Boise
has been on a growth tear with the population increasing and new to the area companies moving in. Boise was steadily growing before the pandemic and the pandemic accelerated growth. Some people have said that the pandemic didn’t cause all the changes rather sped some of them up. These days most if not all of us are watching the national and local economy and other world events and wondering what may come next. So, let’s start with a national picture of the office and then industrial worlds.
Two recent Wall Street Journal articles had some interesting views and facts. Nationally 17.5 % of all the office space is vacant. Pre-covid, if it was not occupied, it was vacant. Now, in the larger coastal cities the occupancy rate for downtown office space is between 40 and 45%. Another industry term is “shadow vacancy” where the space is leased but underutilized and unneeded. Such shadow space is likely not going to have its lease renewed. So, more vacancy to come. And in the article according to Costar there is 125 million sf of office space vacant or available in New York City. Wow we only have a total of 33 million sf in the greater Boise market. That means NYC has nearly five times as much vacant space then we have total space! Sorry can’t resist, but also in that article it said that from April 2020 to March 2021, 23,600 small businesses closed permanently in New York City. The pandemic caused suffering on many fronts. And, given recent Covid outbreaks and resurgences it doesn’t look like we will be back to per pandemic occupancy of office space anytime soon.
So what seems to be happening in Boise? Speculative office construction has stopped. The new Class A buildings that were available in 2020 have been leased, despite Covid. This is reflective of the ‘flight to quality’ the office market is experiencing both here and nationally. Class B space, on the other hand, has experienced a significant ‘give back’ by tenants either vacating or subleasing. Our overall vacancy rate has not jumped dramatically but choices for tenant/occupiers have noticeably increased given new offerings. Two years ago we were tasked by a user client to find a 15,000 to 20,000 sf vacant and available office building for purchase. Through diligence and good fortune, we located and secured the one vacant building on the market. Today there are 10 such buildings available for sale. It seems these owners aren’t too optimistic about the possibility of leasing them so they are putting them on the market.
So, what do we PREDICT for the Boise office space market?
Prices for office building given the above will begin to come down. Tenants in Class A and well-located office buildings will see renewal rents increase from inflationary pressure. Tenants renewing Class B/C space or looking for such space will have significant leverage. In order to capitalize on this we are suggesting to clients and friends that they allow at least 12 months before the existing lease expires to “go to market” to consider their options. We want to make time our friend not our enemy.
Industrial space has a different story. In the last 18 to 24 months local and “new to market” or companies moving into the Treasure Valley have absorbed space at record levels. We have never seen the number of large space leases (50,000 SF +) executed here before. This has kept our industrial space vacancy rate below 2 percent for the last 24 months even though new construction has been at record levels. Idaho has been discovered by companies attracted by our low cost, not over regulated, pro-business government. And we have finally attracted the big national industrial developers…the guys that 2 or 3 years ago wanted to know where in Iowa Boise was. Depending on who you talk to there may be 5,000,000 to 8,000,000 sf of new industrial space delivered in late 2022 and through 2023. With an existing base of 59,000,000 sf that could be a sudden flood 12% more space. That is a lot to lease and especially if we are in a recession. Another factor to consider is so far the developers are planning/constructing the same large distribution type buildings. But “one size doesn’t fit all” in Boise. Much of our demand is looking for smaller spaces with yards, parking and more flexible design.
So, what do we PREDICT for Boise industrial space?
2023 will bring many choices for our larger (25,000 SF +) industrial clients and friends. And when we get overbuilt the lease economics will turn to the tenant’s advantage. Rates may not drop but free rent, tenant improvement allowances and other tenant friendly lease details will become more prevalent. Smaller tenants needing yard space and companies looking to purchase will be in a different situation. Things will remain tight for these needs but options will become somewhat more available as tenants begin to move around. But concession will likely be hard to find.
If you have a lease expiring this year you might want to do a short-term extension and get ready to begin negotiating in 2023 and 2024. The market is not fully visible right now so be sure to look at all options and be diligent in your search. With all the moving parts it is best to engage a true tenant representing broker. Call us to discuss further!