‘Soft’ market requires motivation – and concessions

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Jay Story of Story Commercial, a commercial real estate brokerage in Boise, was asked a series of questions relating to the office-and-commercial market in the area.

He answered the questions via e-mail, and here are his responses:

Q. What is the current condition of the Boise-area office/commercial market?

A. The current commercial market is soft, where most investment deals require lots of motivation and owner/user transactions typically require lots of concessions.

All sectors (office, retail, industrial and multifamily) continue to have increased vacancy and declining rents. This is trending with national statistics where CCIM (Certified Commercial Investment Member Institute) is reporting vacancies near or above historic highs for all sectors.

Q. What is the best thing about the market, and what is the biggest challenge?

A. The best thing with the current market are the current opportunities for those investors with cash. If you have cash and the fortitude to work your way through some problems, the opportunities are amazing.

The biggest challenge in today’s market is setting realistic expectations for owners and sellers. Most haven’t realized, or don’t want to realize, the rents and prices it will take to move their property.

Q. How does a softer housing market impact the office/commercial market?

A. The commercial market typically follows the housing market by about 15 months, according to statistics presented by Case-Shiller/S&P as well as MIT/Moody’s real estate value reports.

During this cycle we’ve seen commercial values drop even more than residential values, and they’ll continue to drop at least through the tail end of this year.

Q. How do you feel about current office vacancy and rent averages, and capitalization rates?

A. As office vacancies continue to climb into the high teens, we’ve seen lots of asking rents drop below $10/SF/year, even in nice complexes. Capitalization rates have climbed substantially, but it’s hard to tell by how much since most deals getting done are owner/user deals with very few pure investment deals.

Q. How do today’s numbers compare to those of, say, five or more years ago?

A. I’m witnessing “A” locations holding fairly steady on rents and values, while B and C locations are taking the brunt of deterioration.

Having said that, if your property is not in an A location, your property value and market rent are most likely less than they were five years ago.

Q. How does this area stack up against other markets in the U.S., or other markets in the state?

A. Boise is not faring very well compared to most other markets (the exception being the “sand states”).

This is something we’re not accustomed to, as in the past, Boise has weathered the storms better than most.

As the market was going up, we overbuilt not only in the residential market but also in the commercial market. This run-up led to lots of “artificial” equity, employment and incomes, which went away as the fundamentals started to deteriorate.

Q. What are you seeing more of in your business lately?

A. We’re seeing a lot more rent concessions, foreclosures and note sales. Many tenants are approaching their landlord and asking for lower rents even when they have a lease in place. These landlords are then put in the position to grant rent reductions or lose a tenant with no good way to replace them.

I also track commercial foreclosures, and these are finally starting to come onto the market, much like the residential market a year and a half ago. Another active part of the market are banks looking to sell underperforming or nonperforming notes.

They’ve found it a great way to raise capital while not taking on the risks and uncertainty of bringing a property all the way through foreclosure.

Q. How do you foresee the future of your industry, either short- or long-term?

A. The short term of our industry will continue to be problem solving, setting realistic expectations and working our way through high vacancies and low rents. I’m also focusing on helping investors with cash seize opportunities that we’ve never seen in our market.

In the long term, I’m convinced our market will return to being very strong as people migrate towards our quality of life and job creation gets back on track.

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Story Commercial, LLC is located at 950 W. Bannock St., Ste. 1100, in Boise. For more information, call (208) 319-3535.

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