Panel discusses growth of commercial real estate throughout Treasure Valley

The phrase “going through the roof” may best sum up the evolving commercial real estate market in downtown Boise and neighboring communities throughout the Treasure Valley.

“Look out a window in downtown Boise and you’ll see a tower growing,” said Joe Jackson, executive vice president of ESI Construction. “Fifteen years ago, we got super excited if we saw even one tower going up in our downtown market. Now it is the norm to have about five to seven at any given time. That represents a lot of confidence in our downtown.”

Jackson shared his perspectives on the valley’s rising commercial real estate market within the valley during a panel discussion Aug. 5 at Boise Centre. Hosted by Idaho Business Review, the session was the fourth installment of IBR’s annual five-part Breakfast Series.

“We’re no secret anymore. Twenty years ago when I started, Boise was not on the map for a lot of people,” said panelist Mark Cleverly, chief leasing officer and partner with Ahlquist Development.

“That’s not the case anymore. Everyone now knows Boise.”

With the secret of Idaho’s quality of life long out of the bag, and growth continuing at a consistent pace, retail space valley-wide has shot to the top of the list in the booming commercial arena.

“At Ahlquist, we’ve historically done a lot of office but it’s not the ‘sexy’ word in real estate right now,” Cleverly said. “It’s been on the decline post-COVID. Retail is the darling of real estate now.”

According to statistics shared by JP Green, president of CCIM and partner with TOK Commercial, the vacancy rate for retail space in Ada County sits at about 4.3%, while in Meridian, the overall rate for its three sub-markets is a minuscule 1.2%. Eagle Road, considered one of those sub-markets, checks in under 1%.

“In the industrial sector, 6% to 8% is considered healthy, and the same thing in retail,” said Green, a specialist in the retail arena. “So, as you can see, it is very challenging to find space in Meridian.

Ironically, in Star, the rate is .54% vacancy, so Star is definitely on a lot of people’s radars.”

And that retail radar continues to stretch west into Canyon County, where Green indicated the overall retail vacancy rate is at 6.3%. Caldwell checked in at 6%, while the long stretch of Caldwell Boulevard registers at 7.5%.

However, he noted that next door in south Nampa, the rate sits at .64%. “Twelfth Street is very, very, very attractive and still very difficult to find space,” Green said.

The biggest factor Green attributed to these vacancy rates is the rental rates for Class A retail space. Class A locations are considered the highest quality buildings in a given market, and the types of properties that can attract top-tier tenants.

“One of the more attractive areas for retail right now is because Class-A space is so expensive,” he said. “Prior to the pandemic, Class A rates were in the high teens and low 20s. Now for new construction projects, we got into the high 20s, skipped the 30s and are now into the mid-40s.”

Which only helps to serve those, he said, with Class B retail space. “We’re really starting to see those landlords, if they’re willing to invest, they’re now able to add $3 to $5 and get upwards of $19 or $20 for Class-B retail.”

Roughly 10 years ago, before the Boise boon, the word on the street was retail was dying, that brick-and-mortar stores and shops would disappear, replaced by online consumers.

Not any longer.

“It started to happen, but retail has made its way back,” Cleverly said. “People want to go shopping, they want to go touch and feel a product before buying. Retail is now doing well as is industrial in our market.”

Scott Schlange, an experienced commercial lender and president of KeyBank, Idaho Market, also believes retail remains the “hot” market at the moment.

“Ironically, anchor tenants by grocery stores are really easy to finance,” Schlange said. “Ten years ago, that was starting to be a secondary thought and wasn’t driving the market. Anchor tenant projects that are retail are hot, as are hotel, another market that has gone through some resurgence.”

For Jim Marsh, an architect principal at design firm CSHQA, he foresees a strong future of growth in the valley, but feels the challenge lies in deciphering what the “trickle down” effect from the massive Micron project will ultimately be.

“We’re still building new offices. There are many places near Caldwell or Eagle that are adjacent to areas that are still feeling quite a bit of growth,” Marsh said.

Cleverly also acknowledged the impact Micron is having on jobs and retail space. “Micron, just that one word alone is going to continue to drive the growth in our valley. We hear Micron will increase employment by more than 7,000 jobs, and the trickle-down effect alone will probably result in another [20,000] to 25,000 jobs.”

A “game-changer” for the region is how Jackson simply summed up the Micron project.

“With the Treasure Valley making all these great place to live lists, and what used to be a lower cost of living, it’s really sustained itself with the growth,” he said.

Growth brings people together, and in his design world, collaboration is key for Marsh.

“Projects are increasingly becoming more complex, pricing is more challenging to predict,” he said. “The more collaboration the more accurate you can be moving forward.”

With three decades of experience in the construction management industry, Jackson feels the COVID pandemic actually taught many in the business to learn to communicate better.

“Collaboration has become more key to help predict costs,” he said. “That is one key part of the process, the communication. The more critical piece is between the contractor and all the trade partners. It takes a lot more communication and creativity these days.”

“The development process is hands-on and we all have to be in the same room together,” Cleverly said. “It’s not an industry where you can sit back and wait for information to come to you.”

But with high interest rates remaining a challenge, and no foreseeable cuts from the Fed on the horizon, Schlange shared that he has found people to be more “pragmatic” and “flexible” when it comes to market rates.

“People are more accepting of the current market, not that anyone is not anticipatory of rates going down,” he said. “But I think there is a hangover of people wanting a cost of capital that probably will never happen again. The standard deviation over eight years was about 7.5%. Over the past 12 years it was closer to 4%.”

But he also feels people may now be moving past lowest cost as their preference for getting into the retail market sector.

“Dependability is the most important thing right now,” Schlange said. “When you look at projects, a proven track record, the ability to keep employees and projects, the whole period is critical for financing such projects.”

Though he acknowledged that access to capital has become more difficult, he noted that financing options still abound, and that many of the projects we see happening locally were financed during the past three to five years.

“There are a lot more options for financing these days than just the traditional balance sheet product which has fueled a lot of growth historically,” he said. “Those other doors are now open because we have a market that is now open and receiving investor attention.”

Or, as Cleverly pointed out, costs and interest rates “do what they do.”

“In the end, we look at the rates and what do we need to achieve in order for us to make a project work,” Cleverly said. “But compared to other markets, Boise rates are still much lower with a lot of room to grow.”

Compared to other larger regional cities — Portland, San Francisco, Seattle, Salt Lake City, Reno — he strongly feels companies still see Boise as attractive market.

“For years it felt like we were stuck. But as we matured as a market, those rates in the last six years have increased,” he said. “You see the national news of the real estate and office markets in other big cities such as Portland or San Francisco that were selling in the $200 to $300 million range that are now going for 10% of that now. They’re vacant and boarded up. Who knows how long it will be before anyone goes back into these buildings.”

And with two-plus decades in the market, he knows Boise is still the place to be. “We’re grateful to live here. We have the opportunities to go to other markets, and for the right project we’ll do it.

But we’re always drawn back to the Treasure Valley because we truly believe in this market.”