Quantcast
Home / Commentary / The year of the renewal

The year of the renewal

Greg Gaddis

Greg Gaddis

When it comes to office and industrial space, there’s no question: Right now it’s a landlord’s market in Boise.

This is in stark contrast to conditions back in the Great Recession, when tenants ruled the world of commercial space.

Back then, vacancies in some areas of the Treasure Valley were in the high teens and business growth was slow. Businesses were closing and the number of Idahoans with jobs had dropped from a peak of over 750,000 in 2007 to fewer than 700,000 by 2009, according to the Bureau of Labor Statistics.

Landlords, seeing the shrunken pool of potential tenants, were highly motivated to attract businesses to their too-empty buildings. They offered low rents and incentives like free rent for the first few months and generous tenant improvement allowances. Companies had many available options and landlords understood this and got aggressive in courting new occupants to their buildings.  All this has changed.

Bill Beck

Bill Beck

Nowadays, Idahoans are working — over 825,000 now — and starting businesses. Businesses are growing and coming to Idaho. Office and industrial vacancies in the area have dipped into the single digits. We haven’t seen a market this tight for a decade…maybe ever.  Rents are increasing and concessions are dropping.

We are advising our tenant clients to take a look at their facility situation early.  Starting early gives tenants a chance to understand what they’re dealing with in this landlord market and scour limited availability for a space that could work. It also gives them time to see a tenant improvement construction project through when they find a space that needs work.

And when we say early, we mean EARLY: Starting the process two years before a lease expires could give a business the best chance for a favorable lease.

square-feet-january-commentary-blurbLooking into our crystal ball, we’re predicting most businesses will choose a lease renewal instead of relocating in 2018. There just isn’t that much available space out there, and what is available may not be in the best location or may not be workable in its current configuration. It may have a bad layout, low ceilings, few windows or run-down finishes.

And even if a remodel could fix a space’s shortcomings, in this market the landlord will probably not pay for all of it.

In 2017, we worked with a mental health clinic that had been growing for years, going from 11 clinicians in 2010 to 32 by early 2017. They were operating out of two spaces — including two waiting areas — separated by a corridor. Many of the offices were windowless.

Noticing this growth, we met with them two years early and we started evaluating options. As is becoming all too common, we couldn’t find anything in the right part of town or in the right price range.

Fortunately, by starting early, we were able to do a build-to-suit. We found a developer with a great site and a helpful architect.  By designing exactly what the client needed, we ended up with a very functional plan with no wasted space.  Even with today’s rents and construction costs, the proposal fit the client’s facility budget.  The client moved in in late 2017 under a lease-to-own agreement.

Build-to-suit arrangements are uncommon in this area, but so is speculative construction. The reason is construction costs are simply too high and tenants are not used to paying the necessary rents for new space… until now, there has always been plenty of move in ready, affordable space.

There are a few reasons for those high costs. One is a labor shortage — we lost a lot of construction workers to the North Dakota oil fields and other industries when construction volume tanked during the Recession — and another is materials costs. As Dave Wali of Gardner Co. mentioned in a recent speech to brokers, we’re paying 12 percent more for materials here than they are in Salt Lake City due to added transportation costs. Additionally, hurricanes in 2017 left behind over $200 billion in damage, driving up demand for materials and labor. California’s fires are factoring in there, too.

In order to finance a new office building, in many cases landlords would have to charge $25 to $27 per square foot. Tenants currently pay an average of $22 per square foot for downtown Class A office space.

Before developers can build, financiers are requiring 60 to 75 percent of the building pre-leased, and that is just not happening at the necessary rents.  There are a few notable exceptions such as the new buildings built for T-Sheets, Ameriben and Paylocity, but we don’t anticipate those price points becoming commonly acceptable in the near future: The area’s growth is solid, but our demand is not powerful enough to command that high of a price for real estate for most commercial tenants.

We’re interested to see what happens with current projects in the pipeline.  At least 3 developers have office projects planned downtown and there are an equal number of speculative industrial projects on the drawing board. If they can find tenants at a price that justifies the construction cost, that will be a good sign for future development.

But for now, with limited new product coming online and limited vacant, appropriate space, we’re expecting 2018 to be the year of the renewal.  Tenants with leases expiring in the next year or two will continue to pay increasingly high prices for existing space and they will see fewer concessions than in years past. So a word to the wise: Start early and use the professional services of commercial real estate advisor who works for your interests, and to your benefit.

Bill Beck founded Tenant Realty Advisors in Boise in 2000. He has expertise in lease, purchase, and sale negotiations and has represented hundreds of clients in commercial transactions ranging from 1,000 to over 72,000 square feet. Greg Gaddis, also of Tenant Realty Advisors, has completed more than 1,500,000 square feein transactions.

 

About Bill Beck and Greg Gaddis