Office Space Client Confidence Increasing

A highlight from the newly released 1^st Quarter 2012 Salt Lake Market Reports from Commerce Real Estate Solutions signals an increase in office space tenant confidence with more than half of the expected construction during 2012 being pre-leased.

Salt Lake OFFICE Market Key Indicators

ABSORPTION

As anticipated, a significant amount of space became available in the downtown Salt Lake office submarket during the first quarter. These availabilities accounted for more than 85 percent of the total negative absorption in the Salt Lake valley. Absorption in the suburban office space remained relatively flat with nearly 30,000 square feet (sf) of negative absorption.

VACANCY

The overall direct combined vacancy rate for all property types in the Salt Lake City Metro Office Market stands at 14.7 percent, an increase of nearly one percentage point from year-end 2011. The increase in vacancy is largely a result of more than 222,000 sf of vacated space in the Central Business District (CBD) of class B buildings. The overall suburban vacancy saw a modest decline from 14.2 percent to 13.8 percent. The remaining submarkets were relatively flat during the first quarter.

RATES

The methodology Commerce Real Estate Solutions used to calculate lease rates for the Salt Lake County Office Market has been changed to reflect rental rates for vacant space only. This provides a more accurate snapshot of current market rental rates. In the first quarter, direct full service rental rates stand at $19.44 per square foot. Expect rates to remain stable as Landlords continue the trend of offering fewer concessions to Tenants.

NEW CONSTRUCTION

The Salt Lake market added 176,000 sf of new construction to the CBD during the first quarter. Questar, the region’s natural gas firm, downsized from a 219,000 sf building to fully occupy the newly constructed build-to-suit project. The Salt Lake market is expected to add another 673,000 sf of new construction by year-end. More than half of this new construction is pre-leased, which signals an increase in tenant confidence.

OUTLOOK

An increased number of office clients, particularly tech firms from the Bay area, are showing great interest in expanding in the Salt Lake market. As commuter and TRAX options increase and the downtown retail and residential markets have been revitalized, the Salt Lake valley will continue to attract tenants and new developments. The southern portion of the valley has continued to add positive absorption due to a larger employment base from Utah and Salt Lake counties.

Salt Lake INDUSTRIAL Market Key Indicators

The overall vacancy rate has slightly increased to 9.10 percent from 8.60 percent last quarter even as market activity increased suggesting other companies are still downsizing and giving up space.

• The Salt Lake market has seen a 76 percent increase in lease activity in the first quarter of 2012 compared to the same period last year. Sales slowed in activity, bringing the total market increase to 66 percent.
• Overall lease rates are flat. Rents in the 50,000 – 100,000 square feet are going up and the spread between asking lease rates and actual lease rates have remained constant. Landlords will continue to offer concession such as free rent as incentives to keep their properties leased.
• Construction remains sluggish for buildings under 100,000 square feet with both developers and users still starving for commercial real estate debt capital. No speculative construction of consequence is expected for user buildings accommodating tenants smaller than 100,000 square feet.

Salt Lake RETAIL Market Key Indicators

Overall vacancy in the Salt Lake retail market continues to remain around nine percent (9.39%) with the average market lease rate at $17.17.

Salt Lake INVESTMENT Market Key Indicators

The overall trend of investment activity is increasing. However, a temporary 16 percent softening in dollar volume occurred during the first quarter when comparing year over year results. The number of transactions remained steady.

An analysis of transactions indicated a decrease of cap rates for all sectors. This suggests a narrowing of the gap between buyer and seller expectations, as well as suggesting that the market is gaining traction. Activity is partially spurred by the evidence of debt capital returning to the marketplace through a variety of lending sources.

An increase in investment volume is expected through the remainder of 2012 based on the existing activity levels as well as deals in the pipeline and continued increases in available financing. Investment buyers, tired of lower yields in alternative investments, are focusing on properties with stabilized and durable cash flow streams.