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SALT LAKE CITY — Commercial real estate markets ultimately reflect the health of local economies. At the firm where I work (full disclosure: I'm a senior research analyst at CBRE), commercial real estate (CRE) is often referred to as "the economy in a box". If you think about it, that's all it (CRE) is - structures that house commerce. So, what does the performance of Salt Lake's commercial real estate market tell us? Looking at the basic indicators, it tells us the local economy is healthy.
Salt Lake office market
Office markets can give some insight into how professional, business and financial services are performing. Lately, tech firms have been driving and turbo-charging growth in our market and other cities where the sector has a large presence. In Utah, the south-end of the Salt Lake Valley and northern Utah County (particularly the area near Thanksgiving Pointe) are preferred locations for tech firms. This is largely due to the area's central location which allows firms to draw from talent in both Salt Lake and Utah County. The area continues to experience high demand, and over half of new construction in the Salt Lake market is taking place in the Sandy and Draper submarkets. Construction remains active in the Lehi area on the south side of the point of the mountain as well.
Salt Lake's vacancy rate is expected to continue declining on a market- wide basis.
So, how did the office market perform overall? The past year was good; of the primary indicators for office markets (net absorption, vacancy and average asking lease rate), all registered improvement. Net absorption (a measure of demand that accounts for space leased and vacated) reached 882,182 sq. ft. in 2013 This total represents an amount of space absorbed that is equivalent to about 3 percent of total market size and is also a post-recession high for the indicator.
However, demand was uneven. For example, the suburban office market accounts for just two thirds of the total net rentable area of the Salt Lake market, but over 84 percent of positive net absorption in 2013 occurred there. Looking ahead, job growth is expected to remain healthy, which will support demand for office space.
With healthy demand and limited amounts of newly constructed space entering the market, vacancy decreased. The market-wide vacancy rate declined by 270 basis points in 2013 and ended the year at 13.1 percent. With continuing demand and limited amounts of new construction, Salt Lake's vacancy rate is expected to continue declining on a market-wide basis. However, it is worth noting that certain areas will experience greater levels of improvement than others.
Lease rates in the Salt Lake office market increased by 2 percent in 2013. At year-end, the average yearly asking lease rate was $20.09 per square foot. However submarkets experiencing high demand such as Sandy and Draper (areas with tech concentration) saw year-over-year increases of 3.9 percent and 4.9 percent, respectively. As demand remains healthy and new supply remains limited, the average asking lease rate is expected to continue increasing during the coming 12 months.
Salt Lake industrial market
The industrial market in commercial real estate includes space used to warehouse and distribute goods and different types of manufacturing. Salt Lake is an attractive location for such operations. The area's geographic location, infrastructure, workforce and growing economy are all favorable attributes contributing to the health of the area's industrial market.
Transaction activity in Salt Lake was healthy in 2013 with the market total at 4,678,691 sq. ft.; however, total activity did not reach the high level achieved in 2012. Notably, the first two quarters of 2013 accounted for 68 percent of the 4.0 million sq. ft. leased in 2013. Spaces between 20,000 sq. ft. and 50,000 sq. ft. experienced the greatest increase in activity.
Strong demand for industrial space in the Salt Lake market is supporting rental growth. The average achieved lease rate for industrial space in the market was up almost 11 percent in 2013.
Strong demand for industrial space in the Salt Lake market is supporting rental growth. The average achieved lease rate for industrial space in the market was up almost 11 percent in 2013, ending the year at $0.41 per square foot on a monthly basis. This represents the largest year-over-year increase in over six years and propelled the average achieved lease rate in Salt Lake's industrial market past its pre-recession level.
Consistent performance and healthy demand is allowing for new industrial projects to move forward. Over 1.5 million sq. ft. of industrial product was completed in 2013, with another 1.1 million sq. ft. under construction at year-end. In addition, over 1 million sq. ft. of new industrial space will break ground during the coming year.
Conclusion
The performance of Salt Lake's office and industrial markets reflect a healthy local economy. With respectable growth levels expected during the coming year, positive trends in the local commercial real estate market are expected to continue. Generally speaking, an improving national economy and advantages unique to Utah will support positive trends during the coming year.
