WESTERN SNAPSHOT, JANUARY 2006

Salt Lake City Office Market

Johnson

With the low vacancy, landlords of Class A buildings have halted concessions. New properties are coming online, countering the shrinking Class A product availability in the market. These Class A projects, such as River Park, Mill Rock and Gateway, are experiencing quick lease-up upon completion. As a result, developers continue to deliver new Class A buildings such as South Towne Corporate Center II, and even venture out east into the Park City resort area, where two 60,000-square-foot office buildings are being built.

There has also been increased tenant demand for newer Class B buildings, such as Pacific Landing, that were not occupied during the slow office market earlier this decade. Due to demand outpacing supply in the Class A office segment, Class B buildings will be filling the void. Class B product will see increases in absorption in 2006. The current vacancy rate is about 12 percent.

Demand for large-block office space (50,000 square feet and more) is not increasing, but there is a limited amount of large contiguous space available. As a result, tenants have been forced to do build-to-suits. NPS Pharmaceuticals recently occupied their build-to-suit facility in the University of Utah Research Park. The U.S. Postal Service just completed a 75,000-square-foot building for its remote encoding center in Pacific Landing. Xango purchased land in Thanksgiving Point to build two new office buildings. Spillman Technology purchased land in Lake Park Corporate Center to build an office building exceeding 80,000 square feet, and Stevens Henagar College just completed a new Class A office building. Fidelity Investment recently broke ground on its more than 230,000-square-foot building at the Gateway. With rising construction costs and interest rates, the question becomes, how much longer will companies be able to choose this option?

The average current lease rate for Class A buildings is $20.17 per square foot for a gross lease. It is projected that Class A lease rates will increase in 2006 due to product scarcity and new construction costs; costs for concrete, steel and oil have increased about 50 percent from last year. Owners will need to cover the actual construction costs and plan for their rate of return on top of these expenses, creating an increase in lease rates. Construction costs are presently 200 percent of what they were between 1982 and 1984. The majority of this increase has been felt in 2005. Currently, Class B space is $16.13 per square foot for a gross lease, and this rate will increase, as businesses look to this product type as a second option.

The redevelopment of two large shopping malls in Salt Lake City's central business district (CBD) will reshape the downtown area over the next 12 months. To make way for one mall, the 300,000-square-foot Key Bank Tower will be razed. Tenants have been relocated to various downtown buildings, which has decreased office vacancy. Another large downtown office building, the 276,408-square-foot Gateway Tower East, is being renovated and tenants have been relocated. Reacting to the 3 percent vacancy for CBD Class A office space, Hamilton Partners will begin construction of a 350,000-square-foot Class A office building at 222 South Main. The office tower will be designed by Skidmore, Owings and Merrill.

Office building sales in the Salt Lake City market have continued to increase this year. The premier suburban Class A office park, Cottonwood Corporate Center, was recently sold by Cottonwood Partners to Gerald Hines Interests at a sub-7 percent cap rate. This prime property consists of four buildings totaling over 400,000 square feet. Other sales have brought new investors to the Salt Lake market. For example, Metro Business Park, a portfolio of Class C and two Class B downtown buildings (257 Tower at 262,019 square feet and HK Tower at 160,000 square feet) was sold to Alaska Consolidated. The former Lakeside Plaza I and II were sold to another new investor to the Salt Lake market. Professors Capital purchased the more than 200,000-square-foot office complex out of foreclosure and is repositioning it as Edgewater Corporate Park.

The Salt Lake office market in 2006 should continue to be a healthy and active one. With a strong economy, fast-growing population and proactive governor, Salt Lake City will likely experience single-digit vacancy by the end of the year in Class A and B properties. Rental rates for both segments will increase, and investment sales of office properties will also continue to grow, especially if interest rates do not greatly increase.

Barbara Johnson is the office division leader and executive director of corporate services at NAI Utah Commercial Real Estate in Salt Lake City.


©2006 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.