By Mike Farmer
The Salt Lake City industrial real estate market is in the middle of yet another banner year, In fact, this market is on par to set new records by the end of the year. That said, a common question we industry insiders are often asked is, “Will it last?”
Like many simple questions, the answers are not always as straight-forward. In this case, the data points to an immediate “yes” in the short term, a brief cooling period and then “yes” again — but in an unprecedented, major way.
Let’s look at the numbers for the first half of the year — particularly those from the most recent quarter. In terms of industrial real estate, the Salt Lake area is a distribution market. Because of the intersection of interstate highways I-15 and I-80, Salt Lake has been leveraged as a major hub for distribution to cities to the south and west such as Las Vegas, Los Angeles and San Francisco/Sacramento and to the north and east such as Denver, the Midwest and beyond.
As such, the vast majority of industrial real estate in Salt Lake County is associated with distribution and several big-box distribution companies are extremely attracted to this area. With a surge in big-box distribution leasing activity, the overall availability rate fell to 5.4 percent during the second quarter of 2017, down nearly one full percentage point from previous quarter and nearly two full percentage points year-over-year.
Vacancy factors are as low as they have ever been and lease rates are up slightly as a result. Leasing activity quadrupled from just less than 650,000 square feet in quarter one of 2017 to almost 2.9 million square feet leased year-to-date. Nearly 2 million square feet of this activity was big-box distribution space. This marks the highest leasing activity in the first two quarters the Salt Lake market has seen in more than 15 years.
Additionally, sales activity is strong with 591,867 square feet of sales occurring in the quarter. An additional 160,000 square feet of industrial space reached completion during the second of quarter 2017, bringing the total construction for the year to roughly 600,000 square feet. The Southeast Quadrant continued to expand with more than 113,000 square feet of speculative warehouse/distribution product added — all in Draper. The amount of product under construction has significantly increased, surpassing 3 million square feet — of which 1.2 million square feet is pre-leased. These remaining projects are all big-box distribution buildings being constructed in the Northwest submarket. Some hesitancy among developers remains as they look to pre-lease before breaking ground on proposed projects.
That said, UPS is building a 900,000-square-foot, state-of-the-art package handling facility and FedEx has five distribution centers in Salt Lake County. Amazon has also made recent headlines by announcing a major distribution facility in Salt Lake. Companies like this have recognized the value of Salt Lake as a distribution hub.
As mentioned, Salt Lake’s industrial market is on track for another record year. More than 1.5 million square feet of construction is expected to reach completion by the end of the year. Normally, this market absorbs about 2 million square feet. If there is going to be 1.5 million on the market, there may be a shortage, particularly in the big-box space.
This could lead to a vacancy deficit, which in turn could drive a slight increase in asking rates. The price and availability of land with proper infrastructure for development will play a key role in the velocity of addition of new product to the market. 2017 will be stellar, however. Going into 2018, the numbers aren’t clear on whether it will be quite as strong, simply because even though the demand is present, there may not be as many buildings built in 2018. Why? Available land is becoming harder to find.
However, Salt Lake will be home to a situation that is unique in the nation. Salt Lake City has an aggressive plan in place to develop the infrastructure needed west of the airport to support the new 4,000-bed prison facility. As part of this, the city has announced it will also extend the infrastructure for an additional 3,600 acres of land, which has been slated for industrial development.
This large area will be 20 minutes from downtown and 10 minutes from an international airport. Nowhere else in the country can offer this is level of industrial availability. This is a major boon to an already booming market. Even if the market does indeed cool off in 2018 due to a dearth of available land upon which to develop, this initiative will completely answer that need in two to four years, and then some.
Mike Farmer is an executive director/industrial specialist with Cushman & Wakefield Commerce, where he specializes industrial real estate, including sales, leasing, sale-leasebacks, investmen, and land.