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MARKET HIGHLIGHT, SEPTEMBER 2011
SALT LAKE CITY
Dana Baird, Tyson Moore, Spencer J. Williams and Jeremy Jensen
Strong market fundamentals, limited construction, and renewed interest from both tenants and investors have given Salt Lake City a leg up on most other commercial real estate markets of its size.
Office
The Salt Lake County office market is showing signs of economic recovery and continues to optimistically outperform most of the country. From 1998 to 2007, the Salt Lake County office market was averaging 1,000,000 square feet of new construction each year, compared with 318,000 square feet in 2010. Of this, 85 percent was preleased. This lack of new speculative construction will continue to lower an already decreasing vacancy rate, which is currently at 15.11 percent.
Market-wide, there are only two speculative office buildings under construction, Old Mill Corporate Center IV and Six Gateway. These buildings will add 300,000 square feet of available product to the market. A limited number of viable and available existing buildings will force some larger tenants to consider build-to-suit options at competitive economic terms.
Significant preleasing requirements are becoming standard in new construction of office space. In 2012, 635,000 square feet of construction will be completed, with 61 percent committed to tenants. Developers’ interest in new construction is starting to increase, but only if the buildings are significantly preleased, as exhibited by the significant market transactions that have closed recently (see chart at right).
The Downtown submarket will be forced to be competitive as it braces for several large vacancies occurring in the periphery as the tenants move into build-to-suit projects currently under construction. Questar will vacate its current residence at 180 E. 100 South in the first quarter 2012, adding 217,000 square feet of vacant space to the market. This former single-tenant building is now being marketed for lease as a multi-tenant property. The FBI will also be vacating 86,000 square feet at 257 Tower in the fourth quarter of 2012.
The two build-to-suit projects, Old Mill IV and Six Gateway, represent the final phases for these established office parks. Old Mill Corporate Center capitalizes on its Cottonwood Heights submarket, which exhibits vacancy below 5 percent and increasing rental rates. This submarket is perpetually strong as it offers convenient freeway access and close proximity to decision-makers’ residences. Similarly, Six Gateway is well situated with its mixed-use development design with plentiful amenities, TRAX access and close proximity to the Central Business District.
At the center of the valley, View 72 is the newest Class A office park development. It is located at 7200 South and 700 West, adjacent to the new Mid-Jordan TRAX line. The first build-to-suit completion was for FLSmidth, with 160,000 square feet followed up by Intermountain Healthcare’s office/distribution facility, which contains 450,000 square feet – 80,000 of which is office space.
Within the past year, the Salt Lake City market has strengthened built-to-suit office interests further south, as exhibited by Adobe Systems’ plans to construct a multi-phase owner/user office campus in Lehi. Goldman Sachs has also recently expanded its Salt Lake County presence by approximately 90,000 square feet. Other major lease transactions include QEP Resources at 170 South Main for 35,320 square feet; L-3 Communications at the former Microsoft Building for 46,062 square feet; Morgan Stanley at Eagle Gate Plaza for 22,094 square feet; ACS Business Solutions renewing at 8760 South Sandy Parkway for 98,500 square feet; and Salt Lake Community College at One Airport Tech Center for 36,000 square feet.
These transactions point to improving signs of strength in the Salt Lake County market as evidenced by increased construction activity, improving rental rates and decreased vacancy with new high-profile business interests making major capital investments in the market.
— Dana Baird, director/office specialist, Commerce Real Estate Solutions, Cushman & Wakefield Alliance
Retail
Refreshingly, despite the recent tough few years in retailing nationally, we are seeing a significant amount of new national retailers and restaurants entering Utah this year. The list of national tenants new to the market includes Crate & Barrel, H&M, Brio Tuscan Grille, North Face, Gordman’s, Tilly’s, Charming Charlie, Buffalo Wild Wings, The Container Store, Performance Bicycle, Banana Republic Outlet, Marshall’s and Johnny Rockets.
Another very exciting national retailer entering Utah is Scheel’s 220,000-square-foot Sporting Goods, which is sure to bring strong competition to Cabela’s and other local sporting goods stores. Furthermore, City Creek, the impressive Downtown Salt Lake City redevelopment project with the LDS Church and Taubman, is on schedule to open, fully leased, in March 2012.
In addition to Nordstrom and Macy’s, more than 80 stores are anticipated to open in approximately 500,000 square feet of retail space. There will undoubtedly be many more new national retailers and restaurants entering City Creek, in addition to those tenants listed above.
Retail lease rates have actually increased from $14.21 per square foot in 2010 to $14.52 per square foot in 2011 in Salt Lake County (excluding regional malls). There are a few plausible explanations for this slight increase. Namely, many of the newly available spaces are located in some of the valley’s better projects. With little new construction, good space is at a premium.
Additionally, tenants are willing to pay a little more when they receive high tenant improvement allowances, free rent, flat rent, percentage rent, shorter lease terms, economic abandonment clauses and many other concessions that landlords are currently willing to do. Our prediction is that we will continue to see lease rates increase modestly until there is more new construction.
Although lease rates have increased, retail vacancy in Salt Lake County (excluding regional malls) has increased from 8.58 percent in 2010 to 10.53 percent in 2011. One major reason for the increase is the recent closings of several Fresh Market stores (Associated Foods stores that were formerly Albertson’s locations), which left behind 45,000- to 50,000-square-foot boxes.
Many of these stores have closed within a relatively short time period, meaning they haven’t had much time to be leased up. The former Borders’ locations are also causing vacancies to increase, as each store is around 20,000 square feet. We do, however, believe vacancy will begin to decrease over the next year if new construction stays at a slow pace.
In terms of retail investments, the average retail cap rate for the market is right around 8 percent, which has remained pretty constant from 2010. This is a good sign for Utah, since cap rates were considerably higher in 2009. The retail investments that remain hot, with cap rates as low as 6 percent, include strong-credit, NNN, single-tenant investments such as Walgreen’s, AutoZone, McDonalds and Chase Bank. Struggling, unanchored centers, on the other hand, are selling for cap rates between 9 percent and 12 percent, if they’re able to sell at all.
The large anchored centers that are full or mostly full are selling for around an 8 percent to 8.5 percent cap. Since we’ve seen cap rates stay relatively constant for the past year, it’s safe to say they should remain constant over the next year. Cap rates will probably decrease in properties with especially strong tenants.
The considerable number of national retailers entering the Utah market this year is a good indicator of the region’s rebounding retail market. Consequently, this past October Forbes magazine named Utah the “Best State for Business,” and we are optimistic that the retail real estate market is on the upswing as well.
— Tyson Moore, retail specialist, Coldwell Banker Commercial
Multifamily
With values of duplexes, triplexes and fourplexes back from outer space, entry-level investors are perhaps encountering the best opportunity to invest in multifamily residences that they’ve ever seen.
But it’s not just low prices that are attracting investors, it’s insanely low interest rates as well. Investors who still have the ability to put 20 percent to 25 percent down are capitalizing on interest rates in the mid 3’s for 15-year fixed loans and the mid 4’s for 30-year fixed loans.
Additionally, with many recent foreclosures of single-family homes, large influxes of families are looking to rent. Because many of them would prefer to rent a duplex or fourplex rather than an apartment in a large complex, landlords with smaller structures have been able to keep their rental properties occupied. The competition for such units has also helped rental prices remain high.
These contributing factors are producing great cash flow for investors. Cash flow allows investors to quickly pay down mortgages and invest in more properties.
Of the 140 units sold in Salt Lake County since Jan. 1, 2011, almost 64 percent sold for between $140,000 and $260,000—these low prices make it affordable for new landlords to begin investing.
Though the economic and housing crashes sidelined many investors over the past few years, the low rates and low prices make today’s investors well-equipped to succeed in the long-term rental market. With plenty of opportunities to create steady cash flow, and a forecast that (hopefully) sees home values increasing in the next 10 to 20 years, investors seeking to buy, rent and hold would be hard pressed to find a better climate.
— Spencer J. Williams, realtor/owner of 4 Duplexes, Keller Williams Realty
Industrial
In the current market environment it’s easy to understand why there isn’t much speculative construction occurring nationwide. But why, then, is it happening in Salt Lake City?
Utah’s low corporate tax rate (now 5 percent), energy costs that are 35 percent below the national average, government with a AAA debt rating, highly educated workforce and a conservative approach to industrial construction may be just a few of the reasons.
Over the past 10 years, the Salt Lake industrial market has absorbed an average of about 3.5 million square feet of industrial space to leasing activity. During that same period, construction activity peaked at a little more than 3.5 million square feet only once, and over the past two years construction in the Salt Lake market has dropped to less than 1 million square feet. In 2009 and 2010, leasing activity remained relatively consistent with a little less than 3 million square feet leased in 2009 and a little more than 4 million square feet in 2010.
It hasn’t all been a bed of roses, though. Utah has had its share of businesses close their doors, with spaces going dark and lease rates dropping. As lease rates dropped, surviving tenants negotiated better terms on nicer space and landlords braced themselves for the worst. But, with the lack of new construction, Utah never really had to hit rock bottom.
Freeport West broke ground late last year on a speculative 500,000-square-foot distribution facility. The building isn’t yet completed, and new leases have been signed for all but about 50,000 square feet. The sound of construction activity can be heard at four other industrial developments in the local marketplace as well, as more than 1.5 million square feet comes out of the ground, nearly 500,000 square feet of which has been preleased.
We anticipate lease rates will rise, sales prices will start to climb and activity will increase. We also anticipate a temporary increase in the market vacancy rate, currently hovering just below 10 percent. This will occur as the market works to absorb the new construction and the vacancy left by the specialty manufacturing Kraftmaid facility, which contained about 846,000 square feet. Unless additional new product is announced in the short term, we expect the market to absorb the newly constructed and recently vacated space within 6 to 12 months.
In an economic environment like today’s, with the Dow making wild five- and seven-point short-term swings, it is easy to get caught up in the negative energy flurrying through the media. However, this year alone Salt Lake-based Alumasteel expanded its operations with the acquisition of a 76,452-square-foot manufacturing facility; Advanced H20 moved into a 194,510-square-foot facility; and HandStands moved from its 58,909-square-foot building to occupy 173,040 square feet. Meanwhile, Core-Mark and International Paper have nearly filled the new 505,000-square-foot Landmark #8 facility nearing completion. They absorbed 173,539 square feet and 277,000 square feet, respectively. There are positive signs of life and growth in the Utah industrial market, and reason to look forward to the future with a calculated optimism.
— Jeremy Jensen, senior vice president and partner, IPG Commercial
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