Commercial real estate along the Wasatch Front continues its recent strong showing, according to Newmark Grubb ACRES’ annual midyear market report. Highlights of the report include near-record vacancy rates in the industrial sector and a torrid pace in both commercial investment and land sales. The demand for retail space is stabilizing and the office market continues on a steady growth pattern, the report concluded.
Newmark Grubb ACRES evaluated data on vacancy, absorption, lease rates and other market indicators. The following is a summary of the findings outlined in the report with conclusions drawn by the authors.
Overall the market is quite active, though a bit constrained by a persistent lack of supply. Utah’s vacancy has been low for over a decade; however, now direct vacancy (empty buildings without any rent) has reached near historic low levels, sitting at 4.83 percent. The overall market is officially supply-constrained and out of balance. Net absorption declined 44 percent as compared to first half of 2013. That tight market is responsible for slower growth.
Real estate is cyclical. Vacancy will eventually begin to rise and we will see a jump in absorption. The owner-user product type will loosen up as companies acquire new space in the state-of-the-art speculatively built product that is coming to market.
With the first half of 2014 behind us, the commercial real estate market for Salt Lake continued to show signs of picking up speed. In 2013, the Salt Lake office market experienced 1,061,207 square feet of positive net absorption, which tops the previous four years combined. This trend continued with an additional 210,271 square feet absorbed during the first six months of this year.
The Salt Lake market is experiencing a strong 2014 and is expected to continue to improve into 2015, with an increase in lease rates, a drop in landlord incentives and further positive absorption.
The demand for good retail space is increasing quickly as retailers increase their number of locations and new tenants from out of state enter the market. The vacancy rate is still steadily decreasing towards 6 percent, while the overall average lease rate has risen almost $1 per square foot in the last six months.
Retail centers will gain stronger stabilization as vacancy rates drop, and as sellers see that the market is continuing to close at lower cap rates they will realize that the highest return on their investment could be now.
This continuing level of high activity is due to investor confidence in, and national recognition of, a dynamic Utah business climate, continuing low interest rates, increasing rental rates, declining vacancy rate and poor yields available in alternative investments.
Newmark projects a continued healthy investment market for the balance of 2014, albeit constrained by a lack of sufficient available investments. The company expects that the supply constraint will benefit more problematic investment opportunities, increasing their investor demand. The company generally projects modest rental rate increases contributing to modest increases in property valuations.
Utah’s strong population growth and the influx of new companies have created a steady demand for new product that covers most all property types. Investors and developers have made aggressive purchases of raw ground to take advantage of the current development cycle. The number of transactions is down slightly from last year, but the dollar volume has increased substantially. Land prices have increased and will continue to do so.
Newmark expects the activity in land and upward trend in pricing to continue as long as a growth and development cycle continues.