Commercial real estate in high demand

    By all reports, commercial real estate in Utah is on a steady up-tick. Like the residential housing market, this trend is driven by a strong economy, population growth, and rising values. The evidence is in the numbers.

    Permits for nonresidential construction during the first quarter of 2007 increased 60.1 percent over the first quarter of 2006, according to the Utah Construction Report, published by the Bureau of Economic and Business Research, David Eccles School of Business, University of Utah. This gain marked a first-quarter record of $453.8 million in total value.

    Salt Lake County dominated the nonresidential construction market, accounting for 41.7 percent of statewide construction value at $1.89 million in the first quarter of 2007, according to the report. Those numbers represented a 100 percent increase over the previous year. Washington County also saw significant nonresidential construction with a 41.5 percent increase to $57.8 million, and Utah County recorded $44.4 million.

    A few examples illustrating the nonresidential construction boom include: a $5.6 million city hall in Santa Clara; an $8.9 million Home Depot in Richfield; a $15.5 million recreation center in Uintah County; and a $25.9 million office building in Murray.

    The Utah Construction Report predicts that nonresidential construction will continue growing in the upcoming years. 

Industrial Construction
    
    Salt Lake County saw a shortage of industrial space of all sizes in mid-2007, according to Commerce CRG, a provider of real estate brokerage services.
Big-box space is one area of shortage, Commerce CRG reports. In the year ending in mid-2007, 2 million square feet of big-box space was added, while industrial businesses bought 2.4 million. Meanwhile, lease rates are rising due to the high cost of construction.

    Manufacturing companies have led the demand for industrial space, analysts report. These companies appear confident that they can fill jobs despite the tight labor market in Utah. Because of the lack of industrial space, some of these manufacturing operations are looking for large parcels of land to build their own facilities.

    Gas prices may be contributing to the rising demand for industrial space in Salt Lake County, Commerce CRG reports. Because national manufacturers want to limit their costs, they may be choosing Salt Lake County as a central location to distribute their goods across the country.

Office space

    Salt Lake County has seen a dramatic rise in the demand for office space. According to Commerce CRG, Salt Lake County must construct one million new square feet of office space each year to keep up with job growth. In 2007, the county achieved this with the planned completion of 15 new office buildings with a total of 1.3 million square feet.

    Lease rates in the year ending in mid-2007 rose 12 percent in Salt Lake City’s central downtown district and 5 percent valley-wide, Commerce CRG reports. This growth was spurred in part by remodeling and upgrading older buildings, including the Walker Center and the Boston Building.

    Downtown Salt Lake City has seen limited new construction of office space. According to Commerce CRG, the downtown market has not seen a new speculative multi-tenant office development since 1998. A new 425,000-square-foot office building called 222 South Main has broken ground and space should be available by fall 2009.

    The south part of the Salt Lake Valley – especially Draper and South Jordan – saw a significant boom in office space, according to Commerce CRG. This area saw a huge drop in office vacancy projects completed in the southern part of the Salt Lake Valley in 2007 include RiverParks Corporate Center V, Sandy Park Center I, and Jordan Valley Tech Center II.

    Rental rates have climbed 6 percent throughout the Salt Lake Valley from 2006 to 2007, Commerce CRG reports. The rate has been steeper in downtown Salt Lake, as Class-A rates have risen 2 percent in the same period.

    Office space is at premium in Washington County, according to Commerce CRG. This is “a sure sign that St. George as a business community has arrived.”

Retail Property

    The retail real estate market in Utah is very strong, analysts report. The state continues to grow, unemployment remains low, job growth is strong, median incomes have increased, and population growth continues. As the economy drives wages up, more people have money to spend, such as a local retail stores. National retailers are taking note of this trend. Two that already have are Cabela’s and IKEA.
Salt Lake City has seen a majority of interest from national retailers. Retail centers entering into the completion phase of construction in mid-2007 added 1.5 million square feet of new retail space, according to Commerce CRG. A few projects that saw space being leased at a “brisk” pace included Quarry Bend, Rose Creek, Jordan Landing Phase VI, Draper Peaks II, and The District.

    Beyond new construction, 2007 also saw every enclosed mall in Salt Lake County gearing up for the major redevelopment, according to Commerce CRG.
Commerce CRG expects the retail market to remain strong. In addition, the future should bring a growing emphasis on redevelopment of existing commercial and retail properties to make the best use of space and land.

Investment

    Investment in Salt Lake County has remained healthy, because appreciation rates have stayed strong despite downturns in other parts of the country. “A wave of people and money is moving from the West Coast, through Las Vegas, and spilling into Utah,” Commerce CRG reports.

    Analysts expect investments in Salt Lake County to be more favorable than those in California and the southwest United States.
 
    The multi-family market has seen a dramatic upswing through 2007, analysts report. Multi-family homes have surfaced from a period of flat rents and relatively high vacancy. In 2007, rents were increasing at a rate of 10 to 12 percent each year, the market was full, and tenants were increasingly required to sign one-year leases. One factor limiting the number of multi-family developments is the approval process, which slows construction.

Housing market remains stellar: Residential Market

    Few question that Utah has had an exceptional housing market in recent years. Construction, affordability, and appreciation have all worked to the state’s advantage, allowing it to buck the nationwide real estate downturn.
    
    Underlying every aspect of the strong housing market is Utah’s stellar economy. Utah had a 2.6 percent unemployment rate in mid-2007, compared to a 4.5 percent national average, according to the Greater Salt Lake Multi-Family Report by EquiMark. Salt Lake County helped lead that charge with a 2.5-percent rate.
The impact of a strong economy and population growth on the housing market can be seen in the steady appreciation rates and the number of homes built.
Homes across Utah saw dramatic appreciation, according to numbers collected by the Office of Federal Housing Enterprise Oversight. In the year ended in mid-2007, the Provo-Orem area led the state (and was second in the nation) for home appreciation at 19.67 percent. Salt Lake City was third at 19.12 percent, Ogden was fifth at 15.7 percent, Logan was 30th at 10.18 percent, and St. George was 119th at 4.65 percent.

    Due to rising home prices, condominium sales are vibrant, according to EquiMark, Condominiums have been popular for those who do not want to move immediately into a single-family home, as well as for those wanting to downsize. Condominium prices in the Salt lake area ranged from $104,750 to $625,243 in mid-2007, according to the Wasatch Front Regional Multiple Service.

    The strongest appreciation has been in Salt Lake, Davis, and Utah counties, where median purchase prices for each were 4298,214, $263,888, and $294,811, respectively, according to data from the Wasatch Front Regional Multiple Listing Service. Additional data can be found in the Utah Construction Report, published by the Bureau of Economic and Business Research, David Eccles School of Business, University of Utah.
    
    In the first quarter of 2007, permits were issued for 5,267 total residential units, representing a 12.5-percent decline from the same period in 2006, according to the report. Of the total, 3,854 permits were issued for single-family homes in 2007, compared to 4,856 in 2006. In the same period, permits were issued for 114 mobile homes and cabins, a 10.7 percent increase over the previous year.
    
    Much of the new single-family home construction during the first quarter of 2007 was in Utah County, with three of the top five cities located here, according to the Utah Construction Report. Eagle Mountain led all cities with permits for 273 single-family homes.

    A related trend was the growth in residential additions, alterations, and repairs. The first quarter of 2007 saw $54.1 million spent on these areas, which was a 33.2-percent increase over the same period in 2006, according to the Utah Construction Report.

Looking to the future

    Utah’s nation-leading economic growth should continue to drive the residential markets through 2008, analysts predict.

    Real estate leaders expect the market to remain strong through 2008 due to affordable pricing compared to other markets around the country, the many lifestyle choices available to homebuyers, and the growing demand for housing in the state.
Housing in Utah remains affordable despite strong price appreciation that has led the nation. In 2008, appreciation should level and pricing should remain steady in well-established communities and soften incrementally in areas of newer growth, according to Ivory Homes.

    Homebuyers along the Wasatch Front can choose from everything from semi-rural to urban living. One recent trend has been the rise of “new growth,” which emphasizes mixed-use neighborhoods with stores and other amenities within walking distance. Urban living options are available in downtown Salt Lake City and along the East Bench. Ivory Homes expects a return to “the establishment” in 2008, when established communities will be the focus of growth and improvements.
Demand for housing is unlikely to diminish, according to real estate analysts. This trend will continue to rely on the strong economy in Utah and low unemployment. In addition, analysts expect growing demand for maintenance-free communities for those entering the housing market and retirees looking to downsize.

Demand grows for apartments, condos

    While the single-family home market in Utah remains strong, the market for multi-family homes was exceptional in 2007 and is expected to remain strong in the coming years. Salt Lake County has led this trend.

    Declining vacancy rates, growing demand, rising tenants, and steady construction are a few measures of this rising demand for multi-family housing.
Salt Lake County had a 10.9 percent vacancy rate in 2002 and has dropped every year since, measuring 4.1 percent in mid-2007, according to the Greater Salt Lake Multi-Family Report by EquiMark. The vacancy rate for properties of 100-plus units was even less at 3.5 percent. EquiMark expects the vacancy rate to continue declining moderately as job growth and single-family home appreciation continue.

    Demand for rental properties is expected to rise due to condominium price appreciation, rising mortgage rates, and demographic trends that make home ownership more difficult for first-time buyers, according to EquiMark.

    Rental rates in Salt Lake County have risen every year since 2002, according to mid-2007 numbers compiled by EquiMark. Overall, the typical rent went from $633 per month in 2003 to $697 in 2007. All types of rentals – from studios to three-bedroom units – saw rising rents. Rents increased 11 percent during the year ending in mid-2007, according to Commerce CRG, a provider of real estate brokerage services. The average rent in mid-2007 was $728 per month, which was a $76 increase from the average rent in 2006.

    Salt Lake County saw 582 new apartment units completed in 2007 through June, according to EquiMark. At the same time, 551 units were under construction. Of the 1,100 units proposed to start construction during 2007, 140 are located on the east side of the Salt Lake Valley and the rest on the west side. The most active areas for new construction are the downtown/periphery and south/southwest areas of Salt Lake County.

    The Utah Construction Report indicated a steep increase in the number of multi-family homes built during the first quarter of 2007 compared to the same period in 2006. Permits were issued for 1,299 new units, representing a 22.2 percent increase from 2006. Salt Lake County led the growth with 434 units, followed by Utah County with 354, Washington County with 113, Summit County with 99, and Davis County with 98. West Jordan led all cities with 171 new apartment and condominium units.

Updated 07-10-08