Business

The building boom in big Treasure Valley office buildings is about to end

This artist’s rendering shows what TM Crossing may look like when Gardner Co. completes the 71-acre business park. The plans could change. Gardner may build multifamily housing or retail space. “Could it be finished within five years? It’s a possibility,” Executive Vice President David Wali says.
This artist’s rendering shows what TM Crossing may look like when Gardner Co. completes the 71-acre business park. The plans could change. Gardner may build multifamily housing or retail space. “Could it be finished within five years? It’s a possibility,” Executive Vice President David Wali says. Provided by Gardner Co.

Commercial construction in Downtown Boise had barely started to rebound from the Great Recession when the Gardner Co. decided in 2012 that the time had come to think big.

Gardner executives liked the area’s swelling population and pent-up demand, says David Wali, Gardner’s executive vice president in Boise. Construction costs were higher in Boise than in the company’s home, Salt Lake City. But they were low enough that Gardner started building Eighth & Main (sometimes called the Zions Bank building) in the blighted, boarded-up hole that had long testified to redevelopment failures at one of Idaho’s most valuable sites after the Eastman Building burned in 1987.

Gardner soon followed up with City Center Plaza, Pioneer Crossing, Ten Mile Crossing and other big projects.

But there are no more on the way. The economics have changed, Wali says.

Commercial construction projects in the Treasure Valley now cost 12 percent more in Boise than in Salt Lake, thanks to a labor shortage that has driven up subcontracting costs and slowed projects. Materials and financing have also become more expensive.

Eighth & Main would cost 25 percent more to build today than in 2012, Wali says.

“It definitely makes you take pause on projects,” he says. “The question is whether the business sector side of it has enough rising incomes to meet the rising costs.”

Deals fall apart

Other developers and builders agree, though their estimates vary.

Neil Nelson, president of Engineered Structures Inc. in Meridian, Gardner’s buildng contractor on its Downtown projects, says costs for materials such as concrete, steel and drywall increased more than 10 percent since 2012. (Wali pegs increases in concrete, glass and electrical components at closer to 25 percent.)

“With escalating costs and inflation, deals fall apart more easily now,” Nelson says.

Keith Jones, president at Datum Construction Management in Meridian, says subcontractors command 15 to 20 percent more money than in 2012, particularly in the skilled trades. Those include dry wallers, plumbers, electricians, heating, ventilation and air cooling professionals.

“We’re starting to see subcontractors that are flat maxed out, going as fast as they can with as many people as they have but having to turn down work,” Jones says. “The subs are driving the market right now.”

That darn labor shortage

Nelson says the labor shortage remains ESI’s greatest limiting factor both in the Treasure Valley and for projects across the nation.

Framers, plumbers, drywallers and waste-rubble removal workers are in high demand, Nelson says. When jobs get tough, as when harsh weather slowed work at the Inn at 500 Capitol last winter, Nelson says ESI leaned on its most loyal subcontractors.

“Because we knew the stucco guy for 20 years, we could say, ‘Frank, this is a tough one, but we need you to get through it, even if that means shoveling snow,’” Nelson says. “You’d better have 10 years of good history before you make that call.”

For smaller general contractors such as Datum, dealing with the labor shortage means calling subcontractors weeks or months in advance and keeping subs happy so they come back.

“You have to do good business. You have to have good communication,” Jones says. “You can’t jerk them around with several trips when better planning would have meant one trip, or they will take a different project next time.”

Local workers’ wages still lag

However, union tradesmen haven’t benefited much from the labor shortage, says Leland Heinbach, president of the Boise Central Trades and Labor Council.

Heinbach, a plumber, says journeymen in his trade now make about $30 an hour, just a few dollars more than in 2012, in part because the unions don’t want to outprice nonunion contractors.

“Wages have been stagnant,” he says. “Wages have exploded up and down the West Coast, but we’re not seeing that in Idaho.”

Union growth has grown marginally since 2012, he says, and Southwest Idaho still loses journeymen to cities like Portland, where a plumber can earn $50 an hour.

Politics, isolation make impacts

Some materials are in flux because of political pressures, Jones says.

Domestic steel makers complain that Chinese imports have suppressed prices, which could change if President Donald Trump acts on promises to impose tariffs on steel imports.

Trump already set a tariff on Canadian lumber of up to 24 percent. Oil prices, currently below the 10-year average, are always subject to politically driven volatility.

The Treasure Valley’s isolation means materials cost more to bring here, Wali says.

“It’s not just the labor costs that are expensive. It’s that nothing is manufactured here,” Wali says. “Your cement, your glass, everything comes from somewhere else. If things are exploding in Denver, Salt Lake, Los Angeles, Seattle and Portland, there won’t be a break for doing projects in Boise.”

Will office-lease rates rise?

Construction costs are rising more slowly now than in the last three years, Nelson says.

“We’re starting to catch up with demand,” he says. “There are fewer projects in for permit and design. I wouldn’t even call it a slowdown, but it’s now normal business instead of crazy business.”

Developers today appear unlikely to take on large office projects until lease rates rise.

Gardner’s Ten Mile Crossing, under construction in Meridian just north of I-84’s 10 Mile Road interchange, commands lease rates in the “mid-20-dollar” range per square foot per year, Wali says. Normal inflationary pressure should have increased office-lease rates into the high 20s or low 30s by now, he says, but demand isn’t strong enough.

The average asking price for Downtown Boise Class A (high quality) office space climbed to $20.75 in May, according to commercial real estate firm Thornton Oliver Keller.

“We will see a slowdown in not-too-distant future,” Wali says. “You can’t build into a price range where you can’t get the rent.”

Zach Kyle: 208-377-6464, @ZachKyleNews

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