By Brent Wilson with Tok Commercial Real Estate
2023 will be remembered as the year we saw the Fed’s eleventh consecutive interest rate hike and astronomical construction costs. These conditions have greatly impacted the local commercial real estate market, with investment sale transaction volume down 50% versus recent years. Despite this, East Idaho’s commercial real estate market is performing much better than the neighboring Boise metro, Coeur d’Alene and Magic Valley markets. This is primarily attributable to the growth of the Idaho National Laboratory and related projects – such as NuScale’s Small Modular Reactor project.
The Office Market
The Office market saw a slowdown from 2023 with total transactions declining 33%. However transaction volume remained higher than the number of deals recorded in 2017 through 2020. Pocatello saw the most activity, accounting for 26% of transactions, followed by South Idaho Falls with 24%. Net absorption stayed positive throughout the year, ending at 183,000 square feet. The most notable deals for the year included Portneuf Health occupying their new 20,000 square foot primary care clinic in Pocatello and Summit Orthopaedics new space on Woodking Drive in Idaho Falls.
Over 142,000 square feet of new construction delivered in 2023. The majority of construction was primarily for owner occupants with less than 5% of total construction being speculative. There is high demand for Class A product considering projects such as The Knolls and 1135 Pier View have seen strong leasing activity. However, high inflation has increased costs for materials and labor ultimately creating challenges for developers to make new office projects pencil.
With limited speculative product coming online, vacancy remained low with total vacancy staying below 4.5 % throughout the second half of the year. Multi-tenant vacancy also declined, dropping from 6.3 % to 5.8 % over the past 12 months.
Organic growth drove leasing activity in 2023, a trend that will likely continue. 36% of transactions in 2023 were tenants expanding or opening additional locations while 29% were tenants moving locations. Medical tenants will continue to be the primary business type expanding their footprint throughout the market considering various new medical spaces are currently planned or under construction. Some of these projects include Alligator Pediatrics’ new office on Eagle Drive in Idaho Falls and Idaho Eye & Laser’s planned 25,000 square foot building in Snake River Landing.
Overall asking lease rates are expected to stay in the $12 to $13.50 per-square-foot range, with the current rate averaging $12 per square foot (NNN, annual). Class A space will continue to see high demand but overall supply will be limited ultimately keeping rates on the rise. Currently Class A lease rates are averaging $20 per square foot.
The Industrial Market
Demand for industrial space continued to boom in 2023 with net absorption surpassing 550,000 square feet for the second consecutive year. Top deals included Peterbilt’s new estimated 140,000 square foot facility on Andco Drive in Idaho Falls and Elevate Holdings leasing 86,500 square feet at Gem Lake Industrial Park. Leasing activity was most dominant in North Idaho Falls with the submarket accounting for nearly 60 % of all industrial transactions. The most sought after spaces continued to be in the 1,000 to 3,000 square-foot range.
Industrial development remained strong in 2023 with 458,000 square feet delivered. Of this new construction, speculative projects made up 31%. Most notable projects were built in the Andersen and Clark Business Parks located on Yellowstone Highway in Idaho Falls. The majority of spec space continued to lease up at or before completion, resulting in vacancy staying below 5% in most submarkets. In Idaho Falls, the largest industrial submarket, vacancy ended the year at a historic low 1%.
New product pushed Class A rates up to an average $0.79 per square foot (NNN, Monthly), while overall asking lease rates are currently $0.75 per square foot, a 6% increase from the previous year. Overall lease rates in East Idaho remain lower compared to the Boise and Magic Valley markets where rates are averaging above $0.80 per square foot.
Nearly 500,000 square feet of industrial space is under construction or planned for delivery within the next few years. A notable development near completion includes two buildings totaling 280,000 square feet at Gem Lake Industrial Park in Idaho Falls. However, project delivery schedules will likely be impacted as rising construction costs and labor shortages remain a challenge for developers.
Organic growth is expected to continue to drive leasing activity considering 46% of 2023 deals were tenants opening additional locations or expanding. There is still interest from out-of-area businesses; however, these types of deals are down 63% compared to 2021. The substantial growth in e-commerce operations since the pandemic continues to drive demand for more logistics and distribution warehouses throughout the country, but with the economy slowing, companies will become more cautious in their leasing decisions and determining where to grow their business.
The Retail Market
The retail market remained strong throughout 2023, with total net absorption reaching over 169,000 square feet. This is the market’s second highest level on record behind 2020. In addition, all but one submarket (Blackfoot) remained at positive net absorption levels. Some notable deals include Dick’s Sporting Goods back-filling the former Macy’s space (60,300 square feet) at the Grand Teton Mall in Idaho Falls and Grocery Outlet leasing 20,000 square feet at Pocatello Square.
Leasing activity was primarily driven by local tenants expanding or opening additional locations who made up 39% of deals. Some notable tenants that expanded their footprint throughout Eastern Idaho in 2023 included Grocery Outlet, Downeast, The Red Rabbit Grill, and Fit 1 Gym. New-to-market deals declined from 2021, but there was still high interest from out-of-area businesses. However, a major challenge is finding quality retail space for these tenants as vacancy remained consistently low in 2023. Total vacancy declined from 6.5% to 4.5% over the past 12 months. Unanchored vacancy ended the year even lower at 2.4% down from 4.2% a year prior.
Limited supply has ultimately kept lease rates on the rise. Overall asking lease rates are currently $14 per square foot, up 5% over the past 12 months. In addition, Class A rates are averaging $22 per square foot (NNN, annual).
The retail sector should stay resilient in 2024, but retailers will be cautious as rising interest rates and elevated prices become a growing constraint for consumers. Leasing activity will remain driven by organic growth; however, national and regional tenants will continue to circle the market. New-to-market retailer RC Willey is also anticipated to break ground on their new 191,000 square foot store in Idaho Falls later this year.
High construction costs limited new speculative retail space in 2023 with very few projects delivering, but 2024 should see more construction completed. Some notable projects in Idaho Falls include an 8,800 square foot strip center at 3430 25th Street and a second strip center at Hillcrest Plaza. Rising construction costs will remain a challenge for developers, though, and will ultimately keep new supply limited. Overall vacancy is expected to stay in the 4.5 to 5.5% range. In addition, lease rates are anticipated to stay on their rising trajectory.