OPTIMISM has to be the word that springs to mind when reviewing the Salt Lake County Office Market for 2011. Various “corrections” were underway that seemed painful but are a path back to stability. There are also some very positive elements illustrated in this market study that indicate a strengthening in the economy and foretell a continuing uptrend for 2012. On the positive side, the overall direct vacancy rate dropped 1.5 points to 13.71%, the lowest it has been since 2007, and the class “A” vacancy rate at 8.72% is down nearly seven points from those 2007 levels. The southeast submarket had the lowest overall vacancy rate at 7.8%, perhaps signaling an opportunity in that area. The greatest number of leases signed by far were in the central east submarket (93) followed by the central
business district (59), but the activity achievements of those submarkets were equaled or eclipsed by the actual square footage of deals done in the north west (565,813 SF) and south west (448,185 SF) submarkets, also indicating future opportunity for developers or investors in these areas.
The best news overall has to be the 590,562 SF of net absorption in the total market. This follows two years of negative absorption. The total number of lease deals done (339) was up 25% over 2010 levels and the square footage leased or activity (2,558,811 SF) was up 21%. Overall asking rates are down 7% over a 3 year period with Class “A” rates taking the biggest fall, while class “C” rates were almost unchanged.
Evidently, there is tough competition in the high-end office market. Tenants are attracted to quality buildings with aggressive lease rates. We believe, based on the lower vacancy rates and increased absorption levels, that this rate correction phenomenon is over.
On the office investment side, the number of transactions was up an average of 60% in each of the last two years, and the total dollar volume of the sales, while being four times larger than in 2009 or 2010, was only a fourth of the 2007 volume. Office cap rates for class “A” buildings, however, approached 7% -- investors are bidding up quality buildings. Also to the positive, owner user sales in all classes are trending up even though the average asking sales prices are down slightly. It appears the latter made the former possible.
New construction in 2011 was encouraging, but given the improved Utah economy and our office market, we expect to see more announcements in 2012 of “build to suits” and “spec” developments. Expect the positive momentum experienced in 2011 to continue into 2012!
