It’s no secret Idaho’s real estate market is hot, and that includes industrial space. Devin Ogden, who specializes in industrial brokerage services, offered insights earlier in February, at the BOMA Idaho commercial real estate symposium. This Q&A, edited for length and clarity, explores what’s been happening since.
Has there been anything noticeable/noteworthy/surprising recently?
For the most part, it’s more of the same. There have been a few more concerns of inflation and costs and how to cope with that. It was already kind of going in that direction, but I am seeing a little bit more of that.
How are you able to work with those concerns?
I heard this a lot recently at a national conference in Phoenix: it’s how you structure a deal, because right now, the big unknown is cost and time to get the product in. Trying to commit to a lease rate when the construction costs between now and by the time you start doing the tenant improvement work could be drastically different. So there’s negotiations of how to structure that, whether there’s a cap (estimate) up to a certain amount or it’s a bit of a moving target until you get closer to when you actually do the tenant improvements. I heard at the national conferences that some developers — not local — aren’t even entertaining letters of intent until they’re close to completion, which normally, you would never do and we don’t do it in this market because it helps with the financing; you get pre-leased, you minimize some of that risk. Right now the issue is you have an equation and you usually have one or two unknown variables; in this analysis, we’ve got a lot more. One of the concerns is structuring lease deals from landlords to make sure there’s no big unexpected changes that can hurt the bottom line of either the tenant or the landlord.
What else did you take away from the conference that you feel might apply to Idaho?
Nationally, especially in the West, everything’s extremely tight — here, we’re under 1.5% vacancy — with low vacancies; it’s highly competitive to get good functional space. One of the main comments I hear from national tenants that haven’t been in Boise, haven’t been in the Treasure Valley or Magic Valley or in eastern Idaho, they think the lease rates are going to be significantly lower. And they say, “Why am I paying the same rate in Boise that I’m paying in Denver and Phoenix or in Washington?” It’s supply and demand. So we hear a little bit of kickback and then it’s “OK, let’s move forward. We need to have a location.”
Pertaining to our market, land and construction costs continue to go up, which means lease rates have to go up for it to make sense for a developer to actually build these buildings. So far, the tenants are paying the increased rent. Everyone (the investor, developer and the tenants) likes our market because of the long-term trajectory moving forward. Tenants need to be here to be able to service the growing population; it’s going to continue to grow drastically. And developers want to be here because it’s business friendly. We’re underserved when it comes to industrial space, as far as amount of square footage that we have based on the population, and so tenants will continue to pay, because on their expense sheet, the lease (monthly rent), generally speaking, is going to be about 8% to 9% of their total expenses. So even though the rent jumps up quite a bit, even if the rent jumps 15% what they’re used to paying, that still doesn’t move the needle too much on their expenses, and the profit that they can make by having a location or bigger space here by far trumps the increased rent. But that’s going to cycle. Right now, tenants are paying, but at a certain point the rents can be so high or maybe the economy slows down a bit and they can’t move as much product and so now they can’t justify a certain amount of space.
Typically, when is that threshold hit? Are you expecting it in a year or a little longer? Or less?
When it comes to industrial real estate, my prediction would be it’s going to be more of the same for the next year, 18 months, maybe going up to two years. The other looming thing is the amount of square footage that’s being constructed. If we add in flex space, we’re close to 50 million square feet for industrial and industrial flex. And all of a sudden, you add on 6-8 million square feet, that’s one of the biggest percentage jumps nationally from what I’ve heard from brokers around the country.
When you use that number 50 million…
That’s the Treasure Valley. If you go to, say, Magic Valley, that is like 13 million square feet; eastern Idaho, you’re at like 10 million square feet. I don’t have the stats up north, like Coeur d’Alene, but up north a lot of it gets serviced out of Spokane.
Can you give us a breakdown of what you’re seeing in different sectors?
As far as tenant demand, all sectors are in high demand — distribution space, manufacturing, food processing, cold storage — cold storage is very underdeveloped in the Northwest, but those are tougher and more expensive to build — and same thing with the smaller flex-type industrial (around 30,000 square feet with bays around 5,000 square feet). The 6-8 million square feet, most of that is big box space for distribution, so you’re talking at least 100,000-square-foot buildings, concrete tilt. Then you have a couple build-to-suits for manufacturers. All these new players that are coming in, everyone wants to go big box distribution because you can build that spec, because it fits 85% of the tenants out there. Manufacturing spaces are so unique depending on who goes in there. But we’re seeing demand from both local tenants that are just growing that need more space and also companies coming in. I’ve always said one of the biggest attributes that helps our economy is the regulations in California.
And then on the development side, while most has been big box, we’re starting to see some smaller players, kind of local players, building the smaller buildings. I feel there will need to be more developers building the smaller stuff, but it costs more to do that. You don’t get the economies of scale.
Anything new that’s happened in terms of access to capital?
Money is running rampant. And so many people want to place money into real estate. If you have a good industrial product you won’t have any issues finding an investor that’s willing to put money into the deal. As far as access to capital through financial institutions, that’s there as well. Industrial and multifamily is viewed as low risk. I’d say the money is there, it’s not as cheap as it used to be. I haven’t heard of anyone kicking back on an industrial deal.
Are there at least a few users that are constructing with the intent to own their own building?
There’s a lot of companies, especially manufacturers, that do want to own their own building because they put a lot of money into it and it’s hard for them to move. What we’re seeing is, some past and current clients have been frustrated. Ideally, most everyone wants an existing building they can tweak, make it their own, being they can be in sooner, it’s less headache and time and in theory, it’s cheaper. But you can’t find any of that, and so it’s like, “Alright, we got to buy land.” The issue we have now is most of this land is controlled by developers. And so, you have an owner that wants to go out and build their own building — say 80,000 square feet on 6-7 acres — it’s tough to find a spot where they can actually buy and build.
Is there availability that hasn’t been tapped into yet that you’re watching?
No. Twin Falls is lower vacancy than us. We didn’t have a whole lot of development players here in Boise until kind of recently. One of the problems is to find land that’s zoned, annexed in the city and/or has utilities at least close by. I’d say the biggest hindrance to businesses right now, the two main pinch points are real estate, they can’t grow because they can’t find a big enough space, and labor; they can’t grow because they can’t get employees.
Throughout Idaho, it used to be always the same players and they did things kind of the same way. They do the same underwriting; they build the same kind of construction with the same contractors. And now, it’s completely changed. There are different ways of thinking on how to do construction or how to underwrite a deal, what does or doesn’t make sense. It’s kind of a reset, where there are a lot of new ways of looking at it.
Are there new factors that are continuing to be considered?
It’s still kind of off and on, but inventory, receiving product. We still have some of those issues, but I don’t think it’s as drastic as it was. It kind of ebbs and flows on what’s hard to get and what’s not hard to get.
Also, because of the logistical challenges, these past interruptions to business (due to COVID), companies are asking, “How do we prevent that from happening again,” and have put plans in place to make sure that they can to avoid that. And part of that is what feeds the industrial market and this demand for space. It’s the supply chain line, if you can control your own supply chain — you have more warehouse space, more product you can ship more in and store yourself, that you aren’t relying as much on a third party. It’s also other ways of how they’re doing it, getting different suppliers and obviously creating more relationships with more suppliers, “If you can’t get it to me, this person can.”
Is there anything we didn’t talk about that you want to make sure that we do?
Lead time. It’s still crazy. You might have to wait, you know, nine months before you can get steel for a building. Those things are still there that people are having to deal with. Hopefully, that improves.
Also of note is the maturation of our market and our state, where it was all kinds of small, local and an occasional bigger deal. It used to be a typical deal was 5,000-8,000 or 5,000-10,000 square feet, it now seems that size has kind of doubled, 15,000-30,000. The size of tenants that we’re seeing and the frequency is a lot more than it was for decades. It’s attributed to the size of our market and trajectory, not only our growing market growing but with everything (also) spurred with COVID…It’s one of those perfect storms where all these things happen that really made our industrial market in Idaho robust.
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