lifestyle, have attracted home buyers from both San Diego and Orange counties. Harveston, a new 550-acre, 1,900-home community offering a variety of residential components, was recently developed by Lennar Communities. The multifamily market is less of a force, but continues to attract developers. Vacancy rates in the Valley for apartments and attached housing are less than 5 percent.

The thriving retail market is closing in on 9 million square feet of product, with vacancy rates consistently at less than 5 percent. Several mid-sized retail centers have sprung up along Highway 79. Additionally, the development of 41 acres, located just south of the Temecula Auto Mall, is expected to add five more dealerships within the next 2 years.

The Valley’s industrial market has continued its rapid expansion on the west side of I-15 in Temecula and Murrieta. While manufacturing and warehouse buildings larger than 20,000 square feet tend to lease up and sell more slowly, the demand for smaller industrial product has skyrocketed, with vacancy between 4 and 7 percent. Current trends have smaller industrial buildings being offered for sale, which trade quickly in the current low interest rate environment. Future expansion will occur along the Highway 79 north corridor in the vicinity of the burgeoning French Valley area.

The office market is also performing well in Temecula Valley with vacancy rates averaging 6 percent. Numerous projects are currently under construction or being planned, including the first phase of the 240,000-square-foot, Class A Crossroads Corporate Center in Murrieta. A development of San Diego-based Whitaker Investment Corp., the first phase is scheduled for completion in June 2005.

The cities of Murrieta and Temecula have traditionally encouraged development, though new mitigation fees and other slow-growth measures will impact future development. In general, however, the commercial real estate market in the Temecula Valley continues to outpace other markets within the state and beyond.

— Bob Crisell is a senior vice president for Lee & Associates in Temecula, California.

Boise, Idaho

With a growth rate of 2.6 percent, Idaho created new jobs at twice the national average during third quarter 2004, ranking it fourth in the nation. In Boise, the number of single-family housing permits issued was 94 percent higher in February than in the previous 12 months. These figures are indicators of a growing economy that has caught the attention of tenants and investors alike.

As in many markets, retail is the strongest commercial sector in the Boise area. The population of the Boise area has now surpassed 500,000, a benchmark number for many national retailers, as well as employers. In January 2005, the overall vacancy in non-mall retail was approximately 9.5 percent and dropping. Rental rates have been increasing with the current average approximately $14 per square foot NNN. Projects currently under construction are quoting rates in the mid-$20 per square foot NNN range. Retail properties continue to attract investor interest, with an average cap rate for 2004 of approximately 8 percent.

The Boise industrial market, though improving, remains somewhat weak. For 2004, industrial absorption was negative, with new construction intensifying the problem as some developers proceeded with building plans in order to avoid further increases in construction costs. Overall market vacancy increased throughout the year, ending at approximately 10 percent. Rental rates held steady through 2004, but all indications are that 2005 will show improvement as the economy in the Boise area continues to grow. Industrial investments continue to be of interest to local and national investors, but there has been very little inventory available.

Boise’s multifamily market should strengthen some in 2005. Sustained job growth, combined with fewer multifamily units being built and the possibility of rising interest rates and construction costs, should mark the beginning of a return to healthy occupancy and income levels. According to a recent market survey, apartment vacancy in the Boise market dropped by 3 percentage points to 8.5 percent.

The office market is stable overall — some submarkets saw negative absorption in 2004, while others saw gains. In the past 18 months, new product saw firmer rates and fewer concessions while second-generation space required more flexibility in negotiations with tenants. Total availability remained at approximately 12 percent. It is anticipated that steady demand throughout the year will bring about gains in all of Boise’s submarkets. The universal trend of the small office user-owner is providing approximately 114,000 square feet of new sublease space market wide. This segment, combined with approximately 400,000 square feet of new inventory, will continue to maintain the gap between new versus second-generation space.

— Jackson Cooper and Heidi Mickelson are senior advisors for Sperry Van Ness in Boise.

Stockton, California

Stockton’s commercial real estate sectors remain robust with both strong sales and leasing numbers. The office market remains tight with vacancy less than 4 percent and rents at historic highs. The A.G. Spanos Company’s first foray into office development is a five-story, 150,000-square-foot Class A building. None of the more than half dozen tenants taking occupancy are shying away from the substantial tenant improvement bill or the $2.65 per square foot equivalent full-service rate.

Brookside Business Park’s vacancy has dipped under 2 percent with a number of projects slated for completion in late spring and mid-summer. Pre-leasing of these properties remains strong even with skyrocketing building expenses and lease rates at $1.75 per square foot NNN and 60 cents per square foot NNN fees.

Normal market forces are at play in an office market that is just now adding product to keep up with the population growth. A lot of small to mid-size businesses across all industries are coming into the market to service the growing population.

Retail continues to be the most active sector following the population surge in the Central Valley. The first phase of Kitchell Development’s project in Spanos Park West is almost fully leased, with the second phase slated to break ground this year. Lease rates are running $2.50 to $3.00 per square foot NNN in new retail centers both large and small. The City Centre Cineplex in downtown Stockton is fully leased with average lease rates at $2.50 per square foot NNN and the tenants thriving on the continuous foot traffic.

The industrial market is the second most active market in Stockton with a number of large developments by Buzz Oates Real Estate and Panattoni Development. Big box (50,000+ square feet) rates have stabilized at 28 to 30 cents per square foot NNN. Panattoni is currently under construction on a 250,000-square-foot build-to-suit project for BMW in the Airport Gateway Center.

— Brian Heffernan is an office specialist at Colliers International in Stockton.

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