Fugal: Office space market weakening a little but still strong

If the market for offi ce space is a good economic gauge, Utah is strong but nonetheless weakening just a tad.

That was the message that Brandon Fugal, chairman of Coldwell Banker Commercial Advisors, conveyed to the Governor’s Offi ce of Economic Development (GOED) board at its most recent meeting during a briefi ng about the offi ce segment of the commercial real estate market.

“The brakes have kind of come on the market a little bit,” Fugal said. “So with all that has been happening, I will tell you there is some degree for caution.” While Fugal characterized 2016 as the “Year of the Headquarters for Utah” — new buildings for Overstock.com, Vivint Solar, Ancestry.com, Entrata, InContact and Younique led the way — activity for headquarters has dropped signifi cantly during the past nine months.

“There is nowhere near the momentum and market activity today that there was a year or two ago,” he said of headquarters. “Again, [it’s] cause for concern and maybe some cautious optimism as we move forward and an even greater need for us to dig deep to incentivize companies to continue to come to Utah.”

Fugal noted that the slight slowing is happening in other states as well.

“It’s not that we’re experiencing a downturn or really troubling market conditions,” he said. “We’re seeing a pause in the market, and the brakes have been put on a bit. We’re still in a very healthy, healthy market and we anticipate the coming year to [have] continued growth and development. There has been a slowdown. It hasn’t come to a screeching halt but we have had a little bit of a correction.”

In 2017, the local market nonetheless will see legacy projects continue development and new construction occurring “that will fuel that perception of a very healthy economy up and down the Wasatch Front, which is positive,” he said.

Along the Wasatch Front, Utah County “dominates,” he said. It saw positive absorption of offi ce space of nearly 1.2 million square feet this year, far ahead of Salt Lake County’s 502,000 square feet. Utah County’s offi ce vacancy rate was down to 6.14 percent, while Salt Lake’s was 10.22 percent.

“With the demographic that is literally half the size of the Salt Lake Valley, Utah County saw almost 1.2 million square feet of positive absorption this year, versus Salt Lake County at just over half a million square feet,” Fugal said. “It truly is indicative of how dynamic that market has become and how critical to the growth along the Wasatch Front Utah County’s health and vitality has been. … That is a very sobering and exciting statistic, to see that kind of seismic shift in the market as far as growth and absorption.”

Salt Lake County’s figures for vacancies, absorption, lease rates and construction were up across the board. The average vacancy rate was up a little and “although it’s gone up just a hair, it’s is still in a good place and we’re still really benefi ting from a healthy market, especially as you compare to other markets across the country,” he said.

Stats indicate that Salt Lake County’s growth is happening in suburbs, where 83 percent of absorption and 77 percent of construction occurred this year. Only 17 percent of absorption occurred in the central business district and periphery areas.

Large projects in 2016 included the 111 Main building in downtown Salt Lake City, with Goldman Sachs, CBC Advisors and Durham Jones Pinegar as major tenants. Next year will see the construction of several large projects, including Mountain America Credit Union’s headquarters building, consisting of 11 stories and 327,000 square feet; 53rd Center; 136 Center, part of halfmillion- square-foot offi ce park; and Valley Grove, a six-story, 200,000-square-foot project at the Pleasant Grove interchange of I-15.

Likewise, transit-oriented development continues at SoJo Station, Vista Station and the View72 Corporate Center. “Site selectors and top executives still gravitate toward these types of projects,” Fugal said.

In Utah County, 88 percent of offi ce space absorption this year occurred in the northern end, with 12 percent in central Utah County.

“But, I think the story and what to watch in the next few months is the fact that some of the newest projects that are being completed and coming online are actually in Orem, Lindon and Pleasant Grove — no longer Lehi,” Fugal said. “I think that can be attributed to concern over traffi c issues in Lehi, but companies still wanting to be part of the north Utah County dynamic and all of that energy and really seeking alternative locations that are still Class A and offer immediate freeway access.”

Fugal had strong comments about the need for incentives to entice companies to Utah or get them to expand here. The GOED board is the entity that awards state incentives, typically in the form of tax credits after the creation of high-paying jobs.

“Utah has really joined a national stage in a way that, I think, no one really anticipated, at least at this rate,” he said. “We have seen unmatched interest from national and global players that are continuing to make a commitment. I think Utah being on that stage is a permanent thing from here on out.”

Still, he said, those incentives are critical and should even be strengthened.

“Anyone at the Legislature or in government that thinks that we don’t have to incentivize companies, that we can be cocky and that companies are going to come here without public/private engagement and incentives, they’re completely wrong. It is because of our public/private engagement and the incentive programs that you have fostered here that have really helped motivate companies to expand here in Utah,” he said. “If we pull back on that at all, if there’s a hiccup or we pull back, if we don’t continue to champion those kinds of incentives to help companies and motivate them to grow here in Utah, we could see it taken away from us just as fast as it came. We would be very humbled. And it would spread like that,” he said, snapping his fi ngers, “in a heartbeat.”

Fugal said he is concerned about a movement or at least an attitude that incentives are not necessary. However, Utah already has lost projects to other states — projectss that, in his estimation, should have come to the Beehive State.

“Other states are writing big checks; they’re not post-performance. They’re truly doing everything possible to kill our momentum. It is truly a competitive environment … and we can’t rest on our laurels in any way, shape or form. We have to plan for the future,” he said.

“They are all very envious of our position and we have a target on our back. They are taking great pride in competing against us and actually putting together more-compelling incentives.” Fugal summarized by saying that “cautious optimism is kind of what rules the day.”

“We just have to be cautious in the way we move forward. Even though I’m an optimist and I’m very proud of where the market is going and think we have a great story to tell, we have to be very careful not to be drinking our own Kool-Aid so much that we lose that competitive edge. We have to be hungry at all times.”