Commercial Real Estate UTAH REAL ESTATE RISING UP TO FACE UNPRECEDENTED CHALLENGES WRITTEN BY: CBRE
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ommercial real estate is at the heart of the economy. No matter your circumstances, you are being impacted by the trends and health of commercial real estate; it touches where we work, play, shop, eat and live. For the past ten years, Utah’s economy has been expanding, bringing job, wage and population growth with it, but all that came to a halt in the second quarter of 2020 as the COVID-19 pandemic took hold of the world. Markets nationwide — including Utah — expected a degree of uncertainty in 2020 due to the length of the current business cycle and the presidential election, but nothing could prepare the world for what we’ve experienced. When you factor in the additional challenges of a major earthquake, hurricane-force winds and civil unrest, Utah has experienced its fair share of unique challenges recently. However, Utah’s strong foundation of business-friendly leadership, work ethic and its diverse economy and population have aided in keeping commercial real estate afloat — and even expanding in some cases — as the industry has risen up to meet a year of unprecedented challenges.
When looking at the market as a whole, Utah has continued to earn national recognition for its sturdy economic growth, even during a global pandemic. The ability for many to work from home has created a changed mindset in the general populace and made Utah an even more attractive location for those seeking a market that offers year-round access to outdoor recreation.
GROWTH AND EVOLUTION
OFFICE
Despite recent road bumps, Utah’s commercial real estate industry experienced growth in 2020. At the time this piece was authored in November 2020, the industrial sector had 6.5 million square feet under construction and an extremely low vacancy rate of just 3.0%. Office construction remained at historical record levels with 3.5 million square feet under construction, though the vacancy rate was an elevated 14.7%. But regardless of property type, one common thread throughout the industry is that of COVID-19 acting as an accelerant to alreadyexistent transformations.
Office space in Utah was arguably the market segment most affected by the pandemic, as remote work became the norm for the majority of office-using employees. In the previous cycle, the Salt Lake City-Provo office market experienced robust growth with steady construction taking place, but throughout 2020 office vacancy increased along with landlord concessions, as companies began to reevaluate their space needs. This has resulted in a steadily increasing inventory of sublease space available throughout the market, which had reached more than 2.1 million as of Q3 2020.
For the past several years, there have been profound changes in the ways commercial real estate spaces have been marketed and utilized. Office users have been focused on creating more collaborative environments and reducing the 42 42
amount of office space dedicated to individual workspaces, building more flexibility into their lease structures; retail investors have focused on omni-channel marketing to reach their customers across various platforms and create more immersive destinations; and industrial users have increased the efficiency of their buildings to incorporate advancements in technologies and logistics to accommodate the increasing volume of online sales. Though these trends had already taken hold, the need for strategic agility took center stage in 2020. Companies that had already begun to adapt to the changes within their industry have fared much better in the past year than those that were forced to start from scratch during the pandemic.
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available in today’s market. Given the increase in remote work, prioritizing flexibility will continue to take precedence in the future. In September 2020, CBRE conducted a "Workforce Sentiment Survey" with a focus on remote work during the pandemic in which 32 companies in 18 countries participated. Three key takeaways from this survey were: 1) 90% of employees and employers feel remote work is productive, 2) 85% of employees prefer to work remotely at least two to three days per week in the future, and 3) 60% of respondents believe that office is here to stay and plan to return to the office for collaboration and community. The office segment will continue to evolve into a more agile environment to meet the growing desire and needs for ongoing flexibility, but office space is not going away.
INDUSTRIAL The phenomenal growth of Utah’s industrial sector has not skipped a beat during the past year’s challenges — record-breaking construction has persisted, while vacancy rates have decreased even further, ending Q3 2020 near record lows at 3.0%. The industrial segment’s growth has been augmented by the environment created by the pandemic, as more consumers have turned to online shopping to avoid doing so in-person. The convergence of the industrial and retail segments began long before the pandemic, but has grown even stronger, as large e-commerce
The evaluation of a company’s needs for office space is nothing new; in fact, it’s a trend that began years ago and gave rise to many of the coworking and short-term lease options
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