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Ashley Lowery, Deseret News
Office vacancies in Salt Lake County rose slightly in the first six months of 2008 due to the economic downturn.

After two years of strong growth, Salt Lake County's commercial real-estate market has been struck by the impact of the sputtering economy.

A report released this week by real-estate firm CB Richard Ellis showed that demand for office space softened in Salt Lake County during the first six months of 2008, compared with the same period a year ago.

The office vacancy rate for Salt Lake County increased to 13.5 percent for the six months of 2008, up 1.7 percent over the 2007 mid-year vacancy rate of 11.8 percent. The increase was also 1.5 percent higher than the 12 percent vacancy rate at year-end 2007.

"The modest increase in overall vacancy reflects some slowing in the Utah economy," said Zion's Bank chief economist Jeff Thredgold. "You've got the rise in energy prices, which are forcing many companies to cut costs wherever they can."

The state's economy is growing at about one third the pace it had been growing a year ago in terms of job growth, he said.

The CB Richard Ellis report said the county had 8,438 square feet of additional empty office space compared with the same period last year.

"That points to the fact that the economic conditions generally have people concerned," said Scott Wilmarth, senior vice president at CB Richard Ellis.

Nearly 1 million square feet of new office space is scheduled to be added to the Salt Lake market by the end of the year, which "is pushing vacancy rates slightly higher and may force landlords to offer concessions as the office market becomes more competitive," Wilmarth said.

Prospective tenants generally lean toward the "nicer, newer buildings," defined as "Class A" office space, and find that concessions make their relocation plans more attractive, he said.

"We still have low vacancy in Class A office buildings, only 7 percent," Wilmarth said. "The suburban market has about 14 percent vacancy for all classes, and a little over 10 percent as it relates to Class A."

He said the overall vacancy rate is still considered healthy, despite the slight rise.

"The concern right now is not that our vacancies are inordinately high, it's that our absorption has moderated to essentially flat," he said. "Companies are not as bullish on occupying more square footage than they had last year."

While overall leasing activity was soft, the report stated that leasing remained strong for premium Class A office space in areas that were outside of the downtown central business district. The suburban office market saw an increase in occupancy in Class A buildings of 197,710 square feet.

Mid-year lease rates for office space across Salt Lake County remained virtually flat, at $18.60 per square foot, down slightly from $18.70 per square foot during the same period last year.

"Although Salt Lake City's economy continues to outperform many other parts of the country, we are not an island," Wilmarth said. "The U.S. economy is significantly worse compared to Salt Lake City, but it's having a significant impact on us as national firms scale back expansion plans."

The flat leasing rates may be a concern for some landlords, but that trend doesn't necessarily point to "some sort of crisis," he said. "We've been at a ferocious pace for the last two-and-a-half years."

He noted that among the more high-profile office construction projects now underway downtown are the 222 S. Main building, the city's first high-rise in over a decade, and the highly publicized City Creek Center residential and business development.

Those projects will increase the supply of office space, he said, but they also are "going to create a more vibrant, 24/7 downtown."

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