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FEATURE STORY

Tight Industrial and Office Vacancy Rates Not Seen as an Inhibitor of Economic Development

Utah’s robust economy is putting the squeeze on industrial and office space along the Wasatch front, most notably in Salt Lake County. NAI Utah Commercial Real Estate says Salt Lake County has seen a 32% reduction in available industrial square footage over the past year. When compared to last year, Commerce CRG’s Greg Hunter says 2006 has seen a 42% increase in absorption of medium-sized industrial space.

In the office market, Class A space in Salt Lake’s central business district is practically impossible to find, according to Commerce CRG’s office specialist, Mike Richmond, leading some companies to retrofit older buildings, like the current renovation of the Walker Center at 175 S. Main, and the just completed $24.5 million renovation of the Zions Bank building at the corner of Main and South Temple.

Richmond says the office squeeze in downtown Salt Lake will continue for the near-term, as no new downtown office space is scheduled to be available for the next year-and-a-half and space continues to close up to make way for LDS Church’s plans to redo the shopping mall areas. Consequently, businesses who couldn't find the Class A quality office space they wanted have asked developers to build new space. According to Richmond, a total of 750,000 square feet of build-to-suit office construction is currently underway by such companies as Fidelity Investments, CompHealth, Myriad Genetics, Southern Nevada University and Spillman Technologies.

Eric Smith, first vice president for CB Richard Ellis, says the Salt Lake metropolitan office market continues to sustain strong construction activity with a total of 326,277 rentable square feet (RSF) of office space completed in the first half of 2006, compared to 504,843 RSF in the first half of 2005. The completed office buildings for the first half of 2006 include Rio Grande (40,000 RSF), Stevens Henager (87,037 RSF), Bach Building (54,000 RSF), South Towne Corporate Center II (124,000 RSF), and Twin Peaks I (21,240 RSF). He says eight buildings totaling 926,777 RSF of multi-tenant office space are currently under construction, including Wasatch Corporate Center 16 (81,000 RSF), RiverPark IV & VI (280,000 RSF), Millrock II & III (295,000 RSF), Sandy Park Center (125,000 RSF) and Horizon Financial Center (39,777 RSF). In addition, Smith says there are two notable single-tenant buildings totaling 375,000 RSF under construction, including Gateway IV (250,000 RSF) and Southern Nevada University (125,000 RSF).

Numerous developers are planning over 1,000,000 RSF of space in both the downtown and suburban markets, according to Smith: “Depending on the project and developer most of these projects could break ground in 6 months or less.”

Jeff Edwards, president and chief executive officer of the Economic Development Corp. of Utah, says the tight commercial real estate market will not likely affect economic development efforts. “While available office space is important to a company’s decision-making process, it is not the primary factor in a go or no-go decision. In our experience we’ve found that an available workforce is the most important factor in a company’s decision-making process," he says. "If a company finds the work force and needs to make a move soon, the company may be willing to take space in a location that might otherwise have been a second choice."

Edwards believes the decline in vacancy rates is typical of a strong economy and the cyclical challenges of supply and demand. “Companies are moving in or expanding here because they have faith in the workforce, the infrastructure, and the booming economy,” he says.

Rad Dye, a senior vice president at CB Richard Ellis, says the industrial market is tight, but very healthy right now—not just in Utah but across the western U.S. While there is a short supply of buildings for sale, Dye says the market is “the best I’ve seen in 24 years.

Jim Sheldon, an industrial property specialist with NAI Utah, says the strong economy, augmented by Governor Jon Huntsman's ambitious economic development program, is a primary contributor to Utah's robust industrial real estate market. Nonetheless, Sheldon says Salt Lake County needs to add roughly 3,000,000 square feet to the industrial base annually in order to meet future demand. The vacancy rate, which is the percentage of all available, unoccupied or not leased units at a given time, is currently at a 10-year low. Meanwhile, the industrial base has increased 2,500,000 square feet and is on track to have increased by 4,000,000 square feet at year end.

In Weber the office market is experiencing the lowest vacancy rate seen in 10 years, while the industrial market vacancy dropped a significant 2% in the last six months, according to Commerce CRG. In Davis County, the overall office vacancy rate dropped an astounding 3% in the last six months. Furthermore, low vacancy rates in the industrial segment show no signs of change. New industrial space under 20,000 square feet is in great demand in Davis County.

The industrial market in Utah County is also strong. After initiating a rebound in 2005, rates and demand for both sales and leases

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continue to rise, says Commerce CRG’s Jon Anderson. In light of increased demand, absorption of both newer and older industrial buildings is high and has provided a push for several speculative projects in 2006—even in the midst of rising steel, concrete, and borrowing costs. Sheldon says demand is especially strong for northern Utah county properties with easy freeway access. IM Flash Technologies, a joint venture between Intel and Micron, has increased demand around Lehi and Thanksgiving Point as companies providing support for this new venture will require new or additional facilities.

Like the Wasatch Front, industrial vacancy rates in Washington County are also declining. The vacancy rates for industrial space have dropped to less than 2%, according to Sheldon. Over 613,685 sq. ft. of industrial space is under construction, but most of this space is for owner-occupied uses. Sheldon says less than half of the industrial square footage under construction is being built as spec space and many of those spaces have been leased even before completion.

“While rising construction costs are slowing absorption, we are still seeing the vacancy levels drop and no near term changes are anticipated," he says.

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IN THE NEWS

Economic Development Headlines

Utah Economy Humming

- Interest rate hikes and high gas prices are finally showing their teeth, nibbling into the regional and national economies - except in Utah, where the state's business leaders and supply managers are reporting brisk economic activity. (Morning News)

Russian Leaders to Tour BDO

- Business Depot Ogden will be on display this week as an example of a former military installation that has been successfully converted to an economic engine for the local community. (Standard Examiner)

Titanium Plant Planned

- Allegheny Technologies Inc. said Monday that it will build a $325 million titanium sponge facility in Rowley, Tooele County, creating 150 jobs. The company said the jobs will pay an average of more than $45,000 annually. Shipments are expected to begin in the third quarter of 2008.
(Morning News) (Tooele Transcript Bulletin) (KSL) (Pittsburgh Post Gazette)
(SL Tribune)

Soccer Plan Morphs Into a Retail Giant

- Hopeful soccer fans see Real Salt Lake bending go-ahead goals and racking up back-to-back championships in suburban Sandy. But Mayor Tom Dolan envisions stores ringing up holiday sales, restaurants serving up alluring entrees, condos offering up elegant rooms and offices piling up multimillion-dollar contracts.
(SL Tribune here and here)

Islanders' Firms Thriving

- Sione Tavake has owned his own business for nearly 11 years. "I was working in the social-work field and decided to apply to get a contract and was accepted," said Tavake, owner of New Leaf AlterNative, which provides outpatient care for troubled youth. As a Pacific Islander, Tavake is part of a small but fast-growing business community. (Morning News)

St. George Job Availability Skyrockets

- Another round of government figures is confirming that St. George is a boomtown. Employment numbers for May show that St. George had 8.2 percent more jobs available than in May of 2005, the largest over-the-year percentage increase of 367 U.S. metropolitan areas in a monthly U.S. Department of Labor survey.
(SL Tribune)

Microsoft President Ballmer to Speak at Utah Tech Council Event in October

- Steven A. Ballmer, president and chief executive officer of software giant Microsoft Corp., will be the keynote speaker during the Utah Technology Council's eighth annual Hall of Fame celebration at 6 p.m. Oct. 27 at the Little America Hotel, 500 S. Main, Salt Lake City. (Morning News) 

(Utah Business Magazine)

P.G. Mall Developer Gets Cut

- Though plans for a large mall in Pleasant Grove are in limbo after the original developer dropped out, the city is continuing to plow forward with grand economic plans. (Herald Extra)

Warehouses Filling Up

- Not too long ago, empty warehouses in Salt Lake County were a common sight. But as thousands of people move to the Wasatch Front, manufacturing and distribution space is growing tighter, according to a new report by Commerce CRG. (Morning News)

Ogden City, USA Targets European Ski Companies

- Once again, Ogden is extending an invitation to the world much like it did during the Winter Olympic Games in 2002. Today, the invitation is extended to companies in the ski industry from Europe to come to Ogden, which is quickly becoming a business center for ski companies from around the world.
(PR Leap)

Highly Engaged Employees Help Boost the Bottom Line

- A new global employee engagement study shows a dramatic difference in bottom-line results in companies with highly engaged employees when compared to companies whose employees had low engagement scores. (Utah Business Magazine)

Opinion: 'We Ought to Champion Port 15'

- I was concerned with the tone of the opinion published, June 20, in The Spectrum, and therefore, appreciate the opportunity to express support for Cedar City's Port 15 industrial development project. (Spectrum)

Major Pleasant Grove economic player to move to American Fork

- Westroc, Inc., a leading supplier of ready-mix concrete, has announced it will leave Pleasant Grove later this year. The company will relocate its central batching facilities to American Fork, ultimately taking away one of Pleasant Grove's major economic players. (Daily Herald)

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CALENDAR

July 21:  GOED Board Meeting

August:  EDCUTAH Annual Meeting

Aug. 10-13:  Outdoor Retailer Summer Market

Sept.: 13-15: Utah League of Cities and Towns (St. George)

Nov. 12-15: CoreNet Global Summit, (Orlando, FL.)

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