MARKET HIGHLIGHT, FEBRUARY 2011

SALT LAKE CITY
Dana Baird, Travis Healey, Kip Paul and Nick Clark

Stable and balanced are words often used to describe Salt Lake City’s commercial real estate market. What adjectives are on the table for 2011?

Office

The Salt Lake area office market has stabilized with very little change in numbers between the end of 2009 and 2010. However, there was movement towards a slow, but much healthier, recovery from the recession.

Overall vacancy rates remained almost flat, ending the year at 15.7 percent versus 15.72 percent in 2009. Lease rates saw only minor fluctuation, with some downward pressure on effective rates evident. Landlords ramped up efforts to win tenants.

In reportedly the largest Salt Lake-area office transaction last year, Maier Siebel Baber acquired Lone Peak Center in Draper, Utah.

Absorption for 2010 rose from the previous year, ending the fourth quarter at 212,827 square feet versus 88,050 square feet in 2009. Several large deals contributed to the climb including FLSmidth, which opened a new 100,000-square-foot building in the View 72 development; Fusion-IO for 118,000 square feet at Cottonwood Corporate Center; Provo Craft for 60,000 square feet at RiverPark Corporate Center; Advanced MD for 52,000 square feet at RiverPark Corporate Center; and Goldman Sachs, which moved into 150,000 square feet of space on seven floors in the new 222 Main Street building downtown. The Royal Bank of Scotland Group came into the market for the first time, opening a 30,000-square-foot IT office in Taylorsville.

While this is good news and an indication of an improving economy, the Salt Lake market is still substantially below the 10-year absorption average of 900,000+ square feet. In 2010, there was an increase in the number of both inquiries and site visits from companies looking to enter or expand into the market. State and city governments were very aggressive with economic incentives.

The market added 318,000 square feet of new construction in 2010 versus 768,294 square feet in 2009. However, more than half of the 2009 square footage was from the 222 Main Street building, which added about 460,600 square feet to the market. The 10-year average of new construction is about 1 million square feet, so while positive activity occurred, it is still significantly below the norm. On a positive note, more than 85 percent of the new space that came online during the year was leased and occupied by year’s end.

Investment sales in the office market fell substantially, from $73 million in 2009 to $28 million in 2010. Hesitant to sell their properties in a down economy, owners were a major factor in this dramatic drop.

New construction in 2011 will be almost exclusively build-to-suit projects, like the 160,000-square-foot Questar building and the 125,000-square-foot University of Southern Nevada facility at RiverPark. It has been several years since a significant Class A office development was built on spec, a trend that is expected to continue until developers feel confident the recovery has gained more momentum. The one exception will be Old Mill Corporate Center IV, which is scheduled to break ground in March 2011 with a six-story, 175,000-square-foot structure to be delivered in 2012.

Overall, expect to see lease rates, vacancies and absorption continue to stabilize and make slow, but steady, upward progress. The state’s unemployment rate of 7.5 percent is significantly lower than the current national average of 9.4 percent. Temp agencies are busy placing employees in the Utah workforce. Expect to see positive job growth in 2011, supporting the office market’s continued recovery.

— Dana Baird is an office specialist at
Commerce Real Estate Solutions.

Industrial

Although Salt Lake City industrial vacancy rose slightly in 2010 from 7.16 to 7.28 percent, it is still one of the lowest levels in the United States and significantly lower than in peer cities. Although vacant space increased in smaller buildings in the 5,000- to 50,000-square-foot range, a vacancy decline in larger buildings and a lack of new construction kept rates relatively close to 2009 levels.

A remarkable rise in lease activity occurred in 2010. Sharp increases were posted in the number of completed transactions as well as the amount of square footage involved. The total amount of space leased in all size increments in 2010 exceeded that reported in 2009 by close to 1 million square feet and is now keeping with the historic average for the Salt Lake area market.

Improvements in leasing activity levels have not resulted in a corresponding decline in available space. While the number of lease transactions executed went up from 178 in 2009 to 246 in the past year, the amount of available space on the market did not diminish, instead growing by 334,685 square feet. This apparent anomaly can be explained by the fact that the majority of tenants that relocated in 2010 downsized their space requirements. Companies that shuttered their local operations also added to the pool of available space.

The limited supply of quality buildings available has stymied industrial sales. Although 37 industrial buildings were sold each year in 2009 and 2010, the cumulative square footage involved in the transactions plummeted in the past 12 months. The aggregate 765,275 square feet sold in 2010 represents a 50 percent decline from the previous year and is the lowest total reported in a decade. Demand for quality industrial buildings far exceeds supply, and the continued dearth of debt capital available to owner/users is yet another obstacle to improvement in this aspect of the market. A few well-capitalized developers, like Freeport West and Scott Nielson, will deliver badly needed, speculative big box facilities this year, including Landmark VIII and Pacific Landing III. In West Valley City, Freeport West is adding in excess of 507,000 square feet and developer Scott Nielson is building approximately 350,000 square feet at Pacific Landing. Owner/users will be the only other developers in 2011

Lease rates continued to decline in 2010, reflecting weakened market conditions; overall asking rental rates fell 5.26 percent in 2010. Landlords are aggressively competing for potential tenants with lower rents and generous concessions. Lease rates should begin to stabilize in 2011, but an increasing number of tenants will pursue short-term leases and lower rents due to the uncertain economy.

Investment sales in the Salt Lake industrial market went from $58 million in 2009 to more than $98 million last year. The increase came from a number of large transactions, yet the overall sales volume was low: 21 transactions representing 2,158,398 square feet.

— Travis Healey is an industrial specialist at Commerce Real Estate Solutions.

Multifamily

Salt Lake area renters have seen a slight dip in what landlords are charging. According to a recent 2010 apartment, rents dropped 2.7 percent when compared to 2009. In an attempt to attract new tenants and keep those they currently have, 55 percent of area landlords are offering concessions such as free rent and lower deposits. <p>The multifamily market is presently healthy and reasonably well balanced with a vacancy rate of 5.7 percent. Nevertheless, in 2010, developers continued to build, adding 520 new apartment units. An additional 3,222 units are currently under construction. Another 2,082 units are in various planning stages and construction on those could begin in 2011. In the past 10 years, an average of 1,000 new apartments were added annually to the Salt Lake market.

An interesting trend has emerged. Developers are building higher-density structures in the downtown area. Wasatch Properties recently broke ground on a building at 100 South and 300 East. Cowboy Partners completed its construction of Liberty City Walk on 200 South and 300 East. PEG Development is expected to break ground on two projects at 300 South and 600 East and, when finished, will add 173 units. Lotus Development should soon begin construction on 110 units located along South Temple, a prestigious and historic city street in Salt Lake City. Outside of the downtown district, Wasatch Properties continues to build additional projects in the area of 7200 South and 700 West in Midvale. Miller Development has an estimated 1,000 units under construction in three different locations across the valley.

Including both the construction and permanent loan components, HUD financing is driving this surge of development with an attractive interest rate, 40-year amortization and low equity requirement. With 3,000 to 4,000 new units poised to open in the market in the next 2 years and the plethora of foreclosures and failed condo projects, the multifamily market could soften.

Meanwhile, investors continue to consider apartment complexes the most stable and attractive opportunities, with Class A and B properties obtaining the best prices. While multifamily investment sales were down in 2010 when compared to previous years, this sector still outperformed all other commercial real estate markets. A total 1,731 units worth than $131 million were purchased.

— Kip Paul is an investment specialist at Commerce Real Estate Solutions.

Retail

Retail lease rates softened in Salt Lake, ending the year at $17.42 per square foot compared to $20.60 per square foot in 2009, including a significant drop in the rental rates of space in the large regional retail centers. Vacancy increased due to the closure of some grocery stores last year. Hollywood Video’s exit from the market left thousands of empty square feet behind.

The grocery sector was one of the more dynamic segments of the market. Associated Foods closed two Albertsons/Fresh Market stores in the Salt Lake area (six total closures in Utah), yet Wal-Mart continues to move forward on its Parley’s Way store. Harmons broke ground on two new stores and committed to occupy the former Emigration Market space. Sunflower Farmers Market announced two new locations and WINCO opened multiple stores in 2010. Competition is fierce and may have reached a saturation point.

People stayed close to home last year, choosing local craft/hobby stores, discount retailers, restaurants and entertainment. The soft economy appeared to benefit discount stores. Also, the second half of 2010 saw strong attendance at movie theatres and a continued expansion of local eateries, especially value-oriented establishments.

Significant changes took place in the Salt Lake area regional malls. Fashion Place Mall had a complete interior remodel and constructed a new building for Nordstrom. Nordstrom’s old space will be home to Crate & Barrel. Trolley Square and Valley Fair Mall had sizable expansions and remodels. The Gateway and South Towne malls remain strong with no vacancy. The future of the former Cottonwood Mall is uncertain.

Investment sales in the retail market grew from $63 million in 2009 to $98 million in 2010. A few of the most significant transactions include Draper Crossing and the Little Cottonwood Shopping Center. Investors are tapping both ends of the market — paying premium prices for Class A properties and finding attractive opportunities in the value-add classification.

There will be more retail transactions, and the robust holiday shopping season points to an improved 2011. While problem projects and loans are still a concern, this year could usher in solutions to make them productive again. Lease rates should stabilize and possibly strengthen. There will likely be a lack of appetite for speculative retail development, with the Sugarhouse area the one possible exception. Nervous over non-performing loans and default/foreclosures, lenders will play a bigger role in dictating stricter lease terms.

Blockbuster plans to significantly reduce its presence here as it emerges from bankruptcy. Executives have indicated they intend to slash in half the number of stores nationwide, from 3,000 to 1,500. It is not known how many stores in the Salt Lake area will close, but Blockbuster currently occupies more than 300,000 square feet of retail space in Utah.

Utah’s liquor laws continue to hinder new restaurant location and expansion in the market. The state’s requirements negatively impact the ability of several national restaurant chains to utilize their prototype property layouts seen elsewhere across the country. The serious shortage of liquor licenses will also have an impact on this otherwise healthy segment of the market.

— Nick Clark is a 
retail specialist 
at Commerce Real Estate Solutions.


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