Commercial real estate brokerage CBRE has released its annual “Salt Lake City Real Estate Market Outlook” report and by all accounts, 2018 was a very good year for the industry. The publication highlights the performance of the local commercial real estate market during 2018 and provides insights into expectations for the year to come.
Though all markets performed well, one of the highlights of 2018 was the investment sales market, which achieved a record $2.6 billion in sales volume, the report found.
“Looking back, 2018 was an excellent year; looking ahead, 2019 will present new challenges, as well as opportunities,” said Lloyd Allen, managing director of the Salt Lake City office of CBRE. “Although global economic conditions are likely to be more challenging, we expect moderate growth in Utah during the coming year — growth that will be broadly supportive of commercial real estate markets.”
Some of the key findings highlighted in the report include:
Broad-based user activity continued historic levels of activity — even among late-cycle concerns — thus instilling confidence among developers and investors. This activity is likely just the beginning as Utah’s business economy continues performing well. Overall population and job growth will help provide the necessary components for commercial real estate growth.
Building off a strong 2018, 2019 is expected to continue to show positive fundamentals, amidst some likely softening. The demand for office is evident by record absorption, a strong pipeline of new development and decreasing vacancy. Balances between demand and supply have so far remained in check, as few projects have broken ground as speculative — instead, tenant commitments have kicked off new development. Upward pressure due to rising labor and construction costs should increase asking lease rates and new development is expected to give vacancy some wiggle room.
After a volatile few years of high-profile closures and shifting consumer patterns, the retail market saw much-needed stabilization in 2018. Re-tenanting of retail big boxes, as well as strong demand for new shop space, led annual user activity to a new high. While some national retailers have announced closures, the local impact over the next year will be relatively minimal. Efforts to redevelop, remix or reposition retail centers will dominate activity and drive further improvement.
Job and Population Growth
Utah ranked fourth in employment growth in 2018 at 3.3 percent (as compared to the national average of 1.8 percent). Across the board, all major industries experienced growth, ranging from 7.3 percent year-over-year for information to 1.9 percent for government. Likewise, Utah’s population growth was the thirdfastest in the nation at 1.9 percent. Natural increase continues to hold the lion’s share of total growth; however, net migration is playing a more vital role.
Consumer confidence levels remained robust, yet tempered in 2018. National business sentiment is expected to remain positive in 2019; however, international trade tensions and shocks to the market will likely bring moderating easing to the economy. The commercial real estate market will follow waves made by more direct economic and political forces.
Commercial Market Momentum
Despite economic softening, the outlook for Salt Lake commercial real estate is cautiously positive. The heightened level of commercial activity in 2018 carries with it a momentum that crosses into 2019, boosting the forecast both for commercial real estate and the broader economy.
Utah’s strong demographics give the state a foothold to weather economic volatility. Utah ranks second for total fertility rate and has the youngest median age and the largest median household size.
CBRE’s report also found some “headwinds” ahead for commercial real estate in 2019:
Tight Labor Supply
With Utah unemployment ending 2018 at 3.2 percent, concerns about the availability of labor continue. Resulting pressure on wages — while positive for workers — increases the cost of doing business and could slow down business expansion. As such, Utah is increasingly depending on in-migration to expand the labor pool. Promisingly, net migration is expected to increase in 2019, alleviating some concern.
A shortage of skilled labor and the rising price of raw materials have driven up construction and tenant improvement costs substantially in Utah and across the nation. This not only makes it more expensive to build, but constrains developers during a time of record demand. In addition, a fast-growing population further contributes to the existing housing shortage and threatens Utah’s relative affordability.
Trade and Immigration Policy
Utah’s economy is particularly exposed to policy related to trade and immigration. Stricter immigration regulations could exacerbate existing labor supply issues for critical industries like construction and manufacturing. Likewise, tariffs and tensions with trade partners stand to increase the price of imports, elevating costs for local businesses dependent on foreign materials and manufacturing.
The Federal Reserve is expected to raise the Federal Funds Rate one time in 2019 and another in 2020. This pressures interest rates to rise and disincentivizes borrowing. Still, rate hikes signal normalization in the nation’s macro-economy. Slowing effects from monetary policy are also likely to be countered by stimulative fiscal policy.