MARKET HIGHLIGHT, SEPTEMBER 2007

BOISE, IDAHO
Craig Wagstaff, Devin Ogden, Rick Scruton, Ray Frechette and Gail Heist

The Boise commercial real estate market is showing steady activity with a bustling office construction sector; a tighter industrial leasing market that is coming off a year in which it more than doubled its absorption total from the prior 12 months;  and a  healthy multifamily sector primed to benefit from rising home prices and tighter lending restrictions.

Office

Despite talk of a residential slowdown, the Boise area office market continues to demonstrate significant inventory growth. This growth is occurring despite ever-rising land costs and the fluctuating costs in construction materials and labor.

The office market has experienced a flat vacancy rate through the first part of 2007, currently standing at 10.4 percent overall. However the market experienced a steady absorption of existing office space, which caused a continued increase of new building projects, such as the six-story Idaho Independent Bank Building in downtown Boise (80,478 square feet); the three-story Owyhee Building near the airport (50,520 square feet); the five-story Stevens Henager Collage Building near the corner of Overland and Cole roads (80,000 square feet); several single-story buildings in El Dorado Business Park, which is located at the corner of Eagle and Overland roads (65,000 square feet); the two-story Eagle River Building in Eagle, Idaho (42,000 square feet) and multiple new small owner-occupied office buildings.

Office lease rates fluctuated from being relatively flat to a slight increase, ranging from $14.50 per square foot to $25 per square foot for full-service annual rates. The average rate for this full-service annual rate category was $17 per square foot.

Reasonable interest rates offer office users the opportunity to own their own space; as such the number of owner/users has increased significantly in the last 2 years. This demand has also been fed by numerous developments that have offered multiple small-building lots and buildings for sale. Developments of this type include View Pointe Business Park, located on Federal Way near Overland Road (17 lots totaling 50,000 square feet of space); Rocky Mountain Business Park located in Eagle, Idaho (16 lots totaling 70,530 square feet); and Fairview Lakes Office Park on Fairview and Lakes Avenue in Meridian, Idaho (28 lots totaling 60,500 square feet). Sales prices have ranged from $150 to $215 per square foot with an average sales price of $192 per square foot.

Projections for the end of 2007 and the beginning of 2008 appear to be steady and encouraging for the Boise area office market, pushing growth in the office market upwards. Though the office market isn’t booming, it is healthy with the steady growth in inventory, and lease rates and vacancy rates remaining steady.

— Craig Wagstaff is an office broker for NAI Kowallis & Mackey, Commercial Real Estate Services, in Boise.

Industrial

The Boise industrial market has become tight after more than 1.1 million square feet were absorbed in 2006. More than double the amount absorbed in 2005, this rate is the main driver for the vacancy rate dropping to 5.7 percent, far below the national average of around 8.4 percent. Absorption in 2007 will most likely decrease to 2005’s pace. Though curbed by increased expenses, there has been an increase in construction activity, which can be attributed to a healthy demand and a lack of supply.

Land prices in the Boise area increased significantly during the past few years, and industrial land has been no exception. It has become difficult for developers to make the necessary margins with the high cost of land on top of rising construction expenses. Lease rates need to increase to bridge this financial gap. Rates have increased in the past year, but it has been modest compared to the escalated land prices and construction costs. Current industrial lease rates are at $0.46 to $0.52 per square foot.

Relatively few industrial properties have been sold recently because owners are not willing to sell a promising asset. Land and construction costs are making it cost effective to remodel and upgrade older buildings for future use. Small business owners are creating a demand for industrial condo space from 2,000 to 5,000 square feet, and some developers are responding by providing product to fill the need.

A significant driver for demand in industrial space is the construction industry. Contractors, subcontractors and suppliers have been growing and expanding to meet the demand. The residential market has slowed down while the commercial sector continues steady. Even with the decrease in residential construction, economic growth in the area continues to be strong. The population of the Boise metropolitan area recently surpassed the 500,000 mark, drawing the attention from larger distribution and manufacturing companies.

The City of Boise owns industrial land in southeast Boise and will potentially develop up to 500,000 square feet of warehouse and distribution space. The former Zilog building has changed hands, and was put back on the market with 70,000 square feet of warehouse for lease. Industrial leasing is most active in the Meridian, airport, and southwest sub-markets. Industrial development will be more prominent on the fringes due to lower land prices, with a few infill projects. Sky Ranch, a large development in Caldwell, has sold out most of the platted industrial parcels. However, only two 11,000-square-foot buildings have been erected, and BMC West just started construction on its 80,000-square-foot facility.

For the rest of 2007, expect to see the vacancy rate remain constant, even with more product being constructed. Lease rates will continue to climb slowly and will lead to the appeal of industrial condos as an option to leasing in a multi-tenant building. Also, as the lease rates rise, there will be more developers willing to take the risk of building on speculation.

— Devin Ogden and Rick Scruton are industrial brokers for NAI Kowallis & Mackey, Commercial Real Estate Services, in Boise.

Retail

Retail is always hard. You find the right size space, in the right part of town, for the right price with the right look, and then your client tells you it’s on the wrong side of the street. A retail location is not just a place to do business, it’s an integral part of a business. So many factors have to be right to make a deal in retail — it’s a wonder people stick with it.

But the Boise market has been good to the retail brokers for the last 5 years, and there appears to more good years to come. True, the housing market has slowed some, but the pace that it was setting was not sustainable. Fortunately, retail development did not match that hectic pace, although it came close. There still are areas underserved by retail, especially groceries, and many national retailers have yet to discover Boise.

The city’s total retail vacancy rate has not changed much since 2006, remaining around 8 percent. Asking rates continue to rise, ranging from $8 to $18 per square foot in downtown Boise, and up to $30 per square foot for developments in higher demand areas around Eagle Road.

The latest retail trend in southwest Idaho is lifestyle centers. CenterCal of Sacramento, California, has plans for a new center to be built in the center of population at the busiest surface intersections in the state (92,000 vehicles per day). With the latest retailers entering the market being discounters like Kohl’s and Sierra Trading Post, it will be very interesting to see what retailers are attracted to the development and how successful they will be. After all, lifestyle in Idaho is likely to mean camping, hunting, fishing or boating. The new Cabela’s is doing a great business and so is the new 54,000-square-foot Harley Davidson store.

Restaurants are still doing well with new concepts eagerly supported by the young and old crowd alike. New dining establishments range from Dickies BBQ to Old Spaghetti Factory to P.F. Chang’s China Bistro. Boise residents can’t seem to get enough of the themed restaurants.

As has been true for more than 5 years now, there is still one gaping hole in the Boise retail market: neighborhood grocery stores in the newly developed residential neighborhoods. Albertsons ran most of the competition out of town during the 1980s and ‘90s. Then it quit building new stores. The recent change in ownership has yet to put them back on a building track. Sure there are Wal-Mart Supercenters and a few WinCo Foods mega-stores. The city is even slated to get a Whole Foods Market, but there are many major intersections without a solid grocery store and some areas where the closest grocer is 5 miles away. And what are all the small retailers to do without an anchor to cozy up to?

— Ray Frechette is a retail broker for NAI Kowallis & Mackey, Commercial Real Estate Services, in Boise.

Multifamily

The multifamily housing market has been one of the very attractive investment sectors in the Boise/Nampa market since early 2004. The major factors contributing to this growth are population growth, a low vacancy rate and home affordability. Capitalization rates for multifamily projects have remained stable this year, and rates increased from 6.3 to 6.9 percent during 2006. The multifamily rates are well above the 2006 national year-end average of 5.5 percent.

Although the percentage of the population that prefers renting an apartment to owning a home is declining, strong overall population growth and an aging inventory of housing are likely to support continued demand for new multifamily developments. According to NAI Global Chief Economist Dr. Peter Linneman, 2.5 million to 3 million new multifamily units will be needed between 2007 and 2020.

The new multifamily construction in Boise from January through June of this year shows a very strong growth that is very reflective of the market for the last 3 or 4 years. For first half 2007, multifamily permits were 41 percent above 2006. The majority of the permits were for four-plexes.

The total vacancy rate for multifamily units, which includes one- to four-bedroom units in Boise, is still less than 4 percent. The average rent for one- to four-bedroom units is $0.90 per square foot.

Demand for multifamily in the area is expected to increase due to the combination of increasing housing costs and tighter lending restrictions, which should reduce the pool of potential homebuyers. The median home price in Ada county, currently $235,090, has risen 7 percent in the first half of 2007.

— Gail Heist is the designated broker for NAI Kowallis & Mackey, Commercial Real Estate Services, in Boise.

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