Vacancy rates for commercial office space are trending downward, good news for landlords, according to a new Salt Lake Area office market survey by Consolidated Realty Group.
CRG resident manager Bill Martin said vacancy rates for the Central Business District fell 3.84 percent in 1990 to 13.78 percent vacancies, and in the periphery areas dropped 7.20 percent to 18.61 percent vacancies during the year.Declining vacancy rates are always welcome to those who own buildings, but Martin said the completion of two new high rises downtown will, inevitably, push vacancies back up as well as cause a "major redistributive effect" on the market.
Martin said the Salt Lake office market has been tightening over the past three or four years, despite the addition of some 400,000 square feet of new space added annually.
But the new buildings under construction or scheduled for completion this year will flood the market with 660,000 square feet of new space. Two-thirds of that space will be in One Utah Center, nearing completion at 201 South Main. Broadway Centre, under construction at 300 South State St., will add another 255,000 feet by year's end.
The CRG data suggest that the new buildings will affect vacancy rates in buildings 70,000 square feet or larger but is more likely to drive down occupancy in older small-to-mid-size structures.
Martin said mid-size buildings, whose tenants may decide to upgrade their image by moving into a new downtown high-rise, will feel the pinch the most even though their average vacancy rate is already higher than their counterparts.
Martin credits several factors for propelling vacancies downward since 1986. Overall leasing activity has increased, for one, as smaller firms move into larger, more prestigious locations. Also, an influx of out-of-state tenants leasing large blocks of space have had an impact.
Telecommunications, insurance, human resources and software development industries have all been taking down additional space in recent years, he said.
Martin also credits pent-up demand for the overall absorption of space that has gone on. Eagle Gate Plaza & Tower on South Temple, completed in 1986, was the last major office building to go up in the area, and Consolidated Realty Group's study shows it takes about four years for the market to absorb enough space to justify a new high rise.
Based on that assumption, he said, "it will likely be 1994 before another major office structure is built in the CBD."
While the drop in vacancies has been evident downtown, it has been most dramatic in the suburbs, said Martin, where vacancy rates fell from 19 percent in '89 to 22 percent last year - more space absorbed than in any other market segment and driven largely by tenants who need substantial space and generous amounts of free parking.
In recent years, almost all of the new construction has been in the suburbs. That will reverse this year, which Martin said means tenants who need 30,000 square feet or more of contiguous space will have to go into an existing building converted to their needs - such as Discover Card did recently at the former Build-Mart Mall in Sandy.
Build-to-suit construction for specific large tenants is the emerging trend, said Martin, as speculative building has dwindled since 1987 due to difficulties in getting financing.
Today, he said, a developer must have at least 50 percent of a proposed building pre-leased before a lender will even consider financing.
Overall, the Salt Lake office market increased in size from 14 million square feet in 1989 to 15.7 million square feet in 1990.