MARKET HIGHLIGHT, DECEMBER 2009
SALT LAKE CITY
Darrell Tate, Kip Paul, Barbara Johnson, Ed Johnson and Andy Wheeler
Softening continues in Salt Lake City’s sectors, but its relative strength in the region bodes well for the city in the coming new year.
Developers in the Salt Lake market continue to wait on the sidelines for retailer demand to increase. Virtually no speculative development is taking place at this time, which has helped keep vacancy levels stable. There has been a slight increase in leasing activity, primarily by local and regional tenants taking advantage of aggressive concessions offered by landlords on vacant space.
At the end of the third quarter, vacancy held steady at 8.32 percent. As previously mentioned, there was a slight decrease in actual vacancy due to increased activity by local and regional tenants. Rental rates have softened throughout the year with an average asking lease rate of $20.60 per square foot NNN, which is down from a high of $21.32 at year-end 2007. Rates are tracked and reported on the average “high asking rate,” which provides guidance on market conditions. These rates do not take into account actual lease rates on deals done, which should have softened more than the asking rate and does not take into account concessions offered by landlords. The remainder of 2009 will continue to be a tenant’s market.
Downtown Salt Lake City continues to be the focus of large-scale retail development with the City Creek project in progress. Developed by the Mormon Church and Taubman Centers, City Creek promises to change the face of the downtown retail market. One notable entry into the Salt Lake market is Winco Foods, with two openings in the third quarter and three additional locations under construction.
The Salt Lake market appears to have stabilized, and there are signs of improvement. Activity and interest has increased, and developers are poised to re-enter the market as conditions improve. There is cautious optimism for 2010, with most retail development being user driven with very little speculative development taking place.
— Darrell Tate is a retail/land specialist for Commerce in Salt Lake City.
The current apartment vacancy rate in the Salt Lake market is 7.2 percent, a significant increase over the 4.6 percent reported a year ago. Reasons for this increase are threefold. First, historically, since 1982, an average of 1,000 new units have been built per year. Currently, there are 3,200 new units under construction and another 2,000 in proposed projects. Secondly, failed condo projects are now being added to the rental pool, and, finally, challenging economic times lead to tenant consolidations, tenants moving back home with parents and/or finding roommates. The current economy and job losses have made for a difficult rental market.
Apartment projects with less than 100 units had a lower vacancy rate than projects with 100 units or more. In addition, west side apartments have had lower vacancy rates at 6.5 percent than east side apartments at 7.6 percent.
On a square-foot basis, rental rates have declined from $0.93 in 2008 to $0.87 in 2009, a 6.4 percent drop. About 44 percent of apartment properties surveyed in the Salt Lake market offer concessions in the form of reduced rent or move-in specials.
Apartment investment sales are down dramatically. At the end of third quarter 2009, sales were at $51.5 million, compared to $312.9 million in 2008 and $399.7 million in 2007.
The Salt Lake market should face a challenging economy well into 2010. There are several new apartment projects planned in the market, which will add to the supply of rental units. These conditions will lead to further erosion in rental rates, with vacancy rates continuing to increase.
— Kip Paul is an investment specialist for Commerce in Salt Lake City.
At the end of the third quarter, negative absorption was still occurring in Salt Lake City’s office market, with vacancy hovering ar ound 18 percent in the suburban market and 14 percent in the downtown area. Average Class A rates are around $22.50 per square foot, full service, average Class B rates $17.75 per square foot, and average Class C rates $14.25 per square foot. For the past 3 quarters, there have been more short-term leases executed compared to the typical 5-year term lease.
The Class A central business district office submarket is very strong with less than 10 percent vacancy, and the new office tower, 222 South Main, is signing leases with strong credit companies taking large blocks of space. The Central East submarket is experiencing the greatest vacancy at about 20 percent.
At the beginning of the fourth quarter, the office market was experiencing increased activity. Some companies are beginning to expand — new and larger space requirements with the minimum of a 5-year lease term are occurring. As the jobless rate decreases, both nationally and locally, additional office requirements will develop. The economy is getting healthier, but a slow and gradual increase will be more likely than a fast growing, rapid rise.
As a Salt Lake City tenant, this is a great time to look for office space. Availability and choice are at an all-time high. Companies can acquire quality office space for better rates, concessions and tenant improvements than could be achieved a year ago. This is the time to secure the best deal before the economy heats up.
— Barbara Johnson is an executive real estate agent at NAI Utah Commercial Real Estate in Salt Lake City.
The Salt Lake County industrial market vacancy rate rose to 9.35 percent at the end of third quarter 2009, marking a continuous increase since fourth quarter 2007 when the rate hit a low point of 4.15 percent. While the vacancy rate has been increasing, the Salt Lake County market remains strong relative to competing markets in the West and other areas of the country.
The property segment to see the largest increase in vacancy square footage from a year ago is bulk distribution, with a change from 1.6 million square feet available to 3.6 million square feet, offering users better variety and better deals.
Lease rates have fallen 6.98 percent from third quarter 2008 levels. The product size with the largest decrease is the 20,000- to 50,000-square-foot range at 15.92 percent, with rates dropping below $0.40 per square foot to an average rate of $0.39 per square foot from a high of $.46 per square foot in third quarter 2008. Properties 100,000 square feet and larger saw a lease rate decrease to $0.34 per square foot from $0.38 in third quarter 2008.
The Salt Lake County industrial market consists of around 110 million square feet; approximately 3.3 million square feet was under construction in third quarter 2008 compared to only 179,000 square feet at the same time this year. The beginning of the fourth quarter has seen some increase in activity. A few projects that have been in a holding pattern have recently been taking a fresh look at the market. While there are signs of recovery it seems that the pace will remain slow rather than a rapid ramp-up. Salt Lake City is well positioned to take advantage of a recovery with relatively low vacancy rates.
— Ed Johnson and Andy Wheeler are industrial specialists at NAI Utah Commercial Real Estate in Salt Lake City.
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