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Real
Estate
REAL ESTATE
As visitors can attest, Salt Lake is a city like none other. Honored by
Money magazine as “best place to live in Western US,” Salt Lake earned national recognition for its favorable business climate and quality of life. Now that the economy has begun to stabilize and apprehension levels are subsiding, Salt Lake City maintains itself as one of the most versatile of markets.
Over the past decade, several major factors have contributed to Salt Lake’s real estate growth. Some of these influences include capital investments in infrastructure improvements, low interest rates, the 2002 Olympic Winter Games, growing population, the low cost of doing business, a well-educated workforce, and high quality of life.
Housing Market
Single-family homebuilding was the bright spot for Utah construction activity in 2003 rising 14.2 percent from 2002. Permits were issued for 16,515 new single-family homes. Residential valuation stood at a record $3.0 billion through December, due in large part to the strength of the single-family construction market.
Local real estate professionals feel cautiously optimistic about the housing market. The caution comes from the possible increase in mortgage rates, pent up housing demands released during the active 2003 construction season, a prolonged war on terrorism (and Iraq), and rising oil prices. Local housing markets’ performance is also affected by uncertain economic and political policies, consumer confidence, wages and job stability.
In 2003, Salt Lake County continued to be the center of residential construction activity in Utah. One-third of the 4,909 new single-family homes constructed were located in the county, mostly in the fast-growing suburbs. This represents a 33.1 percent increase from the 3,687 homes in 2002. Home prices rose 0.45 percent from the second quarter to the third quarter of 2003, according to the Office of Federal Housing Enterprise Oversight’s House Price Index. Although Utah had a higher percentage increase in value than three other states, Utah still had the lowest increase in housing prices for the year—ending at 1.8 percent. According to Robert Farnsworth of the Salt Lake Board of Realtors, “We’re starting to see a little bit of appreciation now.” He states that the lack of appreciation stems from mounting job losses in Utah in recent years. “Jobs buy houses,” he said. “If we have any type of positive job growth, we’ll start to see more appreciation.” Nationally, home values have increased at 6 percent, which was a 3.3 percent decrease from 9.3 percent in 2002.
Looking on the bright side, real estate experts predict that Salt Lake area home sales and prices are likely to improve. While employers in Utah are not yet hiring in mass numbers, fewer large-scale cutbacks and consolidations have taken place.
Apartments
The apartment vacancy rate in Salt Lake County was 7.6 percent at mid-year, up from 5.4 percent in 2002. Extremely low mortgage rates, a decline in unemployment, and little net in-migration are the primary underlying causes of the rising vacancy rate. Three-bedroom two-bath units have the lowest vacancy rate at 3.9 percent while one-bedroom one-bath units have the highest vacancy rate at 8.5 percent.
The combined average monthly rental rate for all types of units is $613, a decline of $25 or 3.9 percent in the past year. Rental rates, on a square foot basis, have declined by four cents in the past year, dropping from 78 cents a square foot to 74 cents a square foot.
Commercial Real Estate
The Salt Lake County area is ranked among the healthiest markets in the country, with a well-earned reputation for long-term stability. In 2002 the state of the Salt Lake area commercial real estate market reported a “classic glass half empty or half full scenario,” with aspects that could be construed as positive or negative depending on one’s perspective. Twelve months later, the glass may not be running over, but it’s definitely much fuller. Enormous transition has occurred in the marketplace. Every sector has, at a minimum stabilized if not grown.
Those with an optimistic view will recognize some truly remarkable opportunities for tenants and investors. Tenants who lock in deals at today’s lower lease rates will recognize savings for years to come, and those looking to grow will find they can expand into a larger space at rents equal to what they currently pay.
There are other advantages to consider. Following a decade of record-breaking construction, the available selection of quality properties will meet the needs of almost any tenant. Add a first rate infrastructure and greatly improved transportation system to the mix, and there is good reason to perceive the glass as being more than half full.
Office Real Estate
A decline in vacancy returned the Salt Lake market to positive absorption levels last year. Although vacancy for direct space was flat during the first six months of 2003, it began to edge downward during the last six months, with declines registered in both direct and sublease space. The flow of sublease space coming on to the market has diminished and sublease vacancy made a steady decline in 2003. Sublease opportunities continue to provide an attractive alternative to tenants in search of below market rental rates and concessions.
Relocation is also the rage as perceptive tenants already in the market are taking advantage of opportunities to lock in long-term leases at very favorable rents. Tenants who relocated/improved the quality of their space were responsible for the majority of activity reported this year.
Astute building owners are increasingly aggressive in their deal making. Free rent and a generous array of incentives have become commonplace in today’s market.
Low interest rates are opening opportunities for users to become owners and motivate buyers to turn to real estate as an investment alternative. Small office buildings in particular will see an increase in sales to owner/users and individual investors.
For the first time in recent history, no new space was added to the market. This lull in new office construction, in conjunction with an increase in leasing activity by tenants already in the marketplace, helped propel vacancy rates downward. The job loss and downsizing which contributed to negative absorption in 2002 appeared to slow during the latter half of 2003 when the CBD began registering modest but positive gains. Tenant loss continues to plague the periphery market, particularly in Class B and C buildings. Economic authorities predicted moderate internal growth and in-migration for Utah in 2003, a foundation for new jobs necessary to sustain growth in the market.
Although Utah has been forced to contend with economic factors that have plagued the rest of the country, the Salt Lake area is still among the healthiest office markets in the U.S. With further declines in vacancy and in upward pressure on rents expected in 2004, there will be no better time for tenants to avail themselves of the outstanding opportunities available.
Retail Real Estate
Retail properties have remained the most consistent performers in this commercial real estate market for the past two years. Steady demand drove vacancy down from 7 to 6.33 percent during the first half of 2003.
Aggressive expansion by big box users was a catalyst for retail construction in 2003. Retail construction was the only non-residential sector to exhibit healthy growth in Utah last year. The vast majority of retail development has been generated by Wal-Mart, and pad sites and shop space near the retail giant are in high demand at premium prices. Target, Home Depot, and Costco also expanded their presence in Utah with new stores in 2003.
Theatres made a comeback to retail development this year. After a period when closures and consolidations in the industry brought theater construction to a standstill, theaters and entertainment complexes are once again playing an anchor role in new retail projects.
Jordan Landing continues to be a retail powerhouse in the southwest quadrant. This mixed-use project has established itself as the premier center in the area, impacting older centers nearby. Jordan Landing is one of the largest generators of sales in state, and is currently constructing an additional phase of retail development that will be the future home of Kohl’s Department Store.
2004 will bring a surge in retail construction. Kohl’s entry into the Utah market with five new department stores will generate more than 400,000 sq ft in new construction along with pad sites and accompanying shop space. The plans of the LDS Church to retrofit the ZCMI Center and Crossroads Plaza malls will mark one of the largest retail undertakings in the state’s history. Ongoing expansion by Wal-Mart and other big box retailers will continue to fuel new development throughout the market.
Shop space activity continued to improve in Class A shopping centers, and vacancy rates declined in high quality centers where landlords were driving the market. The overall health and viability of downtown area retail establishments continues to be a major issue although a decline in total vacancy indicates growing strength and stability in the retail market across the board.
Industrial
Leasing and sales activity was robust in the industrial marketplace. The total number of transactions increased significantly during the first six months of 2003, and the 2.255 million square feet absorbed exceeded 2002’s mid-year figures by close to one million square feet. Despite this momentum in market activity, there has been a slight increase in total industrial vacancy due to the closure of two industrial tenants who returned 871,000 square feet back to the marketplace. Lease rates have stabilized and are showing signs of recovery after regaining roughly half of the average 20 percent drop in rates which occurred in 2002.
The market presents unprecedented opportunity for industrial tenants. With anxious landlords offering generous concessions and lease rates comparable to those seen twenty years ago, tenants are likely to take advantage of some terrific deals, getting more for their real estate dollar than ever before. Although the supply of available quality space has begun to diminish due to tenants’ opportunistic attitude, there are good deals still available on the market.
Lease rates will rise for some properties and fall for others. Rents for better properties are likely to rise, although not to levels posted four years ago. Lease rates have now stabilized; however, owners of below average real estate may be forced to discount rates even further to win tenants.
Investment Sales
2003 was a record-breaking year for investment sales. Investment activity reached new highs in terms of sales volume and number of transactions. The more than $610 million in total investment sales represented a 38 percent increase over the previous year, and a 21 percent rise in the number of completed transactions. There are three primary reasons why the Salt lake Investment Market is robust:
· Low Interest Rates: Interest rates remain near the bottom of historic trends, which assist buyers not only in making transactions but also being excited to do so.
· A Questionable Stock Market: When the stock market was rising 25 percent per year, nobody wanted to talk about real estate. Now that investors have seen the stock market can decline 25 percent per year, the concept of acquiring a steady cash flow producing property is high on a lot of investors’ desires.
· Attractive CAP Rates: Although Salt Lake City is experiencing record sales and obtaining record values, our CAP rates are still very attractive compared to other Western markets, particularly California.
As investors continue to be more optimistic and confident in the improving economy, they will increase their willingness to assume a higher degree of risk in properties with a promising future.
(updated March 2004) |
