MARKET HIGHLIGHT, JUNE 2005

LICKETY SPLIT — SALT LAKE CITY EXPANDS
Greg Ratliff, Chris Monson, Jim Sheldon and Barbara Johnson

Utah’s population growth bodes well for Salt Lake City’s commercial real estate market. Retail continues to be the sector with the lowest vacancy numbers, but office is perking up. Benefiting from things like improved infrastructure, the area’s industrial sector is changing into a landlord-seller’s market.

Multifamily

Currently, the prevailing mindset among apartment owners and investors in the greater Salt Lake City area is cautious optimism. In 2004, double-digit vacancies and widespread concessions were commonplace, fueled by record-low interest rates that stimulated renter exodus into home purchases. Vacancy rates currently average 8 percent, and rent increases of 1.5 to 3 percent are evident in some areas. Salt Lake City’s growth rate of around 3.7 percent — second nationally to Nevada — has provided a much needed economic boost to the Wasatch Front and Utah. In 2004, due to record-low interest rates for single-family dwellings, more than 60 percent of apartment turnover was generated by home purchasing. Most apartment renters with stable credit were able to move into a home with little or no down payment. Today, the view is that most of the apartment renters capable of purchasing did so in 2004. Leading industry analysts believe the home-buying spree of 2004 has cooled due to rising interest rates. This too should cause modest market rent and occupancy-level increases for the remainder of 2005.

Investor demand for multifamily communities along the Wasatch Front greatly exceeds supply. Low interest rates, unprecedented capital — particularly from 1031 exchanges — and a general expectation of reasonable rent growth have driven cap rates lower than ever before. Owners are reluctant to sell, facing the challenge of locating suitable trade opportunities. Most apartment properties being currently marketed will close escrow at unprecedented prices and cap rates. Transaction velocity along the Wasatch Front has been strong with both local and out-of-state investors.

A significant increase in the number of multifamily projects completed in 2005 is expected. Presently, approximately 3,400 units are planned for the year. At year-end 2004, approximately 1,338 multifamily units were finished with approximately 900 units set for completion. Product types are dominated by Class B communities, which make up about 80 percent of the new inventory and 28 percent of all affordable, tax-credit projects. Overall, this inventory of new projects should not affect the existing inventory provided in-migration and job growth continue at their strong pace.

For investors seeking opportunity along the Wasatch Front, the east side still holds its allure with average market rents and occupancy levels exceeding most other submarkets. As this current seller’s market window of opportunity continues, apartment owners must note that nothing lasts forever. Commercial interest rates for multifamily investments are beginning to increase. In summary, if you are contemplating selling in this hot market, do it now before it is too late.

— Greg Ratliff is a senior multifamily investment specialist for NAI Utah Commercial Real Estate in Salt Lake City.

Retail

The Salt Lake City area retail market had another strong year in 2004. There was an addition of 1.3 million square feet of new retail construction, up 35 percent from the year before and the highest since 2000. As a result of the large increase, 2004 ended with a modest increase in vacancy rates to 7.13 percent, compared to 6.16 percent from the prior year. This marks more than 10 consecutive years of the retail sector having outpaced office and industrial with the lowest overall vacancy rates.

The most positive factor for the Utah retail market during the last 12 months has been the expansion of Wal-Mart Supercenter with seven new stores opening in Clinton, Salt Lake City, Murray, West Valley, American Fork, Lindon and Payson. Eight additional stores are planned or under construction in Ogden, Syracuse, Centerville, Salt Lake City, Taylorsville, South Jordan, Riverton and Sandy. The recent opening of five Kohl’s stores in Layton, West Valley, West Jordan, Draper and American Fork created a huge impact on the apparel sector. Additional stores for Kohl’s are planned this year. The Home Depot opened stores in Layton, Millcreek and American Fork, with new stores under construction in Riverton and Tooele.

A regional center located at 7000 South and Bangerter Highway, Jordan Landing continues to expand with Circuit City, Bed Bath & Beyond, Pier 1 Imports, Wild Oats Natural Marketplace and Target announcing new locations in the final phase. The Meadows in American Fork opened another phase with PetsMart and Deseret Book; Ross Dress for Less will anchor a new phase there. Draper Peaks completed its initial phase with the signings of Michael’s and Petco. The final phase will include Bed Bath & Beyond and Office Depot.

Granite Furniture, Ultimate Electronics and Mac’s Craft each closed four stores in the Salt Lake market.

The anticipated interchange at Interstate 15 and 11400 South, near the Southtowne Mall, will create opportunities for additional community centers. The planned Boulevard at Southtowne will include a Wal-Mart Supercenter and Sam’s Club as anchors. The recently announced gravel pit project in Sandy at 9400 South and 10th East will be anchored by Wal-Mart Supercenter and Lowe’s Home Improvement Warehouse. The new additions to the Target-anchored Centerville Marketplace in Centerville, Utah, will be Roberts Crafts and a Wal-Mart Supercenter.

Target announced it is anchoring a new regional development called The District at 11400 South and Bangerter Highway. Final plans are unfolding for the complete redevelopment of the two downtown malls, Crossroads Plaza and the ZCMI Center, by the LDS Church and its retail development partner, Taubman Companies. Plans are also in place by General Growth Properties to redevelop Cottonwood Mall in Holladay, Utah.

— Chris Monson is a senior retail specialist with NAI Utah Commercial Real Estate in Salt Lake City.

Industrial

Salt Lake City’s industrial real estate market is in transition from a tenant-buyer market back to a landlord-seller market. Utah’s industrial market base will pass the 100 million-square-foot mark this year. Within this maturing market, large infrastructure investments will pay off. The transportation systems in Utah have been heavily upgraded in the years leading up to the 2002 Winter Olympics, including freeway expansion and the addition of light rail. Today, further investment is directed at widening one of the primary highways in the industrial corridor, SR 201 (locally known as 2100 South).

Companies like the Union Pacific Railway have long leveraged Utah as an intermountain hub. Buoyed by the state’s improved infrastructure, the Union Pacific Railway is making its own strategic investment plans in Utah. It has a new 350-acre inland port planned, which will attract even more business to the state. Union Pacific’s state-of-the-art intermodal yard will benefit companies like Wal-Mart, which has several 1 million-square-foot distribution centers in Utah. Costco and Lowe’s Home Improvement Warehouse are also increasing their investments in Utah. Kraftmaid, a subsidiary of Masco Corporation, recently announced a 700,000-square-foot, 80-acre manufacturing facility in West Jordan that will generate 1,300 jobs.

A pro-business development political environment is helping the cause as well. House Bill 316, which was passed by the Utah Legislature, supports the state’s existing aerospace industry. Adam Aircraft Industries quickly capitalized on the passing of the bill, announcing an expansion of an Ogden, Utah, facility to 80,000 square feet. Adam Air will join other aerospace companies like Williams International, FMC Parker Hannifin, Barnes Aerospace, Boeing, ATK Thiokol, Northrop Grumman IT, Aviation Materials Management, GSC Foundry and TRW ICBM Systems in expanding operations in the market. Also, Bombardier Aerospace is on deck to open a facility at the new Ogden Gateway Center Business Park at the Ogden-Hinckley Airport.

All this activity is occurring in the face of declining vacancy. The state’s industrial vacancy rate is in the single digits. Short supply of quality space has developers rushing to fill the void. The biggest players are those with a long-time presence in Utah like Ninigret, Sorenson, Freeport West and First Industrial. Other active developers are Buzz Oates, Hamilton Partners and Majestic Realty. Reduced vacancy has thrown fuel on Utah’s investment market. By year-end, the numbers will reflect a big leasing year. Low supply will limit the number of sales this year. Land will continue to move and prices will go up. Lease rates will begin to climb as tenants get over “sticker shock” and run out of time to take advantage of Salt Lake’s industrial opportunities.

— Jim Sheldon is a senior industrial real estate agent at NAI Utah Commercial Real Estate in Salt Lake City.

Office

Vacancy in the Salt Lake office market has declined considerably from nearly 21 percent at year-end 2003 to about 17 percent in first quarter 2005. Class A office product has the lowest vacancy at about 10 percent, while Class B and C remain higher, at around 19 percent and 18 percent, respectively. By taking advantage of generous landlord concessions and lower Class A rates, tenants have been able to upgrade their image and provide their employees with more amenities. Due to the decreasing Class A vacancy rates, developers are breaking ground and building speculative Class A office buildings and parks. This product type is being absorbed at a fairly brisk pace.

Newly constructed Class A office parks are being strategically placed around the interstates. For example, Millrock Park and Old Mill Corporate Center III, located just off of I-215, are now fully leased prior to completion. Other recently constructed office parks located on the I-15 corridor, such as River Park and Minuteman Park II, leased quickly. The lifestyle-center business parks are also becoming more common. These centers provide tenants with shopping, entertainment and even residential apartments within steps of their workplaces. The successful Gateway mixed-use lifestyle center, built by local developer The Boyer Company, is more than 95 percent leased. The LDS Church acquired the Triad Center at the end of 2004 to accommodate a campus for the LDS Business College and BYU Salt Lake. This should also have a positive impact on downtown absorption.

Office lease rates in Salt Lake City have remained relatively stable during 2004. Landlords were more flexible and willing to negotiate prices to attract and retain tenants. Landlords also routinely offered concessions. With higher vacancy rates in Class B and C office buildings, rates are likely to remain stable for the meantime. Average full-service lease rates are $22 for Class A, $17 for Class B and $14 for Class C. Year-end absorption of office space in 2004 was significantly higher than the prior year, with approximately 770,000 square feet absorbed in 2004 as compared to 490,000 square feet in 2003.

Expect to see continued recovery in the Salt Lake City office market in 2005, with vacancy rates likely to drop to around 15 percent by the year’s end. Overall lease rates should continue to rise. Class A rates should see the greatest increase due to lower vacancy and new development occurring. Tenant activity should continue to heat up with the increase in job growth and the new governor’s proactive business development agenda. Improved programs and increased incentives will attract new businesses and add momentum to the recovering market. Salt Lake’s office sector has a great future with the market’s young workforce, low cost of doing business and excellent highway infrastructure.

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

©2005 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.