For the past four or five years, commercial real estate in the Boise area has faced rising vacancy, over development, and declining lease rates. With the downturn in the economy in 2008 and 2009, businesses were faced with many tough decisions. Cutbacks and right-sizing were prolific. Many companies also reevaluated their space and made changes to make more efficient use of their existing space or moved to spaces that were more cost effective. Commercial property owners and developers have faced this trend head-on by offering concessions and being very flexible with existing tenants. The reality of finding a new tenant to replace one that vacated their space was dyer. There were more lease transactions completed in 2010 than ever in the Boise area, but many were short-term leases meant to hold tenants in place just long enough for the economic recovery to materialize. It appears that economic recovery may be on the horizon. The first quarter of 2011 proved to be a glimmer of hope for commercial real estate in the Boise market. Vacancy rates improved across every property type, absorption is positive in office and retail, and lease rates appear to have stabilized.
In a Market Update released by Thornton Oliver Keller Commercial Real Estate this month the statistics show that Office vacancy for the Boise MSA dropped for the first time in 7 years. Down from the high in 2010 of 16.07%, the report shows the 2011 Q1 vacancy to be 15.52%. In addition to vacancy rate decreases, the office sector has also experienced a positive net absorption rate for the first time since 2008. The report shows the overall office market net absorption to be approximately 103,000 sf of positive net absorption with South Meridian posting 55,100 sf positive net absorption to lead the way as the hottest office submarket. Nampa and Southeast Boise submarkets still posted negative net absorption rates in Q1 due to significant new development in those areas. Office lease rates as a whole are still declining, but they may be near the bottom. Asking rates have held steady at right around $14.00 per sf per year (Full Service) since 2010 but the actual rates that are being realized are nearly $2.00 per sf less at $12.05. Class A space is asking slightly higher rates ($15.50 per sf) but the actual rates are $2.50 less than what is being asked by landlords.
Retail vacancy is down slightly from 2009’s high of 13.05%. First quarter vacancy in retail properties was 12.50%. Retail net absorption in the first quarter of 2011 was a positive 76,000 sf—nearly doubling the 2010 figure in just three months. While positive and a statistic that has many excited, it is sobering to compare this figure with the over 1,034,000 sf net absorption realized during the boom in 2007. While the net retail absorption for the entire market is positive, the areas near the airport, southeast, central, north and southwest all had negative absorption in Q1. West Boise and Nampa combined for over 192,000 sf net absorption and are the hottest retail markets at this time. Retail lease rates for the first quarter of 2011have stabilized just under $12.00 per sf per year (NNN) with class A retail rates at $13.10 per sf per year (NNN). The asking rents for retail space are approximately $1.50 more than actual rates. Retail rates have remained fairly solid for the past 24 months after a precipitous fall from the high in 2007 of $16.40 per sf.
The first quarter of 2011 revealed Industrial vacancy is stabilized at 11.22% down just slightly from the 11.64% high in 2009. Industrial net absorption is still negative, but only slightly. Since 2008 the Industrial net absorption in the Boise area has been virtually zero. The only bright spot year to date is Caldwell where the first quarter showed 34,000 sf of positive net absorption. Industrial lease rates were down about 10% from 2010. First quarter lease rates were $.34 per sf per month (NNN) after seeing a slight increase in 2010 to $.38 per sf. Landlords are asking nearly $.08 per sf more than they are receiving from tenants which is approximately a 25% spread.
As tenants move and adjust to their new business environment, investors are requiring lower risk exposure and higher Cap rates. There have been too few investment transactions completed in 2011 to get a good feel for the current Cap rates but judging from the data supplied by Thornton Oliver Keller Commercial Real Estate, office Cap Rates are likely nearing 10% while retail, industrial and multifamily rates are likely in the 9.0% range. This will likely lead to a reduced transaction volume in the short-term. In 2007 there were $410,000 in investment transactions completed in the Boise area. In 2010 we only saw $71,000 change hands with office transactions making up nearly 40%, storage and retail transactions were 21% and 15% of the total respectively. Apartment sales, industrial and mobile home transactions rounded out the total with approximately equal shares of the total.
Steady economic and job growth expected in the second quarter will hopefully mean the end to the doom and gloom that has ruled the commercial real estate market across the nation for the past three years. We are optimistic that the trends reflected in the first quarter statistics are sustainable and more than a blip on the radar.