Class A Space is King in Salt Lake's Commercial Real Estate Market
Class A Space is King in Salt Lake's Commercial Real Estate Market
April 16, 2014
SALT LAKE CITY – April 16, 2014 – So far, 2014 has continued where 2013 left off; overall commercial real estate fundamentals are strong and the market is experiencing steady, gradual improvement. The office, industrial and retail markets experienced a stable performance in the first quarter of 2014 and are expected to gain momentum in the coming months. However, one underlying theme is prevalent across all markets—users’ demand for Class A space.
Office Market The Salt Lake office market performed steadily during the first quarter of the year and growth in the coming year is expected to be near historical averages. The current vacancy rate is 13.0%, and lease rates ended the quarter at $20.05 per square foot, full-service gross. Looking forward, there are some significant trends that have begun to impact commercial real estate and will do so for years to come: changing demographics, technological advances and new economic realities.
In 2014, Millennials made up slightly more than one-third of the workforce; this group is projected to encompass nearly one-half of the nation’s workforce by 2020. As companies work to recruit and retain this demographic, CBRE has noted higher levels of demand for newer/Class A space that can accommodate the preferences of the Millennial group. Technological advances, coupled with new economic realities, are also greatly affecting the types of product users prefer.
“Caution regarding the economic future continues and has resulted in a concentrated effort on cost containment”, stated Tab Cornelison, Senior Vice President with CBRE. “In an effort to control their bottom line, occupiers have focused on new workplace strategies. When executed properly, companies are able to reduce the space dedicated to each employee by 30% or more, resulting in a balance of saving space and money, while incorporating new collaborative amenities which will attract a younger workforce.”
Further evidence of the demand for Class A product can be seen in the amount of new construction which is slated to take place in 2014. At the end of the first quarter, 573,587 square feet of new office space was under construction. In the coming months, these new completions should push asking rates up and may potentially influence vacancy rates, particularly at the submarket level.
Industrial Market Fundamentals in the industrial market continue to outperform national averages. All but two submarkets experienced positive net absorption during Q1 2014, and availability decreased 20 basis points from Q4 2013 to 7.7%; well below the national average and highlighting a healthy demand for space amid limited new supply.
One significant observance from the industrial market is the strong demand for new, Class A product. While there are several reasons for this preference, the most prevalent is the desire for greater clear heights driven by booming industries like e-commerce and distribution.
Despite the preference for new industrial product, supply has been limited—primarily due to lower amounts of speculative construction. Though a great deal of speculative construction has begun, many of these buildings have been sold to owner-users or leased to a single tenant early in the development phase, further limiting the inventory of available space. However, the rapid absorption of industrial land observed over the last year has resulted in a high volume of planned speculative product and supply will soon increase.
Tom Dischmann, Senior Vice President, noted that, “Overall, the industrial market is being driven by the demand for new space. There is more than 650,000 square feet of speculative space under construction; most notably Meridian Commerce Center—a 230,000-square-foot building which just broke ground in the California Avenue submarket. In addition, there is more than 500,000 square feet of spec space scheduled to break ground before year end. 2014 is shaping up to be an active year for the industrial market.”
Total sales in Q1 2014 were up over 225% year-over-year; a pace that—if maintained—could make 2014 the top year for industrial sales volume in over five years.
Retail Market Salt Lake’s retail market experienced steady demand in the first quarter of 2014, with particularly strong demand for Class A product. Activity in Class B and C retail product was primarily driven by local tenants. Due to the limited supply of Class A space, many retailers are waiting for new product to come to market as opposed to leasing second-generation space. This is evident in current preleasing levels—often occurring before a project has broken ground.
In order to keep up with the demand for new space, completed construction during the year is expected to be significant. A total of 440,672 square feet is under construction, and new construction expected to break ground in 2014 includes Oquirrh Mountain Marketplace and Costco at Harvest Village. The majority of construction activity is concentrated in the southern section of Salt Lake County.
JR Moore, a retail specialist and Vice President with CBRE observed, “In an effort to keep demand strong, and to lure online consumers, retailers are striving to create destination shopping experiences. This can be seen in Salt Lake with the City Creek and Gateway malls, as well as Station Park in Farmington—each includes amenities focused on entertainment, in addition to the shopping provided. As new construction occurs, this focus will continue to take center stage.”
Also of note, food-oriented tenants led leasing activity in the first quarter of 2014. Notable restaurant tenants new or expanding in Utah include: Zaxby’s, Popeye’s, Mooyah, Beans and Brews, Which Wich and Taco Bell.
For the complete first quarter 2014 reports detailing the office, industrial and retail markets, visit CBRE.com/USA/Research.
About CBRE Group, Inc. CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2013 revenue). The Company has approximately 44,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through approximately 350 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.