WESTERN SNAPSHOT, NOVEMBER 2008

Salt Lake City Multifamily Market

2007 was a year of transition. Sales of multifamily communities soared for the year, several large apartment communities changed ownership and the investor feeding frenzy was in full swing. 2008 is another year of transition, but this transition appears to be heading in the opposite direction.

Upheaval in the capital markets during third quarter 2007 has drastically changed the tempo of multifamily investments along the Wasatch Front. Constricted lender underwriting, interest rate increases and aggressive debt-coverage ratios have contributed to a slowdown in multifamily market activity. Most multifamily buyers are pushing themselves away from the investment table at this time and taking a wait-and-see approach. There are still some multifamily sales, but there are not as many interested investors as even 8 months ago. Financing is available for multifamily investments, and some qualified buyers can obtain sub-6 percent interest rates on quality properties. However, loan-to-value ratios, once commonplace last year at 75 to 80 percent, have dropped to 60 to 65 percent.

Despite the national economic downturn, Salt Lake City continues to stay on investors’ radar screens, but with much more precaution. Its recession-proof economy, as some experts call it, is bolstered by local forces that continue to stimulate activity. The Utah Transit Authority, Utah Department of Transportation and the LDS Church have major construction and expansion projects both planned and underway. Retail expansion of Fashion Place, Valley Fair and Cottonwood malls, in addition to the renovation/expansion of Trolley Square shopping center, will keep the ball rolling for the local economy.

The plummeting single-family housing market has given the apartment rental sector a boost as Utah is currently experiencing one of the strongest performances the area has seen in more than a decade. Rental vacancies in Salt Lake County fell from a high of 10.9 percent in December 2002 to 4.5 percent at the end of 2007. Market rent increases in some areas in Class A and B+ type properties have risen as much as $200 during the last 18 months. Signs of softening in this market are beginning to be seen; the local slowdown of job and economic growth has forced many renters to suffer “sticker shock” and seek more economical rental alternatives. Vacancies in these institutional-grade property types are rising slightly as a result of the renter price resistance. Where are the renters going? Many are doubling up as roommates and moving to Class B and C properties in order to reduce monthly rent payments. 

There will be more of the same as restrictions for the lending and underwriting requirements in capital markets stay tight. Deal-motivated sellers will need to adjust cap rates upward for their properties to attract significant investor interest to offset higher capital costs. The normalization of interest rates should continue to generate investor interest and remain stable for multifamily properties along the Wasatch Front.

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

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