The inventory of vacant commercial office space in the Salt Lake area is shrinking, says a new survey by Commercial Realty Group (CRG). It's a trend that should continue into next year despite some 660,000 square feet of new space becoming available in 1991 - two-thirds of it in the One Utah Center building nearing completion downtown.
CRG's office leasing staff, agents Greg Gunn, T. Orden Yost, Mark Lundgren and Gary Jones, surveyed some 300 downtown and suburban office buildings for the study. They learned that office vacancy rates for the central business district (CBD) declined from 18 percent in 1989 to 14 percent this year and in the suburbs from 26 percent to 19 percent.The reason for the shrinking of vacant space is largely due to a decline in the amount of new office space built in recent years. Whereas the Salt Lake area saw an average of 1 million new square feet annually in the mid-1980s, less than half that amount, about 400,000 square feet, has come on line annually in recent years.
Despite the drop in construction, the report notes that lease rates have fallen during the late 1980s. Now rates appear to have bottomed and are beginning to rise.
The decrease in vacancies is not completely tied to less construction; some can be attributed to growth. The report notes that a number of national tenants have leased large blocks of space in the past year or so, particularly in the telecommunications, insurance, human resources and software development industries. Also, some smaller existing companies have moved into larger, more prestigious locations.
Pent-up demand, stemming from the fact that no major office towers have come on line in the CBD since 1986, when Eagle Gate Plaza & Tower and 257 Tower were completed, is also cited. CRG estimates it takes four years for the market to absorb enough space to justify construction of a major downtown building.
Despite the downward vacancy trend, CRG expects that One Utah Center, under construction by The Boyer Co. at 201 S. Main, will spark a rise in the vacancy rate of 2-3 percent. If the long-delayed Broadway Centre at 300 S. State is completed in 1992, it would add another 255,000 square feet and a further rise in vacancies.
CRG predicts that new construction will drive down occupancy in small, midsize and older CBD buildings whose tenants may want to "upgrade" into one of the newer buildings. But it should have little effect on existing buildings of 70,000 square feet or larger.
The drop in vacancies has been most marked in the suburbs, says the report, where vacancy rates fell from 29 percent in 1989 to 22 percent this year. That market is driven by tenants who want large blocks of space and equally large blocks of free parking.
The study notes that freeway access and an easy commute is, for companies with a high-density work force, a prime consideration when deciding where to locate.
But the lack of new suburban space will mean that tenants who need contiguous suburban space 30,000 square feet or larger will have to go into into an existing structure converted to their needs - such as Discover Card recently did at the former Build-Mart Mall in Sandy - or work with a developer on a build-to-suit facility. The latter is a trend that CRG says is "re-emerging" locally as spec building has decreased.
In the current climate, the report says, developers must have at least 50 percent of a prospective building pre-leased before a lender will consider financing.
"Developers in Salt lake are the ultimate risk takers, and many have reduced in size and consolidated to the point where they could be considered an endangered species," said Bill Martin, resident manager of CRG. "They are being asked to infuse more equity into the transaction and lease to stronger tenants."
Since 1985, many developers have moved out of Utah or changed jobs, said Martin. Ironically, for those who have stayed, the downward trend in vacancy rates hasn't helped much.
"There have been many obstacles thrown in their paths which limit their ability to make money in this market," said Martin. "They've survived, and will continue to survive, but it hasn't been easy."
Despite Utah's improved economy, the local office space market can be negatively affected by cutbacks of national corporations, said Martin, noting that "at least a dozen large companies" have reduced their operations here, creating additional office space available for sublease.