Office vacancies are dropping and lease rates are soaring as Salt Lake area businesses occupy more space, according to a new report.

For the three months ended Sept. 30, the office vacancy rate in Salt Lake County — excluding sublease space — was 10.76 percent, down from 11.25 percent in the third quarter of 2005, according to a report released Monday by Commerce CRG.

In downtown Salt Lake City, premium office space is hard to find, with vacancy rates for so-called "class A" space at 1.36 percent, down from 1.8 percent in the previous quarter, according to Mike Richmond, associate broker for Commerce CRG.

"I don't see that changing," Richmond said. "The challenge is we need the space today."

Even with new office buildings planned, like the 21-story tower that Hamilton Partners is expected to build at 222 S. Main, the construction lag time does little to solve today's tight market.

"You used to just be able to look at buildings that had vacancy," Richmond said. "Nowadays you're actually having to look ahead of tenants making moves in anticipation that their space will be freed up."

Gary Mangum, managing director and principal broker for Coldwell Banker Commercial NRT, said the lack of downtown office space is forcing tenants to move to the suburbs, like Millrock Park in Holladay. Millrock has one building completely occupied. Two other buildings under construction also have been 100 percent pre-leased, Mangum said.

Older buildings, like the Walker Center at 175 S. Main, are undergoing renovations to turn old space into premium space. That project is expected to add roughly 35,000 square feet of class A space to the downtown market by next year's second quarter.

As quickly as some downtown businesses give up their space, others are lining up.

Fidelity Investments is expected to vacate 175,000 square feet of downtown space by next summer, when it moves into a new eight-story office tower, encompassing 230,000 square feet, at The Gateway.

New York Life is expected to vacate 13,000 square feet of space at 170 S. Main.

Richmond said several proposals already are competing to fill both spaces.

"The new product isn't there yet to take care of the demand," Mangum said. "We're seeing the lowest vacancy rates that we've had in a decade in the downtown market."

The report noted that downtown lease rates on premium office space this year have ranged on average from $23.62 to $24.36 a square foot.

"Owners are raising rates," Richmond said. "We're looking at about close to a $2 a foot increase from the beginning of the year to where we will end the year in downtown class A."

On an annualized basis, Richmond said, office lease rates for class A space are up 10 percent, class B space increased 6 percent, with class C space flat.

The report also noted that industrial vacancy rates fell to 6.83 percent in this year's third quarter, down from 7.39 percent in the same quarter in 2005.

Retail vacancy rates were at 10.97 percent in the 2006 third quarter.

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E-mail: danderton@desnews.com