Office vacancies — Demand is catching up with supply in Salt Lake Valley

A decade ago Salt Lake City's tight office market forced tenants in need of new office space to begin their search a year in advance.

In some cases, tenants were willing to double-pay — for their existing rent and a new lease — in order to secure the space they wanted.

"It was very difficult," said Bill Martin, managing partner of Colliers Commerce CRG, who remembers the mid-1990s as the one of tightest office markets he has seen in his 28-year career. "You had to find a tenant that was in the space and figure out whether they were going to expand or contract a year in advance of their lease expiring."

But as the turn of the century turned into a national recession and layoffs became commonplace, Utah's vacancy rates began to skyrocket.

"In America, there were a tremendous amount of service, accounting, call centers, law and engineering jobs that were shipped out to India and Pakistan," said Kyle Roberts, a partner at NAI Utah, who said the offshoring phenomenon had a direct impact on Salt Lake's office vacancy rates.

Those forces put tenants in control, and in the past two years businesses have been able to relocate in a matter of months, often at negotiated leases with upgraded space and discounted prices.

But don't count on those conditions lasting much longer.

While office vacancy rates since 2002 have remained at near-record highs — hovering around 17 percent, excluding sublease space — there is evidence that Salt Lake's office scene is improving.

According to Colliers Commerce CRG, office vacancy rates have fallen during each of the past four consecutive quarters.

In the three months ended March 31, Salt Lake County's overall office vacancy rate fell to 15.68 percent, a 1.01 percentage point drop from the 16.69 percent vacancy rate in the first quarter of 2003.

The recent falling vacancy rates could indicate a new trend, one that would mirror the early 1990s, when vacancy rates hovered between 17 percent and 21 percent and then suddenly plummeted to 8 percent.

Back then, low vacancy rates spurred a construction boom, with nearly 2 million square feet of new office space added to the market each year from 1995 through 2001, according to Colliers.

But since 2001, the height of the past recession, there has been little speculative office construction. In 2003, roughly 314,000 square feet of office space was added to the Salt Lake market, a 38 percent drop from the 510,023 square feet added the previous year, Colliers said. This year new office space will again be down, with an estimated 225,000 square feet of space expected.

With little office space being added and an improving national economy propelling job growth, demand is slowly catching up with supply.