COVER STORY, MARCH 2007

ROCKY MOUNTAIN UPDATE

Urban Revival: Utahans Believe in Downtown Salt Lake City Again

Kirk

Urban revival is charging full steam ahead in Salt Lake City. The central business district will be home to 10,000 people by 2010, which is more than twice the population living in that submarket in 2000. Of course, business follows people, so retail and service firms are growing to meet the needs of the new residents in the city’s core.

Because of active development, people looking for downtown living in Salt Lake City now have more choices than ever. In the past 5 years, developers have added 10 large housing developments to the central business district with more than 900 residential units. Several new housing projects are under construction or are in the planning stages, including 200 tax-credit rental units. Last year, the LDS Church unveiled details of its major downtown mixed-use redevelopment plan, which offers the possibility of at least 600 more housing units.

Condominium buildings — such as The Metro, a high-rise complex near the internationally praised downtown city library — consistently sell out before they’re completed. Due to high demand, some projects have taken to overbooking. Add the popularity of loft-style apartments to the mix and the residential housing market in downtown Salt Lake City is growing like never before, which can be attributed to Utah’s continued strong economy and the desire to live in the metropolitan atmosphere as opposed to the suburbs.

The all-time low vacancy rate of 1.35 percent for Class A office space shows that company demand for quality locations is very competitive. Several years ago, many developers and investors wouldn’t consider Salt Lake City. Now they are often the ones first in line to acquire properties as soon as they’re put on the market. By the end of 2006, six large buildings totaling more than 1 million square feet had changed hands. The core drivers of this increased activity in the last 2 years are an increase in businesses expanding or relocating their operations to the downtown area, companies moving into the Utah market for the first time, and out-of-state developers looking to capitalize on under-performing buildings and rising lease rates.

These downtown developments are a mix of new buildings and renovations, office and residential projects. Construction will soon begin on 222 Main Street, a new Class A office tower. The restoration of older office buildings, such as the Walker Center, also on Main Street, is well under way and will provide the city with alternative Class A space. Developers are also planning conversions of several buildings into combinations of office space and residential condominium units.

It’s not just commercial and residential projects that are driving development in Salt Lake City. Millions are being spent for art and culture. The first phase of the $35 million Discovery Gateway Children’s Museum, near The Gateway shopping area on the west side of downtown, is almost complete. Earlier this year, The Leonardo — an arts, culture and science center in the former main library building downtown — raised the $10 million it needed to match a $10 million city bond. The Leonardo is expected to begin renovating its building by year’s end. Another major project, the Intermodal Transportation Hub, where bus, light rail and commuter rail will meet, is almost ready for service. And a new 500-car parking garage on downtown’s Exchange Place is now open for business. Both will make travel easier as more and more people flow into the city.

With economic growth driving more growth in development in both Salt Lake City’s commercial and residential sectors, expect the upward spiral to propel more than $1.5 billion into the central business district alone in the next 5 years. For Salt Lake City, the urban revival is real. It’s an exciting phase of development, energy and optimism.

Chris Kirk is a Salt Lake City broker specializing in the office market for Commerce CRG, an Alliance Member of Cushman & Wakefield.

Top 10 Trends in Utah’s Real Estate Market

Utah is known for the Great Salt Lake, great skiing, hosting an Olympics, the Mormon Tabernacle Choir, the Sundance Film Festival in Park City, outdoor activities in areas like Moab and being the reddest politically of all red states on the map. Commercial real estate investors should also know it for these top 10 trends that are affecting/defining the market.

10. Investment Transaction Activity – Utah’s commercial real estate market reported nearly $1.3 billion in completed transactions in 2006 with an average deal size of $4.7 million. This amount of activity approached the cumulative dollars transacted from years 2002 to 2004 and was slightly down from 2005, only because investors could not find enough product to acquire.

9. Employment Growth – Utah’s job growth in 2006 was Number 1 in the country at 5.2 percent while the national average stood at only 1.4 percent. Utah led the nation with the lowest unemployment rate — 2.5 percent versus a national average of 4.5 percent.

8. Downtown Salt Lake Investment – More than $1.5 billion is being poured into downtown by key players in the Utah market in a revitalization effort. There are currently 11 major projects underway that will transform the 10-block area located around historic Temple Square.

7. Home Value Appreciation – While most U.S. markets’ home valuations have lagged or retreated, Utah posted an impressive 17.4 percent gain in home values in 2006, second in the country behind only Idaho. The continued residential growth has compelled additional office and retail to develop near the new housing areas in the south and west portions of Salt Lake County.

6. Intermodal Hub – Salt Lake City is the first place east of the major West Coast ports at which all three rail lines merge. Union Pacific Railroad has developed the Intermodal Hub just south of the Salt Lake City International Airport to accommodate the increased demand for cargo shipments coming in from Asia for national distribution.

5. Religious Headquarters - U.S. News & World Report noted that Salt Lake City-based The Church of Jesus Christ of Latter-Day Saints is the fastest growing religion in American history. The Mormon church impacts the real estate market through its land holdings, its stake in the vitality of the downtown area and the quality labor force it provides.

4. Low Vacancy Rates – Utah has seen a drop in vacancy rates across the various product types, signaling increases in NOI for investors and triggering development proformas for builders. Industrial vacancy is at 6.52 percent, office stands at 11.54 percent (down from more than 22 percent 2 years ago), retail boasts vacancy of only 5.61 percent and multifamily clocks in at merely 4.5 percent.

3. Population Growth – Utah’s population growth stood at 2.7 percent in 2006, sixth highest among all states. The national average is only 1 percent.

2. Market Arbitrage – Now more than half of Utah’s investment transaction activity is coming from money based outside of the state. The last 3 to 4 years of bullish investment activity in Utah have been highlighted by investors selling at cap rates 1 to 2 percent lower in western sunbelt cities and redeploying those funds into Utah real estate at higher cap rates.

1. Finite Land Supply – Utah’s dominant population base has natural geographic constrictions with mountains on the east and west and major lakes to the north and south. Unlike other competing western markets, you cannot continue to draw a bigger ring around the bull’s eye in Salt Lake County.

The Utah real estate market could be labeled a tortoise versus other markets that act more like hares. Utah typically does not have the dramatic sprints that you will find in other areas of the country, but, while others may fizzle out, Utah continues on its successful steady pace for investors.

Bryce Blanchard is a principal and investment specialist at NAI Utah Commercial Real Estate in Salt Lake City.

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