Average rent for industrial space in Salt Lake County increased by 28 percent in the first half of 2008, according to a report this week from Commerce CRG.

The midyear report also said that the market for finding space is tighter: The industrial vacancy rate declined from 6.11 percent in the first quarter this year to 5.62 percent in the second quarter.

"The dynamics are primarily are lack of land, rising construction costs and increased activity levels," said Craig Kaminski, industrial specialist with Commerce CRG.

The Salt Lake City area is benefiting from high gasoline prices, because the large distribution centers in Los Angeles and Oakland, Calif., have become too costly for many companies to use to service the Intermountain West, as they have in the past, he said. The gas prices, combined with California's expensive real-estate and traffic gridlock, have made Utah more attractive.

"Now they're saying it's worth it to spend the money to build a regional distribution hub in Salt Lake," he said.

Cosmetics distributor Sephora, online retailer Overstock.com and Professional Hospital Supply were among the companies that signed large lease transactions this year to occupy some of the recently constructed industrial space.

Kaminski noted that because industrial real estate has become more costly and lending standards are now stricter, most companies are choosing to rent or lease space instead of building their own. The number of leases of large facilities was nearly double compared to the same period in 2007, the report stated.

Rents are hitting new highs, and Kaminski said this trend will likely persist through 2008, due to the shortage of industrial space. The average lease rate as of June 2008 was $60.57 per square foot, up from $47.96 per square foot in 2007.

Lease rates are up significantly for all facility sizes, and are expected to continue to rise as long as the current activity levels remain stable.

"The people sitting on the product to lease are sitting pretty, because they know that there is no product for those who want to buy, and obtaining financing is difficult right now, due to the current credit crunch," Kaminski said.

Construction costs are still substantially high right now, which also adds to the expense of trying to build new distribution centers. With availability of land still tight and demand still high, those factors will contribute to higher rents for industrial space, he said.

"We're on track to do 5 million square feet of leasing for this year," he said. "That's huge for our market. That's why our rates are up, because of the high demand."

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