Ashley Lowery, Deseret News
SALT LAKE CITY — After a few years of struggling, the local commercial real estate market may be moving toward a comeback.
Where the market has stabilized throughout 2011 and last year, 2013 is expected to start an upward climb as lease rates begin to rise, construction activity continues to be strong, absorption remains positive and investment sales pricing continues to increase, according to the Cushman & Wakefield Commerce 2012 Year-End Market Review.
Net absorption is defined as the difference between tenant move-ins and move-outs over a period of time. When more tenants move in than leave, absorption is positive. When more tenants vacate then move in, that is considered negative absorption.
The overall vacancy rate increased from 13.8 percent to 14.8 percent, with the Salt Lake downtown central business district experiencing the greatest increase as its rate climbed from 13.2 percent to 18.2 percent.
The report noted that a significant component of the increase was a result of Questar relocating from a larger class B building to a newer, more efficient space in a build-to-suit property.
Class A represents the newest, highest quality buildings in the market. They are well-located, have good access and are professionally managed.
Class B is the next notch down. They are generally a little older, but still have good quality management and tenants. Class C is the lowest classification of office building. They are typically older buildings — usually more than 20 years — that are located in less desirable areas and are in need of extensive renovation.
Also, the FBI relocated from the downtown Salt Lake City central business district to a build-to-suit property in the northwest submarket near Salt Lake City International Airport.
A number of professional service firms within the central business district downsized their existing space as well in an effort to increase overall efficiency, adding to the vacancy increase, the report states.
With the completion of City Creek in 2012, FrontRunner/TRAX lines and other retail and multifamily activity, the downtown area is beginning to see increased activity, explained Michael Lawson, president and CEO of Salt Lake City-based commercial real estate firm Cushman & Wakefield.
Tenants who had previously located in suburban markets are now looking at downtown as a viable relocation option, Lawson said.
The report also stated that among the highlights of the year was the recovery of the central east class B submarket in the Fort Union area of Salt Lake County, which was the hardest hit during the recession.
Last year, vacancy rates dropped from 25.3 percent to 18.9 percent as a large amount of space was leased up in Union Park. Asking rental rates were initially reduced to stimulate activity and have since stabilized to pre-recession levels. Additionally, some landlords made significant capital improvements to make their buildings more desirable for tenants, the report stated.
The office market experienced the most dramatic increase in new development in 2012, ending the year at just over $200 million — a 73 percent hike over 2011. Meanwhile, lease rates remained relatively flat.
The central business district submarket, which contains larger buildings in the core of the downtown market, continued to command the highest average asking full-service lease rate of $22.73 per square foot, led by class A with a rate of $28.86.
The class A central east submarket saw the largest increase in rents ending the year at $28.63 per square foot, largely as a result of the addition of the Old Mill IV office building in Cottonwood Heights, the report stated.
Although vacancy rates increased as a result of new construction, the Salt Lake market ended the year with 161,785 square feet of positive absorption. The positive absorption occurred despite the negative absorption in the downtown area of almost 350,000 square feet. However, the suburban market was much stronger, yielding more than 500,000 square feet of positive absorption more than offsetting this loss.
Lawson said the outlook for 2013 is one of renewed confidence and steady growth. Market indicators for Salt Lake are solid, but the shadow of domestic and foreign economic uncertainty may create stagnation in many professional services markets.
Locally, a number of new construction projects will break ground in the Salt Lake market, with several large companies moving into new build-to-suit or owner-occupied buildings.
Vacancy and lease rates are expected to remain steady throughout 2013, with corporate expansion within existing buildings being offset by the addition of the new construction.
Looking forward, Lawson said he is “cautiously optimistic” about the progress being made in the commercial real estate sector.
“By any standard, you have to say this past year was substantially better than the year before, which was somewhat better then (2010),” he said. “ If you look at the (trends), you are seeing growth. What we can (see) is very solid, sustainable growth at a higher rate than experiencing today.”