Newmark Grubb ACRES is pleased to present a snapshot of our 2017 Midyear Market Report on the Utah and Mountain West market.
Newmark professionals studied the information to establish opinions and develop forecasts about trends and market activity. The market has been strong, lease rates are steady or increasing and construction continues statewide and outside investors are more interested in our unique market. More generally, Utah’s economy continues to outperform the national average and remains one of the most fundamentally sound economies in the country. We expect you will find the report contains valuable information about the ever-changing marketplace and we appreciate the opportunity to partner with our valued clients and build relationships based on creating and preserving real estate values. You can view the entire report on our website at http://www.ngacres.com/market-research.
Industrial – Salt Lake City Industrial Market Prices Highest Ever
At midyear 2017, the Salt Lake County industrial market maintains its momentum from last year. Vacancy continues to decline despite additional new construction, which was much-needed in a supply-constrained market. Demand remains strong and new supply is quickly absorbed. In the first half of 2017, over 615,790 SF of new construction were delivered, and year-to-date positive net absorption totals 1.4 million SF.
Average lease rates are the highest they’ve ever been, reaching $0.47 overall. Total lease dollar volume for the first half of 2017 is almost twice as much as the first half of 2016, $103 million compared to $56 million. Average owner-user sale prices PSF are also the highest they’ve ever been. Owner-user sales volume climbed steadily from 2012, reaching its peak in 2016, but has remained fairly steady since then. Investment and land prices also continue to rise. Developers and users alike are scrambling to control infill sites and path-of-progress locations. One of the reasons prices are rising is supply is decreasing. Although there were 46 investment transactions in 2015 and a record-setting 48 in 2016, the first half of 2017 only had 15 investment sales. Consequently, investment dollar volume is also down 47% year-over-year ($283 million compared to $148 million).
Office – Demand Remains High in the Salt Lake Market
The Salt Lake County office market remains stable and healthy by historical standards through the first half of 2017, although the pace has slowed for many of the leading indicators. The average achieved full service lease rate market-wide decreased just over 3% to $23.34/SF. Downtown Class A lease rates led all submarkets with an average full service asking rate of $28.84/SF, and average achieved lease rate of $26.65/SF. The direct vacancy rate for Salt Lake County is up slightly from 7.09% at yearend 2016 to 7.96% at midyear 2017, but still well below the national average for similar sized markets. The total amount of new construction underway at midyear 2017 was approximately 1.75 million SF, with seven Class A buildings totaling just over 1 million SF scheduled for completion before yearend. The Salt Lake market has attracted two new top-tier national developers: Houston-based Patrinely Group and Westport Capital Partners (WCP) out of Wilton, CT, to help meet the demand for Class A space. WCP has recently announced a pre-lease commitment of 170,000 SF for Phase I of their two-building development in Sugarhouse to the University of Utah. The Patrinely Group’s 650 Main project, two 10-story office towers totaling 640,000 SF, will be the largest true Class A office development in downtown Salt Lake City. We expect to see an upward trend in average lease rates over the final two quarters as well as a significant increase in net absorption as tenants begin to take occupancy of newly completed projects.
Investment – Outside Investors Coming to Stay
Utah’s commercial real estate investment market was robust the first half of 2017. This was a record first half of the year for sales volume. The fundamentals of our market remain strong with exceptional job growth, low vacancy, aggressive absorption and stable construction. Institutional investors have always looked at Utah as a place they want to “see and ski.” However, over the past couple of years, they have decided to “stay and play,” purchasing assets on the market and making unsolicited offers on off-market properties as well. Historically first tier assets in Utah have been purchased half the time by Utah-based investors and half by regional or national investors. This year the top 10 most notable transactions involved eight purchases by owners based outside of Utah. Overall SF sold is up from midyear 2016 and office SF sold for the first half of 2017 has almost passed total SF sold for all of 2016 since there were several large office properties sold in the first half of the year. Transaction dollar volume is up 24% over midyear 2016. It is projected that these numbers will level off towards yearend.
Retail – Leases Down But Sales Are Up
The Wasatch Front retail market continues to be relatively stable. Average lease rates are down year-over-year but up since yearend. Leased SF is also down, primarily because over 90% of transactions were less than 5,000 SF but also because slightly fewer transactions were completed year-over-year. There were fewer owner-user sales year-over-year, but sale prices PSF are the highest they’ve ever been with all transactions occurring below 10,000 SF with prices averaging over $200 PSF, prices are up 16% year-over-year. The number of investment sales is up across Utah year-over-year. Cap rates are also up year-over-year though total dollar volume is down slightly. Anchorless strip centers saw the biggest jump in dollar volume since midyear 2016: $31 million in the first half of this year compared to $15 million last year.