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MARKET REVIEW & OUTLOOK

Winter 2018

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Missoula(406) 552- 4568

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TABLE OF CONTENTS

Economic Outlook 3

Office Market 4-5

Retail Market 6-7

Industrial Market 8

Medical Office Market 9

Apartment Market 10

Kootenai County 11

New Markets 12-13

K&H Facility Services 14All information furnished is from sources deemed reliable and submitted subject to errors and omissions.

No responsibility is assumed for any inaccuracies. No one should rely solely on this information, but instead should conduct their own investigation to independently satisfy themselves.

Photo credit: Homes by Eugene, Johanna B. Photography, Isaacson Aerial Photography, Emily Fisher Photography Graphics: Mike Lee

2 Kiemle HagoodM A R K E T R E V I E W & O U T L O O K 2 0 1 8

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In both of these sectors, employers will struggle to fill

open positions. Similar to the U.S. trend, initial claims for

unemployment insurance are already low by historical

standards and will continue to be low through the year. This

is a clear signal of an extremely tight labor market. This

tightness, combined with Washington’s new minimum wage

law, is generating regional wage gains that exceed consumer

inflation.

Regional PopulationThe ongoing strength in the region’s labor market continues

to boost population growth through in-migration. Population

growth in Spokane and Kootenai Counties combined was

around 1.5% in 2017, much faster than 0.7% growth for the

U.S. Regional population growth, which will likely exceed 1%

again in 2018. Even the region’s rural counties are enjoying

population growth after a period of stagnant growth following

the Great Recession. However, even with this pickup in

population growth, the age demographics for the region’s

rural counties will remain much older than the urban counties

for the foreseeable future.

Based on the outlook for U.S. GDP growth, regional employment growth will likely be in the 1.5% to 2% range in 2018.

ECONOMIC OUTLOOK

Written ByDr. Grant Forsyth, Chief Economist, Avista Corporation

U.S. Economic PolicyThe U.S. economy is now experiencing its third longest

expansion going back to the 1850s. The recent tax reform

act—the first since the 1980s—will help prolong the current

expansion through 2018. However, even with lower personal

and corporate taxes, the expectation for U.S. GDP growth in

2018 is around 2.5%. This is far below the 4% target of the

Trump Administration, and largely reflects ongoing weakness

in U.S. labor productivity. Consumer inflation is expected

to remain very near the Federal Reserve’s target of 2%. As

a result, the Fed’s ongoing interest rate increases will likely

continue at a modest pace in 2018. One risk to U.S. and

regional growth is a breakdown in NAFTA talks. A NAFTA

breakdown will hit the trade-dependent Northwest hard if it

leads to a protectionist conflict between the U.S., Canada, and

Mexico.

Regional Labor MarketIn 2017 non-farm employment growth in Spokane and

Kootenai Counties combined was over 2%, compared to 1.5%

for the U.S. Regional employment growth continues to be

particularly strong in the construction and health care sectors.

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OFFICE MARKETWritten By

Mike Livingston, Erik Nelson and Craig Soehren – Kiemle Hagood

Market Forecast

There are several reasons to believe 2018 will be a year

characterized by falling vacancy rates, increasing rental rates,

and new construction, including:

– With the completion of the former Macy’s department

store into a market-rate apartment project and a general

increase in downtown activity, we expect increased

demand for CBD office space.

– The University District will see completion of the $14

million Gateway Bridge, commencement of a new,

100,000+ square foot health sciences building, and

completion of the first year for medical students at

Washington State University’s Elson Floyd Medical

School. All should translate into increased demand for

a variety of real estate product in the Close In and CBD

submarkets.

– One or more new buildings will be constructed at

Pinecroft.

– Leasing activity from 4Q17 that did not appear in the

year-end report will boost 2018 results.

– Demand for investment property should remain robust

as investors from out of the area continue to seek higher

yields in Spokane.

Market Conditions

• Leasing and sale activity of office product in the Greater

Spokane area remained strong throughout 2017, especially

at the end of the year. However, due to strong 4th Quarter

activity these reporting figures do not accurately reflect

the strength of the current Spokane Office Market. As an

example, overall vacancy for year end 2017 was 16.3%

compared to 15.6% a year ago. Barring a sudden and

unforeseen economic downturn, we expect office vacancy

figures to be significantly lower next reporting period as

many 4Q17 transactions are reported.

• Leasing activity was especially robust in the Close-In

submarket, historically Spokane’s strongest submarket.

Rock Pointe Corporate Campus and other properties with

sufficient parking had significant absorption.

• Despite a slow start, the Central Business District ended

2017 with positive absorption as well.

• Construction of new office building in the Spokane Valley

(at the Meadowwood Technology Campus and Pinecroft

Business Park) will commence and/or be occupied as

new product is needed due to a lack of large well located

availabilities throughout the market.

• Sale activity was especially strong in 2017 and could have

been even stronger if there had been more available

inventory for investors and owner users. Despite demand

exceeding supply, cap rates for office investments remained

in the 6.5% to 8.0% range.


Iron Bridge Campus

Rock Pointe

Tri-Cities, Washington

DEMOGRAPHIC OVERVIEW OF COLUMBIA BASIN REGION2017

Estimated Population

2022 Projected

Population

2010 Census

Population

Projected Annual Growth

(2017-2022)

2017 Estimated

Households

2017 Estimated Median House-

hold Income

2017 Estimated

Median Age

BENTON COUNTY 199,855 217,991 175,177 1.8% 72,607 $69,473 34.9

Kennewick, WA 83,133 90,359 73,927 1.7% 29,615 $59,515 32.3

Richland, WA 56,574 61,756 48,154 1.8% 22,606 $79,704 38.2

West Richland, WA 14,711 16,085 11,812 1.9% 5,117 $90,561 34.7

FRANKLIN COUNTY 91,089 98,796 78,163 1.7% 26,590 $63,892 28.8

Pasco, WA 70,919 76,927 60,956 1.7% 20,996 $62,788 28,1

*Data Source: U.S. Census Bureau/Sites USA

DEMOGRAPHIC OVERVIEW OF WESTERN MONTANA REGION2017


2022 Projected

Population

2010 Census

Population


(2017-2022)

2017 Estimated

Households


hold Income

2017 Estimated

Median Age

MISSOULA COUNTY 116,390 127,512 109,299 1.9% 49,469 $51,796 35.1

Missoula, MT 72,438 79,218 66,987 1.9% 32,004 $46,358 32.0

FLATHEAD COUNTY 100,647 110,774 90,928 2.0% 39,926 $53,160 41.3

Whitefish, MT 7,560 8,377 6,343 2.2% 3,344 $53,648 41.4

Kalispell, MT 23,696 25,858 19,747 1.8% 9,702 $47,567 36.3

13KIEMLEHAGOOD.COM M A R K E T R E V I E W & O U T L O O K 2 0 1 8

*Market Data Source: Valbridge Property Advisors


Office Submarket Vacancy Breakdown

Office Market Vacancy

Office Market Inventory

11.0%

21.1%

16.5%

14.3%

43.0%

16.6%

Wes

t

Val

ley

No

rth

Sou

th

Clo

se-I

n

CB

D

12%

16%

20%

24%

0%

4%

8%

2013 2014 2015 2016 2017

17.2% 15.7% 17.0% 17.9% 16.5%

16.6% 13.2% 15.7% 15.7% 16.6%

17.4% 16.7% 17.5% 18.7% 16.4%

Total

CBD

Suburbs

208,196483,833

615,7133,743,743

229,2231,086,888

29,291204,202

363,7073,297,850

501,4513,016,261

Vacant SFOccupied SFWest

Valley

North

South

Close-In

CBD

TRI-CITIES, WASHINGTON – Growth Continues In A Strong Economy

The Tri-Cities is located in Southeastern Washington and

is comprised of Richland, Kennewick, Pasco and numerous

surrounding rural communities. Three rivers, nine golf courses,

and 300 days of sunshine offer a wide variety activities and

appeal. Because of its easy accessibility, the area is a service

and occupational hub for the region. The economy is fueled by

a variety of government contracted projects for environmental

clean-up, scientific research and development, agricultural,

food processing, general retail and healthcare.

With a strong economy and job growth, the following projects

recently occurred or will take place in 2018:

• AutoZone’s 500,000 square foot distribution facility in

Northeast Pasco;

• Kadlec Hospital expansion with new multi-level parking

structure;

• New 20,000 square foot Planet Fitness facility on

Columbia Center Blvd;

• New Standard Flooring and Paint 24,200 square foot

facility in former Staples;

• Newly built 20,000 square foot location for Home Goods;

• Party City and Ulta Beauty expanded with locations in

Richland’s Queensgate area;

• New quick serve restaurants, Mod Pizza and Panera

Bread, open in Richland’s Vintner Square;

• Continued growth in the Tri-Cities Scientific Research

District, with WSU Tri-Cities North Richland location;

• Two planned Original Pancake Houses in Kennewick and

Richland;

• Potter BBQ expanding with a second location in

Kennewick;

• Ongoing apartment construction taking place due to the

low vacancy rates;

• Several new and under construction mini-storage

facilities.

Predictions for 2018 are positive as we continue to see

businesses choosing to relocate to the Tri-Cities’ robust

market.

Missoula, Montana

MISSOULA, MONTANA – Entering A New Market

One of our challenges when entering a new market is to

quantify the real estate statistics. How many square feet exist

commercially? What is the current occupancy rate? What are

average rents? Once we are able to quantify the market, our

job is to then to tell the story of current market conditions and

predict what the future may hold. Missoula is fortunate to have

progressive groups who understand the value of assembling

this information to ensure developers, business owners and

investors can make accurate investment decisions.

In 2011, the Missoula Downtown Association, working with

the Downtown Business Improvement District and the

Missoula Redevelopment Agency, commissioned a study to

quantify the building and business inventory in Downtown

Missoula. You can find the study on their website. It is a wealth

of information as to what makes up this vibrant downtown.

The study covered approximately 2.3 million square feet

and 766 “units” of commercial space. This survey breaks

down property types differently than we would traditionally

classify commercial buildings, but it remains a very insightful

and interesting outline of what Downtown Missoula looks

like from a commercial real estate standpoint. For us, it is a

great starting point for analysis of what is going on in the real

estate market in Missoula, and is a excellent reminder of the

important role these agencies play.

We have just finished our first year operating in the Missoula

market, and are very pleased to be part of this community. Best

wishes to all of our Montana clients, customers and tenants

for a successful 2018. We look forward to continuing our due

diligence and research to provide you with the management,

brokerage and investment information you need.

Source: https://www.missouladowntown.com/about/downtown-building-business-inventory/

NEW MARKETSWritten By

Lance Bacon and Gordon Hester – Kiemle Hagood


Market Conditions

• There was some relaxing in the South Hill vacancy rate

which saw a slight increase to 4.0%. This submarket has

been especially tough on national and regional restaurant

franchises.

• Since the recession, the Spokane Valley submarket has

shown a solid recovery in occupancy. After reaching a high

of 12.6% vacancy in mid-year 2013, the Valley recovered to

5.4%, the second lowest vacancy rate in the suburban areas

that are tracked. Even though the occupancy levels have

tightened, average rental rates have not seen a significant

improvement for more than a decade.

Written ByColin Conway and Carl Guenzel – Kiemle Hagood


RETAIL MARKET

RETAIL MARKET BREAKDOWNSubmarket Surveryed Inventory (SF) Vacant Inventory (SF) Vacancy

CBD 1,341,754 131,811 9.8%

Close-in 1,022,862 92,015 9.0%

South 1,228,955 49,321 4.0%

North 6,060,504 499,400 8.2%

Valley 5,976,662 321,788 5.4%

West 267,788 28,595 10.7%

Market Forecast

• In investment sales, a seller’s market shows no immediate signs

of easing. With low interest rates, limited product and available

capital, sellers are demanding low cap rates for even Class B

and C properties. As long as buyers continue to line up, sellers

will be in the position of strength.

• New, smaller retail strip centers are coming online in North

Spokane and Spokane Valley, with either full or close-to-full

occupancy upon completion. Additional speculative building

may soon be on the horizon. Rents are easing into the $30

range for small space, while Mid-Box Retail rents will remain in

the $12-$17 range.

• Even though restaurants are concerned about the impact of

the mandatory health care law and the state’s minimum wage

law, new concepts continue to open. Landlords working with

new operators would be wise to keep alert for warning signs of

struggling tenants.


Hanson Center - Market Pointe II

Retail Submarket Vacancy Breakdown

9.0%

4.0%

8.2%

5.4%

10.7%

9.8%

West

Valley

North

South

Close-In

CBD

Evergreen Crossing

OFFICE MARKET BREAKDOWNSubmarket Inventory (SF) Vacant Inventory (SF) Vacancy

Coeur d'Alene 3,063,542 140,929 4.6%

Post Falls 553,152 33,687 6.1%

Rathdrum 24,915 0 0%

Hayden 368,613 17,879 4.9%

Dalton Gardens 14,710 0 0%

Totals 4,024,932 192,495 4.8%

Office• Significant office space absorption occurred throughout

Kootenai County as roughly 120,000 SF was absorbed

since Summer 2016.

• Similar to past years, new office speculative construction

is fairly nonexistent as the land costs in conjunction with

construction costs and expected returns challenge the

necessary rent levels by tenants in the market.

• Stabilization is expected in 2018 for the office sector with

Landlord contributions in the form of free and or reduced

rent, while TI packages will dwindle.

RETAIL MARKET BREAKDOWNSubmarket Inventory (SF) Vacant Inventory (SF) Vacancy

Coeur d'Alene 4,931,800 223,326 4.5%

Post Falls 1,649,731 154,137 9.3%

Rathdrum 219,501 23,015 10.5%

Hayden 859,896 40,840 4.8%

Dalton Gardens 170,237 5,200 3.1%

Totals 7,831,165 446,518 5.7%

Written ByPat Eberlin – Kiemle Hagood

Retail• Kootenai County is not immune to the ever-changing

traditional retail stores. Web-based presence and

e-commerce drive decision making with many retailers

“right sizing” store fronts to cater to daily consumer needs.

• Service related office users (ie: dental, medical, insurance

etc.) continue to transition into retail positioned product,

while enjoying stronger traffic counts, parking ratios,

exposure and access.

• Expect to see a reasonable retail market with tenant

relocations from within and consistent rents from the “mom

and pops” while strong signatures compete for Class A

locations in the high rent districts.

Parkside Tower


Prairie Shopping Center

INDUSTRIAL MARKET BREAKDOWNSubmarket Inventory (SF) Vacant Inventory (SF) Vacancy

Coeur d'Alene 1,728,874 63,868 3.7%

Post Falls 2,869,130 78,873 2.8%

Rathdrum 462,158 0 0.0%

Hayden 1,375,999 35,819 2.6%

Dalton Gardens 190,314 0 0.0%

Totals 6,626,475 178,560 2.7%

Industrial• Little to no supply across the market continues to favor

Landlords with increasing rents, while leaving little to no

rental concessions until new product comes online.

• Possible new industrial projects are coming to the market

in 2018, which should help the demand by users of 1,500

SF to 50,000 SF.

• Landlords of existing product will continue to see rental

escalations into 2018 as new construction rent demands

will create significant variations between new and second

generation product.

KOOTENAI COUNTY



DEMOGRAPHIC OVERVIEW OF THE INLAND NORTHWEST2017


2022 Projected

Population

2010 Census

Population


(2017-2022)

2017 Estimated

Households


hold Income

2017 Estimated

Median Age

SPOKANE COUNTY 500,280 544,876 471,221 1.8% 205,051 $56,725 36.7

Spokane, WA 216,417 236,029 209,752 1.8% 93,546 $49,062 35.1

Spokane Valley, WA 96,262 104, 681 89,657 1.7% 40,104 $53,777 36.8

Liberty Lake, WA 9,205 10,059 7,591 1.9% 3,609 $72,377 36.4

Airway Heights, WA 6,723 7,235 6,114 1.5% 2,006 $41,941 30.9

KOOTENAI COUNTY 159,314 178,654 138,494 2.4% 62,591 $54,691 39.1

Coeur d’Alene, ID 51,746 57,925 44,113 2.4% 21,164 $47,442 35.4

Post Falls, ID 33,523 37,456 27,780 2.3% 12,654 $52,828 35.0

Rathdrum, ID 8,323 9,291 6,915 2.3% 3,009 $48,207 35.3

Hayden, ID 14,735 16,436 12,998 2.3% 5,767 $62,778 40.8



Overall Retail Vacancy

Coeur d’Alene Town Center

9%

12%

15%

0%

3%

6%

2013 2014 2015 2016 2017

10.4%

10.2%

8.9%7.1%

8.8%

Market Conditions

• The average apartment vacancy rate for the Greater

Spokane region increased from 1.6% in Fall 2016 to 2.9% in

Fall 2017. This increase appears to be due to the anticipated

delivery of several new apartment opportunities and higher

than usual vacancies in the 2+ bedroom apartment category

area wide. Interestingly, the average rental rate increased

$36.00 per month over the same period to $886.00 per

month. The peak rental rate was in Spring 2017, when levels

hit $913.00 per month, then fell during the summer months.

• In addition to new product, first time home buyers continue

to take advantage of low interest rates and home purchase

options, which is a factor in apartment vacancy rates area

wide.

Market Forecast

• Vacancy rates should trend downward as new product

is absorbed. Currently, several apartment buildings in

Spokane County have wait lists up to 30 requests deep.

• Rental rates should stabilize while absorption takes place,

and then trend upwards toward the 4th Quarter, as a

relative short supply remains.

• Properly zoned land that can handle multi-family

development will stay active throughout 2018.

• Quality multi-family investment listings should remain

relatively sparse with low cap rates through 2018, since

investors do not want to give up their investment without

a replacement or a premium sale price.

APARTMENT MARKET BREAKDOWN BY SUBMARKET

Submarket Vacancy % Average Rental Rates

North 2.0% $833

Central 1.8% $777

Valley 2.9% $870

South 3.1% $987

West 7.9% $891

OVERALL 2.9% $886

Written ByTim Kestell and Cody George – Kiemle Hagood

Lilac Terrace Apartments

*Data Source: Runstad Center for Real Estate Studies/University of Washington

APARTMENT MARKET

$720 $710

$751

$848

$886

20

17

20

16

20

15

20

14

20

13

3%

4%

5%

0%

1%

2%

2013 2014 2015 2016 2017

2.9%

4.1%

3.3%

1.6%

3.5%


Overall Apartment Vacancy

Overall Apartment Rental Rates

Market Conditions

• The Spokane Medical Office Market has enjoyed positive

absorption in the last few months. The last survey indicated

a vacancy rate over 10%; however, that rate has dropped to

just under 9% in the most current report. A continued wait

and see attitude is in place as health organizations continue

to merge, uncertainty over the ACA continues, and the

health industry as a whole wonders what’s next.

• Rents will need to rise to recover increases in operating

costs, which show no signs of slowing. Class A properties will

continue to demand top rates, while B and C Class properties

will struggle to attract good tenants. Landlords will need to

be aggressive by offering attractive tenant improvement

allowances, flexible lease terms, and other incentives.

• Capitalization Rates nationwide for medical office properties

have dropped from 8.5% in 2002 to 6.7% in 2016 with

continued downward pressure. (Source: Real Capital

Analytics)

Market Forecast

• Health care will maintain the move toward a convenience

– based model. Health care organizations will continue to

locate in population centers where their customer base is

located and operational costs are lower than on hospital

campuses.

• New rules implemented by the Financial Accounting

Standards Board will impact how health care providers

account for long-term leases, which currently allow sale –

leaseback arrangements. Under the new rules, leases will

be classified as financing leases, which will be treated as

debt by the lessee. These changes will force a fundamental

rethinking of whether providers want to own or lease their

facilities. Developers will need to consider offering credit-

leasing where a provider gets the benefit of ownership

following lease expiration.

Market Conditions

• Spokane’s Industrial Market saw another drop in vacancy

levels during the second half of 2017. Vacancy rates remain

historically low as the overall level dipped just below 2%.

• Demand for industrial space continues to grow throughout

the region, and only 638,134 square feet of new space was

built in 2017, while 1,024,544 square feet was absorbed.

• With constricted options, tenants within the region have

seen an increase in rental rates.

Market Forecast

• Several new projects will come online in 2018. As these

projects are completed, expect to see a slight rise in vacancy

and more options for tenants.

• Keep in mind historically the Industrial Market tends to have

a five year vacancy level incline and decline. Movement

towards a small vacancy level rise is expected to occur in

2018.

INDUSTRIAL MARKET MEDICAL OFFICE MARKETWritten By

Mark Lucas, SIOR , Tracy Lucas and Tracy Poff – Kiemle HagoodWritten By

Ron Horton – Kiemle Hagood

Cheney Spokane Road


*Market Data Source: Mark Lucas, SIOR, Tracy Lucas and Tracy Poff

Providence Medical Park

3.5%

9.6%

9.6%

8.9%

Valley

North

South

Close-In

9%

12%

15%

0%

3%

6%

2013 2014 2015 2016 2017

9.0%

10.7%

10.2%

9.4%

13.2%

2.6%0 - 5,000 SF

5,001 - 10,000 SF

0-10,000 SF

10,001 - 20,000 SF

20,001 - 40,000 SF

Over 40,001 SF

Spokane Industrial Park

2.2%

2.4%

1.5%

OVERALL 1.8%

2.4%

1.2%

2.0%

8 9Kiemle Hagood KIEMLEHAGOOD.COMM A R K E T R E V I E W & O U T L O O K 2 0 1 8 M A R K E T R E V I E W & O U T L O O K 2 0 1 8

Industrial Vacancy by Building Size

Medical Office Submarket Vacancy Breakdown

Overall MedicalOffice Vacancy

Industrial Market History

Absorption

Vacancy

-1,000,000

-500,000

0

500,000

1,000,000

1,500,000

2,000,000

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2014 2015 2016 2017201320122011201020092008200720062005200420032002200120001999199819971996199519941993

5.7% AVGVACANCY

663,476 SF AVGABSORPTION

SF ABSORPTION TOTAL VACANCY %

DEMOGRAPHIC OVERVIEW OF THE INLAND NORTHWEST2017


2022 Projected

Population

2010 Census

Population


(2017-2022)

2017 Estimated

Households


hold Income

2017 Estimated

Median Age

SPOKANE COUNTY 500,280 544,876 471,221 1.8% 205,051 $56,725 36.7

Spokane, WA 216,417 236,029 209,752 1.8% 93,546 $49,062 35.1

Spokane Valley, WA 96,262 104, 681 89,657 1.7% 40,104 $53,777 36.8

Liberty Lake, WA 9,205 10,059 7,591 1.9% 3,609 $72,377 36.4

Airway Heights, WA 6,723 7,235 6,114 1.5% 2,006 $41,941 30.9

KOOTENAI COUNTY 159,314 178,654 138,494 2.4% 62,591 $54,691 39.1

Coeur d’Alene, ID 51,746 57,925 44,113 2.4% 21,164 $47,442 35.4

Post Falls, ID 33,523 37,456 27,780 2.3% 12,654 $52,828 35.0

Rathdrum, ID 8,323 9,291 6,915 2.3% 3,009 $48,207 35.3

Hayden, ID 14,735 16,436 12,998 2.3% 5,767 $62,778 40.8



Overall Retail Vacancy

Coeur d’Alene Town Center

9%

12%

15%

0%

3%

6%

2013 2014 2015 2016 2017

10.4%

10.2%

8.9%7.1%

8.8%

Market Conditions

• The average apartment vacancy rate for the Greater

Spokane region increased from 1.6% in Fall 2016 to 2.9% in

Fall 2017. This increase appears to be due to the anticipated

delivery of several new apartment opportunities and higher

than usual vacancies in the 2+ bedroom apartment category

area wide. Interestingly, the average rental rate increased

$36.00 per month over the same period to $886.00 per

month. The peak rental rate was in Spring 2017, when levels

hit $913.00 per month, then fell during the summer months.

• In addition to new product, first time home buyers continue

to take advantage of low interest rates and home purchase

options, which is a factor in apartment vacancy rates area

wide.

Market Forecast

• Vacancy rates should trend downward as new product

is absorbed. Currently, several apartment buildings in

Spokane County have wait lists up to 30 requests deep.

• Rental rates should stabilize while absorption takes place,

and then trend upwards toward the 4th Quarter, as a

relative short supply remains.

• Properly zoned land that can handle multi-family

development will stay active throughout 2018.

• Quality multi-family investment listings should remain

relatively sparse with low cap rates through 2018, since

investors do not want to give up their investment without

a replacement or a premium sale price.

APARTMENT MARKET BREAKDOWN BY SUBMARKET

Submarket Vacancy % Average Rental Rates

North 2.0% $833

Central 1.8% $777

Valley 2.9% $870

South 3.1% $987

West 7.9% $891

OVERALL 2.9% $886

Written ByTim Kestell and Cody George – Kiemle Hagood

Lilac Terrace Apartments

*Data Source: Runstad Center for Real Estate Studies/University of Washington

APARTMENT MARKET

$720 $710

$751

$848

$886

20

17

20

16

20

15

20

14

20

13

3%

4%

5%

0%

1%

2%

2013 2014 2015 2016 2017

2.9%

4.1%

3.3%

1.6%

3.5%


Overall Apartment Vacancy

Overall Apartment Rental Rates

Market Conditions

• There was some relaxing in the South Hill vacancy rate

which saw a slight increase to 4.0%. This submarket has

been especially tough on national and regional restaurant

franchises.

• Since the recession, the Spokane Valley submarket has

shown a solid recovery in occupancy. After reaching a high

of 12.6% vacancy in mid-year 2013, the Valley recovered to

5.4%, the second lowest vacancy rate in the suburban areas

that are tracked. Even though the occupancy levels have

tightened, average rental rates have not seen a significant

improvement for more than a decade.

Written ByColin Conway and Carl Guenzel – Kiemle Hagood


RETAIL MARKET

RETAIL MARKET BREAKDOWNSubmarket Surveryed Inventory (SF) Vacant Inventory (SF) Vacancy

CBD 1,341,754 131,811 9.8%

Close-in 1,022,862 92,015 9.0%

South 1,228,955 49,321 4.0%

North 6,060,504 499,400 8.2%

Valley 5,976,662 321,788 5.4%

West 267,788 28,595 10.7%

Market Forecast

• In investment sales, a seller’s market shows no immediate signs

of easing. With low interest rates, limited product and available

capital, sellers are demanding low cap rates for even Class B

and C properties. As long as buyers continue to line up, sellers

will be in the position of strength.

• New, smaller retail strip centers are coming online in North

Spokane and Spokane Valley, with either full or close-to-full

occupancy upon completion. Additional speculative building

may soon be on the horizon. Rents are easing into the $30

range for small space, while Mid-Box Retail rents will remain in

the $12-$17 range.

• Even though restaurants are concerned about the impact of

the mandatory health care law and the state’s minimum wage

law, new concepts continue to open. Landlords working with

new operators would be wise to keep alert for warning signs of

struggling tenants.


Hanson Center - Market Pointe II

Retail Submarket Vacancy Breakdown

9.0%

4.0%

8.2%

5.4%

10.7%

9.8%

West

Valley

North

South

Close-In

CBD

Evergreen Crossing

OFFICE MARKET BREAKDOWNSubmarket Inventory (SF) Vacant Inventory (SF) Vacancy

Coeur d'Alene 3,063,542 140,929 4.6%

Post Falls 553,152 33,687 6.1%

Rathdrum 24,915 0 0%

Hayden 368,613 17,879 4.9%

Dalton Gardens 14,710 0 0%

Totals 4,024,932 192,495 4.8%

Office• Significant office space absorption occurred throughout

Kootenai County as roughly 120,000 SF was absorbed

since Summer 2016.

• Similar to past years, new office speculative construction

is fairly nonexistent as the land costs in conjunction with

construction costs and expected returns challenge the

necessary rent levels by tenants in the market.

• Stabilization is expected in 2018 for the office sector with

Landlord contributions in the form of free and or reduced

rent, while TI packages will dwindle.

RETAIL MARKET BREAKDOWNSubmarket Inventory (SF) Vacant Inventory (SF) Vacancy

Coeur d'Alene 4,931,800 223,326 4.5%

Post Falls 1,649,731 154,137 9.3%

Rathdrum 219,501 23,015 10.5%

Hayden 859,896 40,840 4.8%

Dalton Gardens 170,237 5,200 3.1%

Totals 7,831,165 446,518 5.7%

Written ByPat Eberlin – Kiemle Hagood

Retail• Kootenai County is not immune to the ever-changing

traditional retail stores. Web-based presence and

e-commerce drive decision making with many retailers

“right sizing” store fronts to cater to daily consumer needs.

• Service related office users (ie: dental, medical, insurance

etc.) continue to transition into retail positioned product,

while enjoying stronger traffic counts, parking ratios,

exposure and access.

• Expect to see a reasonable retail market with tenant

relocations from within and consistent rents from the “mom

and pops” while strong signatures compete for Class A

locations in the high rent districts.

Parkside Tower


Prairie Shopping Center

INDUSTRIAL MARKET BREAKDOWNSubmarket Inventory (SF) Vacant Inventory (SF) Vacancy

Coeur d'Alene 1,728,874 63,868 3.7%

Post Falls 2,869,130 78,873 2.8%

Rathdrum 462,158 0 0.0%

Hayden 1,375,999 35,819 2.6%

Dalton Gardens 190,314 0 0.0%

Totals 6,626,475 178,560 2.7%

Industrial• Little to no supply across the market continues to favor

Landlords with increasing rents, while leaving little to no

rental concessions until new product comes online.

• Possible new industrial projects are coming to the market

in 2018, which should help the demand by users of 1,500

SF to 50,000 SF.

• Landlords of existing product will continue to see rental

escalations into 2018 as new construction rent demands

will create significant variations between new and second

generation product.

KOOTENAI COUNTY





Office Submarket Vacancy Breakdown

Office Market Vacancy

Office Market Inventory

11.0%

21.1%

16.5%

14.3%

43.0%

16.6%

Wes

t

Val

ley

No

rth

Sou

th

Clo

se-I

n

CB

D

12%

16%

20%

24%

0%

4%

8%

2013 2014 2015 2016 2017

17.2% 15.7% 17.0% 17.9% 16.5%

16.6% 13.2% 15.7% 15.7% 16.6%

17.4% 16.7% 17.5% 18.7% 16.4%

Total

CBD

Suburbs

208,196483,833

615,7133,743,743

229,2231,086,888

29,291204,202

363,7073,297,850

501,4513,016,261

Vacant SFOccupied SFWest

Valley

North

South

Close-In

CBD

TRI-CITIES, WASHINGTON – Growth Continues In A Strong Economy

The Tri-Cities is located in Southeastern Washington and

is comprised of Richland, Kennewick, Pasco and numerous

surrounding rural communities. Three rivers, nine golf courses,

and 300 days of sunshine offer a wide variety activities and

appeal. Because of its easy accessibility, the area is a service

and occupational hub for the region. The economy is fueled by

a variety of government contracted projects for environmental

clean-up, scientific research and development, agricultural,

food processing, general retail and healthcare.

With a strong economy and job growth, the following projects

recently occurred or will take place in 2018:

• AutoZone’s 500,000 square foot distribution facility in

Northeast Pasco;

• Kadlec Hospital expansion with new multi-level parking

structure;

• New 20,000 square foot Planet Fitness facility on

Columbia Center Blvd;

• New Standard Flooring and Paint 24,200 square foot

facility in former Staples;

• Newly built 20,000 square foot location for Home Goods;

• Party City and Ulta Beauty expanded with locations in

Richland’s Queensgate area;

• New quick serve restaurants, Mod Pizza and Panera

Bread, open in Richland’s Vintner Square;

• Continued growth in the Tri-Cities Scientific Research

District, with WSU Tri-Cities North Richland location;

• Two planned Original Pancake Houses in Kennewick and

Richland;

• Potter BBQ expanding with a second location in

Kennewick;

• Ongoing apartment construction taking place due to the

low vacancy rates;

• Several new and under construction mini-storage

facilities.

Predictions for 2018 are positive as we continue to see

businesses choosing to relocate to the Tri-Cities’ robust

market.

Missoula, Montana

MISSOULA, MONTANA – Entering A New Market

One of our challenges when entering a new market is to

quantify the real estate statistics. How many square feet exist

commercially? What is the current occupancy rate? What are

average rents? Once we are able to quantify the market, our

job is to then to tell the story of current market conditions and

predict what the future may hold. Missoula is fortunate to have

progressive groups who understand the value of assembling

this information to ensure developers, business owners and

investors can make accurate investment decisions.

In 2011, the Missoula Downtown Association, working with

the Downtown Business Improvement District and the

Missoula Redevelopment Agency, commissioned a study to

quantify the building and business inventory in Downtown

Missoula. You can find the study on their website. It is a wealth

of information as to what makes up this vibrant downtown.

The study covered approximately 2.3 million square feet

and 766 “units” of commercial space. This survey breaks

down property types differently than we would traditionally

classify commercial buildings, but it remains a very insightful

and interesting outline of what Downtown Missoula looks

like from a commercial real estate standpoint. For us, it is a

great starting point for analysis of what is going on in the real

estate market in Missoula, and is a excellent reminder of the

important role these agencies play.

We have just finished our first year operating in the Missoula

market, and are very pleased to be part of this community. Best

wishes to all of our Montana clients, customers and tenants

for a successful 2018. We look forward to continuing our due

diligence and research to provide you with the management,

brokerage and investment information you need.

Source: https://www.missouladowntown.com/about/downtown-building-business-inventory/

NEW MARKETSWritten By

Lance Bacon and Gordon Hester – Kiemle Hagood


OFFICE MARKETWritten By

Mike Livingston, Erik Nelson and Craig Soehren – Kiemle Hagood

Market Forecast

There are several reasons to believe 2018 will be a year

characterized by falling vacancy rates, increasing rental rates,

and new construction, including:

– With the completion of the former Macy’s department

store into a market-rate apartment project and a general

increase in downtown activity, we expect increased

demand for CBD office space.

– The University District will see completion of the $14

million Gateway Bridge, commencement of a new,

100,000+ square foot health sciences building, and

completion of the first year for medical students at

Washington State University’s Elson Floyd Medical

School. All should translate into increased demand for

a variety of real estate product in the Close In and CBD

submarkets.

– One or more new buildings will be constructed at

Pinecroft.

– Leasing activity from 4Q17 that did not appear in the

year-end report will boost 2018 results.

– Demand for investment property should remain robust

as investors from out of the area continue to seek higher

yields in Spokane.

Market Conditions

• Leasing and sale activity of office product in the Greater

Spokane area remained strong throughout 2017, especially

at the end of the year. However, due to strong 4th Quarter

activity these reporting figures do not accurately reflect

the strength of the current Spokane Office Market. As an

example, overall vacancy for year end 2017 was 16.3%

compared to 15.6% a year ago. Barring a sudden and

unforeseen economic downturn, we expect office vacancy

figures to be significantly lower next reporting period as

many 4Q17 transactions are reported.

• Leasing activity was especially robust in the Close-In

submarket, historically Spokane’s strongest submarket.

Rock Pointe Corporate Campus and other properties with

sufficient parking had significant absorption.

• Despite a slow start, the Central Business District ended

2017 with positive absorption as well.

• Construction of new office building in the Spokane Valley

(at the Meadowwood Technology Campus and Pinecroft

Business Park) will commence and/or be occupied as

new product is needed due to a lack of large well located

availabilities throughout the market.

• Sale activity was especially strong in 2017 and could have

been even stronger if there had been more available

inventory for investors and owner users. Despite demand

exceeding supply, cap rates for office investments remained

in the 6.5% to 8.0% range.


Iron Bridge Campus

Rock Pointe

Tri-Cities, Washington

DEMOGRAPHIC OVERVIEW OF COLUMBIA BASIN REGION2017


2022 Projected

Population

2010 Census

Population


(2017-2022)

2017 Estimated

Households


hold Income

2017 Estimated

Median Age

BENTON COUNTY 199,855 217,991 175,177 1.8% 72,607 $69,473 34.9

Kennewick, WA 83,133 90,359 73,927 1.7% 29,615 $59,515 32.3

Richland, WA 56,574 61,756 48,154 1.8% 22,606 $79,704 38.2

West Richland, WA 14,711 16,085 11,812 1.9% 5,117 $90,561 34.7

FRANKLIN COUNTY 91,089 98,796 78,163 1.7% 26,590 $63,892 28.8

Pasco, WA 70,919 76,927 60,956 1.7% 20,996 $62,788 28,1


DEMOGRAPHIC OVERVIEW OF WESTERN MONTANA REGION2017


2022 Projected

Population

2010 Census

Population


(2017-2022)

2017 Estimated

Households


hold Income

2017 Estimated

Median Age

MISSOULA COUNTY 116,390 127,512 109,299 1.9% 49,469 $51,796 35.1

Missoula, MT 72,438 79,218 66,987 1.9% 32,004 $46,358 32.0

FLATHEAD COUNTY 100,647 110,774 90,928 2.0% 39,926 $53,160 41.3

Whitefish, MT 7,560 8,377 6,343 2.2% 3,344 $53,648 41.4

Kalispell, MT 23,696 25,858 19,747 1.8% 9,702 $47,567 36.3


In both of these sectors, employers will struggle to fill

open positions. Similar to the U.S. trend, initial claims for

unemployment insurance are already low by historical

standards and will continue to be low through the year. This

is a clear signal of an extremely tight labor market. This

tightness, combined with Washington’s new minimum wage

law, is generating regional wage gains that exceed consumer

inflation.

Regional PopulationThe ongoing strength in the region’s labor market continues

to boost population growth through in-migration. Population

growth in Spokane and Kootenai Counties combined was

around 1.5% in 2017, much faster than 0.7% growth for the

U.S. Regional population growth, which will likely exceed 1%

again in 2018. Even the region’s rural counties are enjoying

population growth after a period of stagnant growth following

the Great Recession. However, even with this pickup in

population growth, the age demographics for the region’s

rural counties will remain much older than the urban counties

for the foreseeable future.

Based on the outlook for U.S. GDP growth, regional employment growth will likely be in the 1.5% to 2% range in 2018.

ECONOMIC OUTLOOK

Written ByDr. Grant Forsyth, Chief Economist, Avista Corporation

U.S. Economic PolicyThe U.S. economy is now experiencing its third longest

expansion going back to the 1850s. The recent tax reform

act—the first since the 1980s—will help prolong the current

expansion through 2018. However, even with lower personal

and corporate taxes, the expectation for U.S. GDP growth in

2018 is around 2.5%. This is far below the 4% target of the

Trump Administration, and largely reflects ongoing weakness

in U.S. labor productivity. Consumer inflation is expected

to remain very near the Federal Reserve’s target of 2%. As

a result, the Fed’s ongoing interest rate increases will likely

continue at a modest pace in 2018. One risk to U.S. and

regional growth is a breakdown in NAFTA talks. A NAFTA

breakdown will hit the trade-dependent Northwest hard if it

leads to a protectionist conflict between the U.S., Canada, and

Mexico.

Regional Labor MarketIn 2017 non-farm employment growth in Spokane and

Kootenai Counties combined was over 2%, compared to 1.5%

for the U.S. Regional employment growth continues to be

particularly strong in the construction and health care sectors.

3KIEMLEHAGOOD.COM M A R K E T R E V I E W & O U T L O O K 2 0 1 83 Kiemle & Hagood Company

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khfacilityservices.com

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Spokane(509) 838-6541

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Coeur d’Alene(208) 770 -2590

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8121 W. Quinault Ave., Suite F201

Missoula(406) 552- 4568

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TABLE OF CONTENTS

Economic Outlook 3

Office Market 4-5

Retail Market 6-7

Industrial Market 8

Medical Office Market 9

Apartment Market 10

Kootenai County 11

New Markets 12-13

K&H Facility Services 14All information furnished is from sources deemed reliable and submitted subject to errors and omissions.

No responsibility is assumed for any inaccuracies. No one should rely solely on this information, but instead should conduct their own investigation to independently satisfy themselves.

Photo credit: Homes by Eugene, Johanna B. Photography, Isaacson Aerial Photography, Emily Fisher Photography Graphics: Mike Lee


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MARKET REVIEW & OUTLOOK

Winter 2018

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