UTAH MID-YEAR MARKET REPORT
The Wasatch Front commercial real estate market continued its strong performance with high transaction dollar volume and construction activity, historically low vacancies and strong positive net absorption, according to the 2019 Utah Mid-Year Market Report from Newmark Grubb ACRES (NGA).
For the industrial market, the first half of 2019 recorded lower-than-normal net absorption along the Wasatch Front, a direct result of the scarcity of available inventory. For the second half of 2019, net absorption is projected to meet or exceed that of the second halves of both 2017 and 2018 as new deliveries and active negotiations complete before the end of the year. That equilibrium has facilitated rent growth across almost all Class A and Class B space in the market. Barring a radical oversupply or precipitous drop in demand from global economic issues, lease rates and sale prices will likely continue to trend upward.
Office construction is flourishing along the Wasatch Front, with 3.8 million square feet currently underway. Some developers are bullish enough to build on a speculative basis without any pre-leasing. The amount of space that is being pre-leased, both before and after the start of construction, indicates that the risky venture is paying off for some developers. The Tech Corridor experienced the biggest drop in direct vacancy — down 35 basis points year-over-year — and now stands at 3.56 percent. As a result of lease rate growth driven by strong economic fundamentals in Utah, many tenants are taking advantage of low interest rates and looking to buy their own buildings to occupy, pushing the number and prices of office owner-user sales higher.
Redevelopment projects incorporating new and varied uses have become an increasingly significant part of the retail landscape. Several established projects in the market have undergone, or are in the process of, redevelopment to both re-tenant and incorporate non-traditional uses. Restaurants are still a vibrant retail sector, with a healthy mix of national operators as well as home-grown concepts thriving in modestly priced locations. Many grocers have cautious expansion plans with a focus on moving toward smaller formats in densely populated areas — a move that has proved successful for non-food retailers.
The strength of Utah’s diverse economy has pushed institutional investor demand for assets far beyond the available supply of product. Overall, the number of sale transactions fell 25.6 percent from the last half of 2018. Office investment sales were the only property type to show a substantial increase in sales activity, up 111.7 percent year-over-year in transaction dollar volume. With cap rates compressing across the board, investors are chasing the cap yield present in office product, which is harder to find in other product types. The average price per square foot of all sold investment properties now averages $264.95 and has been climbing every year since 2012.
The cost of raw land continues to increase across all property use types and prices will continue to climb, as more regional and national developers move in and compete with local developers for available sites. Demand for multifamily land, both apartment and townhomes, as well as residential land is extremely high. With the nation-wide pressure for more housing, not enough homes or rental housing are being built to keep up with demand, resulting in the continued increasing land and home prices.
NGA’s research staff generates its market reports with contributions from Kyle Roberts, Jackie Kingston, Skyler Peterson, Collin Perkins, Nick Teseros, Chris Falk, Ben Richardson, John Owens and Rick Davidson. Newmark Grubb ACRES was founded in Salt Lake City in 1998 as a full-service commercial real estate brokerage.