FEATURE

Utah's Commercial Real Estate Sector Remains Strong, Despite National Economic Downturn

Four Commercial Real Estate Brokerages Expect Positive Growth in 2008

Utah's housing market may be in the doldrums, but the commercial real estate sector finished 2007 strong and should exceed expectations in 2008, according to experts from EDCUtah investors CB Richard Ellis, Coldwell Banker Commercial NRT, Commerce CRG and NAI Utah.

Coldwell Banker Commercial NRT reports that, overall, every market sector finished 2007 with solid performances. New construction experienced an all-time high, and Utah's commercial real estate sectors were busy keeping up with demand. Vacancy rates remained relatively low and absorption climbed in the office, industrial and retail sectors. Construction costs and lease rates also continued to climb, but the demand for new developments remained stable.

CB Richard Ellis says 2007 was a near-record year for the state when measuring the total value of commercial construction projects. At year-end, non-residential construction was valued at $2.1 billion, just shy of the record $2.2 billion set in 1996.

Office Market

Commerce CRG reports that we're in for a two-year wait before the end of Salt Lake City's downtown office shortage?when Hamilton Partner's tower opens with 420,000 square feet. Fifteen new buildings were completed in 2007, with 1.5 million square feet of office space coming online, but businesses consumed 1.1 million square feet of that space?well above the annual average for the past decade.

Class A vacancy in the central business district hit an all-time low during early 2007, while lease rates shot up nine percent. Nonetheless, Class A tenants appear unwilling to settle for Class B facilities, according to Commerce CRG. Fourteen of 16 buildings currently under construction will come online during 2008, adding 1.1 million new square feet to the market, however, all but one of those buildings are in the suburbs.

Coldwell Banker Commercial NRT says the increased construction and new starts, as well as rising property values and low vacancy rates, proves that Utah is still experiencing the benefits of one of the nation's strongest economies.

NAI Utah projects that three factors will help the Salt Lake office market remain vital and dynamic:

1. Out-of-state companies continuing to enter the Utah market.
2. Growing demand for space.
3. Positive absorption.

CB Richard Ellis adds that the office market and economy in Utah typically does not have the big booms or the sharp declines that larger markets experience. The strong fundamentals of positive job growth, low unemployment, strong in-migration and population growth and a well balanced work force should help the office market continue these positive trends during 2008.

Retail Market

The slowing economy has created a feeling of uneasiness in the retail sector, but the Beehive State's retail market is actually one of the healthiest in the nation, according to Coldwell Banker. The brokerage says 2007 was considered the best year ever for retail, and that trend is expected to continue, with new retailers continuing to come to Utah. New tenants expected to enter the Utah market this year include Whole Foods Market, Ulta Cosmetics, El Pollo Loco, Shari's Restaurant and Corner Bakery Cafe.

The Wasatch Front retail market is viewed as a hotbed for business growth and has even been compared to other successful retail markets in the country such as Austin, Seattle and Houston, all of which are experiencing significant growth. 2007 saw some of the world's most popular brands locate in Utah, including IKEA, DSW, Forever 21 and The Cheesecake Factory, with incredible response from consumers. The market also experienced the expansion of well-known retailers like Wal-Mart, Home Depot, Chipotle, Pei Wei, Best Buy, Lowes, Starbucks, Target, Costco and Home Depot. The market was also introduced to its latest major retail development, The District.

Commerce CRG says Utah's retail sales outpaced the national average by five percent in 2007. What's more, the nervous atmosphere created by the sharp national downturn in residential construction did not mean a decline in the retail sector, which had very respectable growth in 2007. In fact, retailers consumed nearly 1.5 million square feet of new space, yet the vacancy rate was down 1.4 percent--the second straight year where vacancy declined despite historically high levels of new construction.

CB Richard Ellis says the biggest change to Salt Lake's retail scene is happening in the heart of downtown Salt Lake City, where the $1.5 billion City Creek Center development is underway. The massive City Creek Center will span 20 acres and include 700,000 square feet of retail space. The new destination will be home to anchor stores Nordstrom and Macy's. In addition, a Harmon's grocery store will be built on the south side of Social Hall Avenue. The City Creek Center is scheduled to be completed in 2011.

Looking forward, the brokerage expects retail to be directly influenced by the downturn in Utah's housing market in 2008. Construction projects are expected to drop slightly in Salt Lake County, but they are expected to increase significantly in surrounding areas like Utah, Summit, Davis and Weber counties.

Despite the poor housing market and current credit crunch, NAI Utah says the retail market is not overbuilt, rates are not too inflated and lowering land and construction costs will help keep the industry moving forward?just more slowly and more cautiously.
Thanks to built-in population growth, strong job growth and strong retail sales growth, new retail interest in Utah should still hold strong for 2008.

Industrial Market

The four brokerages report that 2007 was a better than average year for Utah's industrial property sector, with demand outpacing supply. CB Richard Ellis reports that nearly 3 million square feet of industrial space was leased last year, which is significant given the amount of new industrial space coming on line.

Sector highlights include Proctor & Gamble's announced plans to build a new manufacturing plant in Box Elder County, U.S. Food Service's announcement that it will build a new 265,000 square foot facility on 36 acres in Ogden, the opening of over 200 acres in the Mountain Vista project, located in the south Provo area, for new industrial development, an announced additional phase at Pheasant Hollow, located just west of I-15 at approximately 9500 South, and pent-up demand for light industrial users in Utah County.

NAI Utah projects another year of positive growth, given historical demand, a strong local economy and consistent population growth. That's despite projected increases in lease rates and limited purchase options. What's more, the brokerage projects that land prices will go up slightly in the one- to five-acre range and then level off as land values will not match lease rate increases. Construction costs should also remain steady.

CB Richard Ellis says the projected higher lease rates for industrial properties are due to the high cost of construction and land prices, yet the higher rates won't be enough to lead developers to overbuild.

Commerce CRG adds that high fuel prices may have an upside for the Beehive State, as manufacturers that ship from the East and Midwest are re-thinking distribution and delivery of goods. Utah's close proximity to the heavily populated West Coast makes it an attractive location for manufacturers looking to cut distribution costs, relocate or expand operations.

CALENDAR

Mar. 26: Quarterly Update, Abravanel Hall, First Tier Room
April 1-3: JEC (Paris)

April 14-16: SME (Salt Lake City)
April 16: Executive Committee (EDCUtah)

May 4-7: CoreNet (San Diego)
May 14: Board Meeting

May 18-21: ICSC (Las Vegas)
May 18-22: SAMPE (Long Beach)
June 4: Golf Tournament (Wasatch Mountain)
June 9-12: AUVSI (San Diego)
June 17-20: BIO (San Diego)
June 18: Executive Committee (EDCUtah)
June 25: Quarterly Update (location TBD)
Aug. 6: OIA Thought Leader
Sept. 13-17: IAMC (Oklahoma)
Sept. 25: What's Goin' Down Up North - Northern Utah Economic Summit Thursday, September 25, 9 a.m. - 3 p.m. Utah State University Innovation Campus, North Logan. Registration form.
Oct. 9-12: CoreNet (Orlando)
Oct. 22: Quarterly Update
Dec. 17: Holiday Open House (EDCUtah)