Commercial real estate improving in S.L. market

Commercial real estate improving in S.L. market

(David Nixon /Jones Lang LaSalle)


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SALT LAKE CITY — Recent months brought conflicting economic headlines.

During the first quarter of 2014, the U.S. economy contracted by 2.1 percent, according to the Bureau of Economic Analysis. At the same time, close to 200,000 jobs per month were created, according to the Bureau of Labor Statistics. With such conflicting headlines, many wondered what is the true state of the economy? Fortunately, the first estimate for the second quarter showed a sharp improvement; the U.S. economy grew by 4.0 percent during the quarter (on an annualized basis) and employment grew at a respectable pace during the same period.

As economies grow or contract, demand for commercial real estate is affected. As such, insight can be gained by looking at such markets. Overall, in the Salt Lake metro area, commercial real estate continues to reflect an economy that is healthy and growing (full disclosure: I’m a senior research analyst for CBRE — the firm’s second quarter 2014 data was used for this report).

Office market

Looking at Salt Lake’s office market as a whole, the picture is generally positive. However, first it is important to ask: What drives an office market? Offices typically house services of a professional nature. The most commonly cited indicator of demand, net absorption (considers space leased vs. space vacated), was positive and up significantly in the second quarter. Vacancy usually falls as demand picks up, but in the second quarter, completed construction brought a significant amount of new space (supply) to the market and effectively muted the effect of higher demand on the marketwide rate.

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Consequently, the Salt Lake office market’s vacancy rate increased slightly to 13.1 percent during the quarter. Meanwhile, the average asking lease rate for the metro area was down slightly to $20.03 per square foot during the quarter but remained positive on a year-over-year basis.

Notable demand is present in the Sandy and Draper submarkets where there is a large concentration of tech firms. Net absorption in those two markets alone can account for almost 70 percent of the market’s 2014 total. This is even more remarkable considering these two submarkets only represent around 20 percent of the market on a square-foot basis. Rapid growth in the south valley area is being bolstered by a healthy tech sector. Looking ahead, steady employment growth bodes well for continued growth in the area’s office market with current trends expected to continue.

Retail market

The retail market is influenced by a range of factors from employment and wage growth to housing and sentiment. Overall, demand increased and, as a result, vacancy decreased during the second quarter to 5.8 percent. Average asking lease rates are also up, rising to $14.75 per square foot during the same period. Retailers are operating in a challenging macro-economic environment, and technology (e-commerce) is disrupting the industry. This is causing many retailers to re-examine their concepts and focus on the quality of the shopping experience. As such, it is notable that retailers continue to expand in Utah, and this is creating healthy demand in the market.

Currently, high quality space with good accessibility is in high demand. This is motivating developers and is evidenced in the amount of retail-oriented construction. In terms of square feet, completed construction in the first half of 2014 surpassed the total for all of 2013 and is expected to continue rising through the end of the year. With a growing local economy, traditional retailers are finding opportunities in Utah, and the retail market reflects this reality.

Industrial market


The amount of construction activity in the market represents confidence in the long-term outlook for Salt Lake's economy. Because commercial structures typically have a long life, new construction is essentially a bet on long-term demand.

With regard to industrial properties, the story remains positive. Most industrial properties are used for warehousing and distribution in Salt Lake. The city’s geographic location makes it an ideal location for such purposes. The other primary use for industrial property involves manufacturing. Although manufacturing is still a relatively small part of the market, it is growing as a share. The demand for the goods and services warehoused, distributed and manufactured in industrial properties drives demand for the sector and can be influenced by geographical and supply chain considerations.

Another factor affecting this sector is the growth of e-commerce. As more shopping takes place virtually, the need for distribution and warehousing grows as merchandise traditionally housed in retail outlets is stored in warehouses for shipping.

In Salt Lake’s industrial market, transaction activity rebounded in the second quarter of 2014 after a sluggish first quarter. The achieved lease rate was relatively stable and ended the second quarter at $0.37 per square foot. Similar to the office market, large amounts of new supply muted the effect of increasing demand during the quarter. Even still, the market’s availability rate remained low at 8.3 percent, continuing an extended period of low availability rates.

Positive trends

So, what does all of this mean? In essence, indicators for all of the major commercial real estate property types continue to affirm a positive view of the local economy. Furthermore, the amount of construction activity in the market represents confidence in the long-term outlook for Salt Lake’s economy. Because commercial structures typically have a long life, new construction is essentially a bet on long-term demand.

With respectable growth expected during the near future, positive trends in commercial real estate markets will continue to play out, barring any unforeseen negative shocks to the economy. Aside from a positive outlook for the Salt Lake metro area's economy, these markets will be further shaped by changes in technology (think e-commerce) and demographics (think generation Y). As these trends develop, changes in the composition of growth are likely, but commercial real estate is expected to continue to reflect a healthy local economy during the near term.


Darin Mellott is a senior research analyst at CBRE, the world's largest commercial real estate services firm. He is also a member of the Utah Economic Council and sits on the board of directors for the Economic Club of Utah. He tweets at @DarinMellot

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