WESTERN SNAPSHOT, JANUARY 2007

Salt Lake City Multifamily Market

As housing prices continue to experience double-digit increases in Salt Lake City and surrounding areas, many potential first-time homebuyers are being squeezed out of the housing market. Higher home prices coupled with a sustained 5 percent job growth will put significant upward pressure on the demand for Salt Lake City apartments.

This increased demand has driven record-setting occupancies, phenomenal rent growth and minimal concessions. Late in 2006, the average apartment vacancy for the Salt Lake City market was 3.2 percent, and the average rent growth was 4.2 percent; the market’s average rent is $682 per month. Several submarkets, such as Midvale/Sandy and North Davis County, are experiencing vacancy rates as low as 2 percent.

Housing prices are increasing so rapidly — 25 to 30 percent annual increase in selected areas — that developers begin an apartment project and, half way through construction, abandon the apartment plan to sell the units as condominiums. Farmington Crossing (150 units) in Davis County and Boulders at Rosecrest (278 units) in southwest Salt Lake County are prime examples of this trend. This shrinks the already insufficient number of new apartments being added to the market’s inventory. Additionally, single-family, tract-type housing prices have increased to the point that they are no longer an option for entry-level home ownership. New town homes and condo projects are now the main choice of first-time homebuyers. For this reason, new construction of multifamily rentals is at a record low. Furthermore, as owner-occupied housing prices continue this rapid increase, more condo conversion opportunities will abound. Stoney Brook, a 48-unit project in the Fort Union area, and Ivanhoe Apartments, a historic project in downtown Salt Lake City, are in the condo conversion process.

Salt Lake City’s apartment sector is seeing an influx of West Coast and institutional investors with a strong desire to obtain core properties in Class A and B areas. As this demand for Salt Lake City apartment properties increases, cap rates for these quality assets are dropping to the high 5 to low 6 percent range with multiple offers. Sales prices per unit are between $70,000 and $110,000.

On the development front, Cowboy Partners is planning a large apartment project as part of City Creek Center, the proposed $1 billion downtown redevelopment of 20 acres owned by The Church of Jesus Christ of Latter-Day Saints. The massive demolition, construction and development will bring an influx of workers to the central city area. Rents are expected to rise as occupancies near 100 percent. This tight downtown apartment market is expected to last for at least a 36-month period.

Several large downtown developers will try to complete large projects to accommodate this influx of new renters. These projects include another phase of Emigration Court, a Black Rock development, and a large project being developed by Western States Lodging just west of The Gateway Shopping District. Both will be Class A projects. Towngate Apartments, a 288-unit affordable apartment project at the south end of downtown, is currently under construction with completion anticipated in the next few months.

Other hot submarkets in metropolitan Salt Lake City include Sandy, where a new master-planned development near 1000 East and 9400 South is being developed. Just underway, the project will include retail, single-family homes, condominiums, and apartments. Several other apartment communities are planned in the immediate area to take advantage of this new development. The southwestern part of Salt Lake County is also thriving with many new homes and apartment developments including Serengetti Springs, a multiphase Triton Development apartment complex in West Jordan consisting of more than 700 units. Monarch Meadows, a large master-planned development in Riverton, will include a 248-unit apartment community as well as an apartment project planned for the Daybreak development in South Jordan.

Large population growth is expected in the northern areas of the Salt Lake market, primarily in Davis County. The Utah Transit Authority has plans to build a $500 million commuter rail system from the northern community of Brigham City to Salt Lake City. The first 44 miles of the line, which is currently under construction, will run from Salt Lake City to Pleasant View, just north of Ogden. Slated for completion in early 2008, the rail system will enable Davis and Weber County residents to easily commute in and out of Salt Lake City. As a result, the exciting possibility of transit-oriented apartment communities will become a reality. The 4010 Station Apartments, being developed in the Millcreek area adjacent to the TRAX station, is a good example of what to expect.

All phases of the apartment market should continue to flourish in 2007 as job growth maintains its steady increase of 4 to 5 percent and the population of Salt Lake City continues its strong growth. The overall demand for apartment housing will most likely exceed supply creating high rent growth with still-affordable cap rates.

Kent Nelson is an associate partner for Hendricks & Partners, an apartment sales and research firm.

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