A new report indicates that Salt Lake City industrial construction reached a record level in the third quarter, while the retail market saw a turnaround following three slow quarters and a flat downtown office market contrasted with a strong suburban market.
The Q3 2017 MarketView reports, released by the Salt Lake City office of CBRE, indicates that 5.3 million square feet of industrial space was under construction at the end of the quarter, in addition to the 1.4 million square feet completed year-to-date. During the quarter, “the already decade-high amount of industrial construction activity soared to an even higher level,” CBRE said.
The high development levels are being substantially driven by large owner-users and build-to-suit projects, it said.
{mprestriction ids="1,3"}In addition to the record-high construction levels, Salt Lake’s industrial market extended two notable streaks during the quarter. First, it reached four consecutive quarters with over 1 million square feet leased. Second, it hit 16 consecutive quarters of positive net absorption. The activity was driven by robust, broad-based demand — primarily by large users. Year-to-date, leases over 100,000 square feet have represented 51 percent of the 5.4 million square feet leased. The highest prior annual share of activity was 34 percent in 2016.
“Industrial is the hottest property type in the West right now, and Salt Lake is a prime example of this,” said Jeff Richards, senior vice president. “Salt Lake recorded 1.5 million square feet of new leases during the third quarter, experienced positive net absorption of over 400,000 square feet, and still construction levels continue to surge.
“Many may question whether or not the market is being overbuilt, but these heightened construction levels are justified, considering the low vacancy rate of just 3.4 percent and the current level of demand. Of the 5.3 million square feet currently under construction, nearly 60 percent is already pre-leased, signaling a well-balanced market.”
The retail market reversed a trend in the third quarter following three consecutive quarters of negative net absorption and rising vacancy rates. The third quarter ended with net absorption of 123,887 square feet and a marketwide drop in vacancy to 6.7 percent. The two major factors cited by CBRE are the successful repurposing of old retail centers and a surge in development activity.
“Efforts to reinvent retail centers with a more diversified and relevant tenant mix have never been higher,” said JR Moore, first vice president. “The market continues to see an influx of capital going towards reinventing traditional retail sites to experience- and entertainment-focused destinations. In addition, older, less strategically located centers with large vacancies are currently undergoing complete conversions or being torn down to make way for mixed-use office or multifamily developments.
“The traditional retail model continues to evolve, and retail real estate is undergoing its own transformation as a result.”
Major new developments reignited in the third quarter following a two-quarter construction lull. Ground was broken on the initial phases at Mountain View Village in Riverton and Anthem Commercial in Herriman, totaling over 360,000 square feet. That activity more than doubled the number of retail anchors under construction; in total, 518,230 square feet was under construction at the end of the third quarter.
The focus on the office market was outside of downtown Salt Lake City. A rapid expansionary period downtown — brought on from the opening of 111 Main — ended in the third quarter, leaving the downtown office performance essentially flat.
In contrast, after three consecutive quarters of low net absorption levels in the suburban market, new development activity brought on a surge of absorption there. Over 421,000 square feet was absorbed on net, which was primarily driven by the completion of two Class A office towers in the Sandy South Towne submarket.
The highest construction levels in the Salt Lake Valley are in the southern end of the county, with nearly 650,000 square feet. A notable new project broke ground in Sugar House. The two-building, 320,000-square-foot office development is currently underway at the site of the former Shopko retail store. About 150,000 square feet of the project is fully speculative while the remainder is a build-to-suit medical office facility for the University of Utah.
“Overall, indicators are demonstrative of a healthy market and the economic drivers of office demand are secure,” said Eric Smith, senior vice president. “While performance has been less uniform across the market, construction remains active and demand looks to be responding to the delivery of new product.
“In total, nearly 1.2 million square feet of office space has been completed thus far in 2017, and there is still nearly 840,000 square feet currently under construction. Indicators suggest that the overall market will continue to sustain healthy levels of growth for the near future.”{/mprestriction}
