May 1, 2012

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Commercial Real Estate

Utah Business Staff

May 1, 2012

What is the Utah County perspective?

MCALLISTER: As far as the midsize offices, with all of the growth that’s happened in the north end of the county, the users are there as they’re building it up so they’re pre-leased or built-to-suit. You don’t really have a lot of vacancy in that midsize to large office, and it’s driving a need for bigger open spaces.

That doesn’t necessarily mean the smaller space is leased. So it’s a slow, steady recovery of the large space, but there’s still a lot of vacancy in smaller spaces—under 10,000 feet, under 5,000 feet—especially in Utah County because it’s so much owned by mom and pop single investors. Those are the people who are suffering quite a bit, not seeing the recovery.

RICHARDS: Actually, in my office my smaller spaces have been pretty active the last three months. I’m running out of inventory. I haven’t seen rates really increase much yet, but I do a lot in the under 5,000 category. I also do a lot in office condo, and I’ve done quite a few deals where they’ve purchased their space using the SBA 504 program. That’s been a savior to the small owner that wants to own their space.

I had 15 spaces under 5,000 feet two months ago, and I’ve got three left. So the last two months have been very brisk in that small office sector.

MCALLISTER: I know you had a couple projects in northern Utah County, down in Lehi. I drove past that yesterday wondering if you were going to start on the other buildings.

RICHARDS: If Bob will make us the loan, we’ll start building.

CHATFIELD: If he’ll pay my rate, I’ll make the loan.

MCALLISTER: That’s interesting because you have the building that’s been ready to go for so long.

RICHARDS: And it’s filled up.

MCALLISTER: But without some pre-leasing you finally filled up the one building you’ve had. And I was interested whether you would start that again in Utah County for the smaller tenants.

RICHARDS: That’s why I had three calls on that building yesterday and I don’t have any space in that existing building to show them. If I can get another building going, then I’ll have some more space.

MCALLISTER: But what would it take to get that building going in today’s market?

RICHARDS: I don’t know. That might be a question for the lender. Fifty percent pre-lease, 75 percent?

CHATFIELD: What George is saying is right. We’re starting to see that ourselves. And this 504 program has been really, really good for small business—they’ve been leasing, they’ve thought about buying, they haven’t quite felt like they could. And this past 12 months has really made a difference in that. A lot of those people have made the move, bought the property and gone forward, and they’re starting to see the benefits. But they got in at a relatively good time in the marketplace in my opinion. I don’t see these things staying at the price they’re staying at right now. I see that increasing.

PETERSON: It depends on what kind of asset class you have; that has a big impact on what type of tenants are drawn to it. We find that the larger national blue chip tenants are expanding, growing solid. The local entrepreneur with the smaller spaces—we’re not able to track them very easily to the A class, but they go to the B and C classes.

Maybe what we’re seeing out there is they’re starting to fill that up. Yet we have a few small spaces that have been vacant for some time. So typically the larger companies will come in and expand into those and we’ll take the walls down. That’s really not what our market is.

These larger tenants that are very healthy, doing well, want to expand, bring more jobs to Utah. CBRE had a study showing that office rents in Utah, I believe, are going to increase by about 32 percent over the next five years. It’s 28 percent, if I recall right, on the industrial land.

Let’s talk about investment. What are the trends you’re seeing?

FUGAL: The smaller deals are coming back, but it’s only been in the last 90 days, in my opinion. Last year’s absorption was largely attributed to more significant lease transactions—greater than about 20,000 square feet.

More national credit companies are looking at Utah than ever before. In 20 years of leasing office space, I’ve never seen so many companies from outside of Utah taking a serious look at Utah and actually starting to negotiate deals or submitting RFPs. We’re seeing weekly site tours with very legitimate prospects, and many of these companies aren’t afraid to disclose who they are. Companies are a little less stealthy than they used to be, which is probably a sign that they’re more confident in their position looking at Utah.

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