CITY HIGHLIGHT, JUNE 2004

WASATCH DISPATCH: SALT LAKE CITY
Chris Gentzkow, Joe Williams, Aaron Jones, Aaron Murray and Kent Nelson

Salt Lake City’s economic growth has finally turned positive and continues to pick up speed in 2004. The retail marketplace remains strong while extensive job growth and decreasing unemployment have fueled the office and industrial sectors. The multifamily sector has benefitted from rising housing prices.

Retail

The Salt Lake City retail sector continues to outpace its office and industrial counterparts. Residential growth in southwest Salt Lake County and northern Utah County is providing the impetus for community shopping center expansion.

Big box retailers have provided the bulk of growth in the retail market. Wal-Mart is rapidly expanding its Supercenter and Neighborhood Market concepts. On the other hand, anchorless strip centers are experiencing rising vacancy rates. Other big box tenants such as Target, Kohl’s, RC Willey, Costco and The Home Depot, as well as medium boxes like Best Buy and Bed Bath & Beyond, are taking advantage of the surging growth in Salt Lake area residential communities. In addition, Cabela’s is targeting northern Utah County. The large amount of outdoor and tourist activities in the area makes it an ideal location for the massive sporting goods retailer.

In order to keep pace with Wal-Mart, Kroger has announced the conversion of five Fred Meyer locations to Smiths Marketplaces. These stores average 154,000 square feet and include a full-line grocery selection as well as general merchandise. Sears Grand has thrown its hat in the ring, opening its first 200,000-square-foot prototype at Jordan Landing.

The 1.4 million-square-foot Jordan Landing project, which will be Utah’s largest open-air center, dominates other west side retail developments. Developer Foursquare Properties Inc. is completing the final phase, which includes retailers Wild Oats, Bed Bath & Beyond, Circuit City and Pier 1 Imports. They will join the already successful tenant lineup featuring Cinemark, Barnes & Noble, TJ Maxx, Sears Grand, Wal-Mart Supercenter, Sam’s Club, Lowe’s and many other national retailers.

Kohl’s has entered the Salt Lake market with the introduction of five stores, which will comprise more than 400,000 square feet of retail space. The addition of new department stores will encourage other tenants to abandon second generation space for new Class A pads and shops.

In the last few years, traditional malls have suffered due to new lifestyle and power center construction. LDS Church has announced a $500 million renovation of its downtown Salt Lake City malls — the ZCMI Center and Crossroads Plaza. Also, General Growth Properties plans to redevelop Cottonwood Mall, the regional shopping center located in Holladay, Utah, just east of Salt Lake City. During the first quarter, vacancy rates in these malls reached all-time highs.

All in all, the Salt Lake City retail market is experiencing a vacancy of 6.6 percent. The average lease rate is $15.86 per square foot.

— Associate Chris Gentzkow and Aaron Murray are members of CB Richard Ellis’ retail brokerage team in Salt Lake City.

Industrial

At the core of Salt Lake City’s recovering warehouse market lie Ninigret Park and Landmark Industrial Park, both cutting-edge, creatively designed properties that are well positioned for the future of Salt Lake City’s industrial sector.

Ninigret Park developer Randy Abood began tilting concrete walls in 1995. The first phase of his development consists of more than 2 million square feet of industrial big box and flex space on nearly 180 acres. Tenants include Packaging Corporation of America, Office Depot, Malt-O-Meal Company, Modus Media International, Qwest Communications, Watson Laboratories and Black Diamond Partners. Abood recently broke ground on the 400-plus acre second phase of Ninigret Park.

Due west of Ninigret Park, on the northeast corner of 5600 West and 2100 South in Salt Lake City, lies the 455-acre master-planned Landmark Industrial Park, one of Salt Lake’s finest owner/user and speculative industrial developments. The park is home to users such as Weider Nutrition International, Cintas and Novus/Discover Card. Speculative developer Industrial Developments International has developed 890,000 square feet of warehouse space, which houses quality tenants such as Mygrant Glass, Husquavarna, Red Wing Shoes, Martin Brower, Back to Basics, Fuji Color Film and Cephalon. Approximately 200 acres remain for future development at Landmark Industrial Park.

Considered Salt Lake City’s industrial corridor, Highway 201 fronts the entire south side of both the Ninigret and Landmark properties. The positioning makes either park an ideal place for distribution and logistics providers. These developments are not the only players in the Salt Lake speculative market. Industrial developers like ProLogis, Majestic Realty and Principal Global Investors are also bidding for existing tenants.

Despite the fact that gross industrial activity has remained steady the past two years, the overall market vacancy rate has continued to rise, closing 2003 at slightly more than 10 percent. The consolidation of manufacturing and distribution companies — a key factor in the market’s rising vacancy — should conclude later this year.

Utah’s centralized location in the West has made it a hub for distribution and warehousing. Other factors in Salt Lake City’s considerable growth in the past decade are capital investment in infrastructure improvements, the low cost of doing business, a well-educated workforce and high quality of life.

— Joe Williams is a sales associate for CB Richard Ellis in Salt Lake City.

Office

Salt Lake City’s economy has begun to show signs of a revival. The unemployment rate in Utah has decreased to 4.1 percent from its high of 6.3 percent in 2002. This trend, coupled with positive absorption in 2003, bodes well for office market performance along the Wasatch Front.

Last year’s overall net absorption in office space was the first positive performance since 2000. The suburban market showed impressive absorption of 342,255 square feet in 2003. The momentum has carried over into first quarter 2004. Projects like Cottonwood Corporate Center, Old Mill Corporate Center and Sandy South Towne have led the way with considerable positive absorption. Conversely, submarkets in and around the West Valley and Airport/International Center have not faired as well, showing negative absorption of more than 250,000 square feet in the last 2 years. However, recently, activity levels in the submarkets have risen dramatically. Class A projects such as Lake Pointe Corporate Center and Legacy at Lake Park have each shown double-digit gains in absorption.

Class A office space led the downtown submarket with positive absorption of more than 25,000 square feet. The gain in Class A space was offset by losses in both Class B and C categories. The central business district finished first quarter 2004 with negative absorption of approximately 3,000 square feet. The overall vacancy rate for Salt Lake City’s office market is around 20 percent.

Average asking lease rates continue on a downward trend. At the start of 2004, the overall average lease rate for the Salt Lake metropolitan office market was $16.08 per square foot. This was a 6 percent decrease from the previous year.

There was minimal completion of new office developments in 2003, and new construction continues to be moderate this year. There are currently four office buildings totaling approximately 445,903 square feet under construction. Gateway III (112,903 square feet) is located downtown while River Park II (96,500 square feet), The Point at 53rd (55,000 square feet) and Old Mill Business Center III (40,000 square feet) are in the suburban market. When completed this year, the new buildings will result in a 50 percent increase from the amount of new office space completed in 2003. Additionally, construction of Old Mill Corporate Center II, Millrock I and Valley Center II is scheduled to begin this year. The increase in construction activity is a good indication of the slow recovery that is underway in Salt Lake’s metropolitan office market.

— Aaron Jones is a senior associate for CB Richard Ellis in Salt Lake City.

Multifamily

The Salt Lake metro area multifamily market is getting stronger as indicated by rising rental rates and decreasing vacancies in the past two quarters. Concessions do remain a major part of the market, however, none of the concessions have exceeded a month’s free rent with a 12-month lease.

Entry-level single-family homes prices average around $140,000. The average price of homes in Salt Lake County has increased 4.9 percent in the past 12 months. If interest rates continue to increase, the pool of qualified home-buyers will shrink causing an upward pressure on rental prices and occupancies in apartment complexes.

New construction remains constant at about 1,500 to 2,000 units for the coming year. They should easily be absorbed without causing even a blip in the multifamily market conditions.

Sales of apartment properties with new market-rate financing have come with cap rates between 7 and 7.5 percent and a price per unit in the $50,000 to $55,000 range for 1980s vintage properties and $60,000 to $75,000 for newer properties. Class A buildings have been sold as high as $95,000 per unit. The market remains a seller’s market as there are many bids on listed multifamily properties. The volume of sales remains very low though with very little trading occurring among 100-plus-unit complexes.

— Kent Nelson is a broker for Hendricks & Partners in Salt Lake City.

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