The Salt Lake City office of commercial real estate firm Newmark Grubb ACRES has released it mid-year report on the state of commercial real estate in the Salt Lake City area.
In the “Market Report on the Utah and Mountain West,” Newmark professionals studied survey information to establish opinions and develop forecasts about trends and market activity. The report concludes that the market has been strong, lease rates are steady or increasing, construction continues statewide and outside investors are becoming more interested in the market. More generally, the report said, Utah’s economy continues to outperform the national average and remains one of the most fundamentally sound economies in the country.
Key finding of the report include:
{mprestriction ids="1,3"}Industrial
At midyear, the Salt Lake County industrial market maintains its momentum from last year. Vacancy continues to decline despite additional new construction, which was much-needed in a supply-constrained market. Demand remains strong and new supply is quickly absorbed. In the first half of 2017, over 615,790 square feet of new construction were delivered. Year-to-date positive net absorption totals 1.4 million square feet, the report said.
Average lease rates are the highest they’ve ever been, reaching 47 cents overall. Total lease dollar volume for the first half of 2017 is almost twice as much as the first half of 2016 — $103 million compared to $56 million. Average owner-user sale prices per square foot are also the highest they’ve ever been. Owner-user sales volume climbed steadily from 2012, reaching its peak in 2016, but has remained fairly steady since then.
Investment and land prices also continue to rise. Developers and users alike are scrambling to control infill sites and path-of-progress locations. One of the reasons prices are rising is that supply is decreasing. Although there were 46 investment transactions in 2015 and a record-setting 48 in 2016, the first half of 2017 only had 15 investment sales. Consequently, investment dollar volume is also down 47 percent year-over-year ($283 million compared to $148 million).
Office
The local office market remains stable and healthy by historical standards through the first half of 2017, although the pace has slowed for many of the leading indicators. The average achieved full-service lease rate market-wide decreased just over 3 percent to $23.34 per square foot. Downtown Class A lease rates led all submarkets with an average full-service asking rate of $28.84 per square foot and an average achieved lease rate of $26.65 per square foot. The direct vacancy rate for Salt Lake County is up slightly from 7.09 percent at year-end 2016 to 7.96 percent at mid-year 2017, but still well below the national average for similar-sized markets.
The total amount of new construction underway at mid-year 2017 was approximately 1.75 million square feet, with seven Class A buildings totaling just over 1 million square feet scheduled for completion before year-end. The Salt Lake market has attracted two new top-tier national developers: Houston-based Patrinely Group and Westport Capital Partners (WCP) of Wilton, Connecticut, to help meet the demand for Class A space. WCP has recently announced a pre-lease commitment of 170,000 square feet for Phase I of its two-building development in Sugarhouse to the University of Utah. The Patrinely Group’s 650 Main project, two 10-story office towers totaling 640,000 square feet, will be the largest true Class A office development in downtown Salt Lake City. Newmark expects to see an upward trend in average lease rates over the final two quarters as well as a significant increase in net absorption as tenants begin to take occupancy of newly completed projects.
Investment
Utah’s commercial real estate investment market was robust in the first half of 2017 — a record first half of the year for sales volume. The fundamentals of the market remain strong with exceptional job growth, low vacancy, aggressive absorption and stable construction. Institutional investors have always looked at Utah as a place they want to “see and ski.” However, over the past couple of years, they have decided to “stay and play,” purchasing assets on the market and making unsolicited offers on off-market properties as well. Historically first-tier assets in Utah have been purchased half the time by Utah-based investors and half by regional or national investors. This year the top 10 most notable transactions involved eight purchases by owners based outside of Utah. Overall square footage sold is up from mid-year 2016 and office square footage sold for the first half of 2017 has almost passed total space sold for all of 2016 since there were several large office properties sold in the first half of the year. Transaction dollar volume is up 24 percent over mid-year 2016. It is projected that these numbers will level off towards year-end.
Retail
The Wasatch Front retail market continues to be relatively stable. Average lease rates are down year-over-year but up since yearend. Leased space is also down, primarily because over 90 percent of transactions were less than 5,000 square feet but also because slightly fewer transactions were completed year-over-year. There were fewer owner-user sales year-over-year, but sale prices per square foot are the highest they’ve ever been with all transactions occurring below 10,000 square feet with prices averaging over $200 per square foot. Prices are up 16 percent year-over-year. The number of investment sales is up across Utah year-over-year. Cap rates are also up year-over-year though total dollar volume is down slightly. Anchorless strip centers saw the biggest jump in dollar volume since mid-year 2016: $31 million in the first half of this year compared to $15 million last year.{/mprestriction}
