Commercial real estate not a picture of gloom
The commercial real estate market is on course to finish the year on a high note. There has been increased activity, new construction projects announced, increased net absorption and lower vacancy rates.
All of this is positive news for a market that has struggled at times over the last couple of years. If you talk to the commercial real estate brokerage firms it is tough, but there has been activity in the market that is allowing us to work through a tough economic time.
If you notice above there is no mention on what would be considered a stable lease rate for any of the product types. From retail, industrial to office, the market still has a large fluctuation in what would be considered a stable rate. Many of the building owners are doing everything they can to keep tenants and are doing the best they can to attract tenants who are making offers below what was considered market rates.
This should all flush out over the next 12-18 months as we see more and more spaces being absorbed and no new construction for the product types in high demand.
Smaller retail and office spaces are actually leasing and this absorption should push rates higher. Time will tell, but the real estate cycle is working its way through the fundamentals and if it moves along at current pace, we should get to stabilization in the above-mentioned time frame.
With that being said, there are actually some very interesting and specific construction projects that will bring new tenants and opportunities to the Boise market.
The biggest news for the market is the Gardner Company announcing plans for a 253,000-square-foot Class “A” development downtown at the corner of 8th and Main. The project will consist of office and retail space anchored by Zions Bank. Construction is planned to start in the spring of 2012 and completion is scheduled for 2014.
This project opens the downtown market for opportunity in a very tight Class “A” market. It will bring much-needed space available for out-of-town tenants to consider as they look to move or add additional locations in Boise. It will actually give them an option downtown that will allow our market to compete for larger regional tenants.
In other developments, Rosauers, Whole Foods and Fred Meyer have all started construction in the grocery segment, and Center Cal’s Meridian Town Center project at Eagle and Fairview is under construction with the Big Al’s concept that has been very successful in other markets. Three of these four tenants are new to the market, which is a good sign that Boise still has something to offer and may be underserved in some instances.
Office, retail and industrial markets have all seen increased activity in the third quarter and continuing into the fourth quarter. There have been several large transactions in the Boise Research Center. The vacancy rates in that sub-market alone have decreased by 50 percent.
Overall, vacancy rates are down in the office, retail and industrial markets. Office vacancy rates decreased to 14 percent, and in the retail and industrial markets we are seeing a downward trend as well. The increased activity and no new speculative construction have contributed to the decrease. The recent net absorption has been the strongest in the valley since 2008.
The average lease rates have remained fairly steady in the third quarter, but typical of the early stages of recovery, rates are soft. The average lease rate for retail is $14.50, industrial is $0.37 and office is $15.
Tenants are gaining confidence to sign longer term leases than they did 12 months ago. The average lease term is 36 months. Landlords are offering more free rent and a tenant improvement allowance to entice tenants to their property, leaving the negotiating leverage in the market in the tenants’ hands.
The commercial real estate market seems to have a disconnect with the weakening economy. The economic outlook deteriorated with the debt ceiling debate and the Europe crisis, but the commercial real estate market did surprisingly well.
Expect recovery to continue for a few more quarters. Don’t expect widespread vitality until the job growth accelerates and the crises in Europe stabilizes.
This guest column was written by Jennifer McEntee, executive vice president of the Office Services Group at Grubb & Ellis|Idaho Commercial Group located at 398 S. 9th St., Suite 260, in Boise.