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2013 will see continued growth in some areas of the real estate market

We have come a long way from the dark days of 2009 and 2010 when office and industrial multi-tenant vacancy exceeded 21 percent and unanchored retail vacancy exceeded 25 percent. For eight consecutive quarters, office, industrial and retail vacancy have been steadily decreasing. Today, total office vacancy sits at 12.4 percent; multi-tenant vacancy is 17.7 percent. Total industrial vacancy is 9.3 percent; multi-tenant is 17.8 percent. Total retail vacancy is 8.7 percent while unanchored centers are 17.7 percent empty.

The next six months will see the office market continue to tighten. While lease rates do not yet warrant speculative construction, the downward trend in vacancy means it is only a matter of time before construction picks up. The only major office project set to be delivered this year is The Village at Meridian located at Eagle & Fairview. The Village will deliver 150,000 square feet of office space in the fall. The Eighth & Main building under construction in downtown Boise is not slated for completion until early 2014.

If demand accelerates, well-capitalized developers may choose to bring spec office buildings out of the ground due to the lack of available inventory, especially for larger tenants. Any new office construction will likely keep vacancy above 12 percent. However, lease rates will continue to rise throughout the year, as much as 10-15 percent in desirable locations. The market is beginning to shift in favor of landlords due to a lower inventory of prime space.

Industrial vacancy will continue to improve after the slight bump at the end of 2012 due to Transform Solar’s vacating of 254,000 square feet in Nampa. Absorption is expected to be positive for a fourth consecutive year. As industrial inventory tightens and projected supply decreases, lease rates will rise. The uptick began in 2012 and is expected to continue in 2013. Some industrial landlords have started bumping rents in projects with few remaining vacancies or that have product in high demand with tenants.

Industrial projects with good access to Interstate 84, regardless of their city, continue to have high interest, as this access is something most tenants require. Poorly located sites will continue to struggle to attract tenants. With the residential market in full recovery, industrial tenants tied to homebuilding are likely to expand into larger spaces as the need arises. New tenants currently in “incubator” spaces, which are a large part of the current market, will look for opportunities to expand as their lease comes up for renewal. This turnover will continue to drive activity in 2013.

Speculative industrial construction will remain limited as lease rates have not yet returned to levels high enough to support new construction. However, some stronger developers may continue to bring buildings out of the ground as tenant options continue to tighten.

Retail absorption will be positive in 2013, largely due to new construction projects like the 165,000-square-foot Walmart Supercenter on Overland Road and continued expansion like The Village at Meridian on Eagle Road. Retail vacancy will continue to improve, though not at the pace seen in 2012, since many of the large anchor spaces vacated in 2009 have already been leased up over the past couple of years.

Retail asking rates are likely to push up slightly in 2013, while actual lease rates will continue their recovery. Obsolete, poorly positioned properties that have remained vacant for years are likely to remain vacant as newer, better product is brought to the market.

With strong holiday sales and no anticipated store closures on the horizon, 2013 will see continued rebound in the retail market. Many retailers who had been waiting to enter the Boise market, such as Nordstrom Rack, Big Al’s Entertainment, Dave & Buster’s, H&M and Rosauer’s, opened stores in 2012. Rumors of Trader Joe’s and Sam’s Club swirl in the winter air. And I’m sure a few retailers that we aren’t even aware of will pop up as well!

The biggest variable? The fiscal cliff. Assuming that President Obama and members of Congress are able to negotiate a way around the revenue and spending impasse, commercial real estate should continue to improve in all segments in 2013. The fiscal cliff is a very real concern in commercial real estate. Many of our clients are telling us they want to hold off on new expansions and investments until they understand what the economic and tax situation will look like next year. Uncertainty keeps money in wallets. Our leaders must strike a compromise if our industry is to continue to see the gains we have achieved these last eight quarters.

Michael J. Ballantyne is managing partner at Thornton Oliver Keller in Boise.

About Michael Ballantyne