MARKET HIGHLIGHT, FEBRUARY 2009

SALT LAKE CITY
Craig Kaminski, Mike Richmond, Jeff Rossi, Darrell Tate and Kip Paul

Negative national trends aren’t felt as much in the Beehive State. Commercial real estate players still buzz about the solid fundamentals found in Salt Lake City.

Industrial

The Salt Lake area industrial market continues to show strength and stability across the board despite the slowdown in the national economy. While the vacancy rate did rise during 2008, the increase was driven primarily by new construction, not by a decline in market activity. Close to 3.5 million square feet of new product were delivered to the market in the past 12 months, with nearly half of that already absorbed.

Lease activity throughout the market kept pace with 2007.  Lease transactions in the small and large space segments were more prevalent in 2008, with big box industrial buildings experiencing a 50 percent increase in leasing activity over the past year. Three notable large transactions in 2008 were Overstock.com acquiring 680,000 square feet, Sephora taking 311,000 square feet and Specialized Bicycles leasing 256,000 square feet. In addition, Proctor & Gamble Family Care selected Utah for its first domestic manufacturing plant in 34 years. Sales activity has not faired as well as leasing. In 2008 there were only 47 sales transactions, down 26.6 percent from 2007.

Industrial lease rates have continued to rise in all segments. Lease rates across all segments have increased an average of 23.42 percent from year-end 2007. This is a significant increase that is indicative of the high cost of construction combined with a minimal amount of product available in certain segments of the market.

For the third year in a row there has been a minimal amount of new inventory added to the market outside of the big box sector. Although there has been a stabilization in construction costs, it is still expensive to construct new buildings and developers are opting to build larger facilities that are more economically viable. There are several developers that are active in the current market including the Rockefeller Group, LNR Property Corp. and First Industrial Realty Trust.

Utah seems to be better situated to manage the current economic slowdown than most states. There will be an impact felt by the contraction and closure of national companies. Local and regional companies, however, will continue to expand at a conservative rate, looking for opportunities to accommodate growth. Utah remains at the forefront of manufacturing companies looking to relocate or build new plants.

— Craig Kaminski is an industrial specialist for Commerce CRG in Salt Lake City.

Office

As Utah continues to out-perform the national economy, the Salt Lake office market is holding its own. The recent expansion in infrastructure, including the transportation system, is causing significant national companies to take a look at the Salt Lake market. Oracle and eBay have both selected Utah as a place for expansion for data centers. The combined investment from both companies will be close to $500 million dollars during the next few years.

The overall office vacancy rate jumped slightly more than two percentage points from year-end 2007, settling at 12.95 percent. This is the highest vacancy rate the market has experienced since 2004. Salt Lake City’s central business district (CBD) remains the strongest submarket, showing a decrease in vacancy, with Class A space at a 4 percent vacancy rate. The reduction in vacancy in the CBD can be attributed in part to the growth of financial institutions and industrial loan charters, and the expansion of several major law firms.

Overall asking lease rates in the office market continue to move upward fueled by owners of existing buildings maneuvering to shrink the lease rate disparity between their product and that of new construction. The average asking lease rate across the market moved upward by 1.8 percent in 2008. Although actual asking lease rates have increased in the past year, the effective rates tenants are paying has decreased as landlords have begun to offer lease concessions.

There were 12 new office buildings added to the Salt Lake office market during 2008. These buildings added an additional 1.064 million square feet of new office space. This amount is on par with the 10-year average, but significantly lower than the record high 1.53 million added in 2007. Expect another decrease in construction, with just more than 500,000 square feet of new office product being delivered in 2009.

The Utah market should continue to out-perform the rest of the nation during the coming year. The on-going City Creek project and the construction of the new 222 Main office building will inject $1.8 billion in construction into the economy during the next few years. These projects will add not only construction jobs to the market, but will bring additional, much-needed Class A office space to the CBD.

— Mike Richmond and Jeff Rossi are leasing and investment specialist and office specialist, respectively, for Salt Lake City-based Commerce CRG.

Retail

Slowing economic conditions in Utah and across the nation, combined with a significant erosion of consumer confidence, had a significant impact on the Utah retail market. Fortunately, either by the arrival of the end of a boom cycle or the realization of an approaching retraction in the market, the development of non-mall retail projects had scaled back considerably in 2008 prior to the economic downturn.

The overall high asking lease rates throughout the market declined minimally from $21.18 to $20.95 per square foot during 2008. Considering the remarkable speed at which the market turned south, it is likely that the asking lease rates have not yet fully reacted to the sharp decrease in retail market activity. The latter half of 2008 clearly began the cycle of a “tenant’s market” that will continue through at least first half 2009. This will put pressure on lease rates to drop even further in 2009.

The overall vacancy in Salt Lake’s retail market increased by 1.29 percentage points in 2008 to 8.31 percent. Vacancy rate increases occurred across all geographic sectors and all retail types as absorption slowed. The closure of national retailers had a major impact on the local retail market. Notable national retailers, including Linens n’ Things, Mervyns, Bally’s Total Fitness and Steve & Barry’s, closed or announced closures of all Utah stores. In addition Starbucks Coffee, Office Depot and Hollywood Video contracted with the closing of selected outlets, however, each maintains a strong presence in the market. Smaller local and regional retailers have not yet felt the need to close stores.

One segment that performed very well in 2008 was the grocery store market. This market not only showed strength, but expanded. National grocers such as Wal-Mart and Kroger added new locations in the Salt Lake Valley, while Winco Foods announced plans to enter the market with multiple sites in 2009. Local grocer Harmon’s also demonstrated resilience with continued expansion.

Despite the challenging economy, the majority of regional mall expansions continue to move forward. City Creek Center, Trolley Square and Fashion Place Mall are all under construction and reflect a positive long-term outlook for the Salt Lake retail market.

— Darrell Tate is a retail and land specialist for Commerce CRG in Salt Lake City.

Investment

Salt Lake investment activity levels took a tumble during the course of 2008 — a total of 175 closed transactions in the past 12 months represent a 38 percent drop from 2007. A market that started the year in a promising fashion, with some 60 percent of investment transactions closing in the first half, began to slow mid-year and proceeded to end in an even more challenging fashion. Many transactions that closed early in the year had been in the pipeline since 2007, with the majority involving higher quality, first-tier properties that featured assumable financing.

Retail developments faced even more challenges, as they were hit hardest by the economic downturn, with office, industrial and multifamily properties close behind. Following an incredible 3-year run of annual investment sales surpassing the $1 billion mark, the total value of sales in 2008 fell to $769,812,205.

Many buyers with accessible cash are hesitant to pursue investment opportunities in today’s market, in the belief that better opportunities may likely arise in the future. One thing to note however: Utah is well positioned to weather the current economic condition. Although impacted by the national recession, Utah continues to out-perform most regional and national markets through the state’s diverse economy, high-ranking growth and substantial investment in infrastructure.

This coming year, foreclosures of investment properties will become more common. It is unlikely that the Salt Lake area will be hit as hard as much of the nation. The investment market will continue to decline in 2009 and investment activity is likely to be moderate until confidence returns to the financial markets. With several past years of impressive investment sales performance, which helped to propel prices to new heights, 2009 will usher in a return to more reasonable underwriting and valuation.

— Kip Paul is an investment specialist for Commerce CRG.

©2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.