COMMERCIAL REAL ESTATE IN UTAH

THE BUZZ ON HOW INDUSTRY IS THE FOUNDATION FOR COMMERCIAL REAL ESTATE WITHIN THE BEEHIVE STATE

BY: SIERRA HOFFER, RESEARCH MANAGER, CBRE

Certain things within our state are destined to withstand the test of time — the BYU and University of Utah rivalry, for example. Our devotion to unique Utah foods such as fry sauce, Jell-O, and funeral potatoes is another long-standing state obsession. However, if the last few years have taught us anything, it’s that change is inevitable. After a century with our current Utah flag, a newly designed state flag has been proposed to the legislature and is up for vote in early 2023. The design showcases a simple yellow beehive at its center. Assuming the flag is adopted, this symbolism marks the most iconic and prevailing Utah attribute — industry.

We know Utah as the Beehive State, and like the mighty bee, Utahns have industry and grit in their DNA. It is this emphasis on industry that has positioned Utah as one of the best states for business, and consequently, commercial real estate.

Growth and development put Utah on the map in many respects. Over the last few decades, a strong population and educated workforce have expanded industry across the state. In addition to natural increase and local innovation, outsiders looked to Utah for our live-work-play environment. As many relocated to the state, they added to the market’s talent pool. Businesses thrived, and so did commercial real estate. Tech expanded into northern Utah County and the Point of the Mountain; an area now known as Silicon Slopes. At the same time, Utah gained another nickname — the Crossroads of the West. Access to major highways and a central location to other major cities within the U.S. transformed the Wasatch Front into an industrial hub of more than 150 million square feet. Growth across the state also brought in major retail centers to support the increasing population.

This story of growth reached new heights prior to the COVID-19 pandemic. Now, with national headwinds posing threats to our strong economy, the local commercial real estate market is looking to evolve. Additional growth is still possible — and, in many respects, still necessary to support demand — but economic uncertainty has changed the Beehive State’s commercial real estate activity in all major sectors, including industrial, office, retail, and multifamily.

INDUSTRIAL Tight vacancy is pushing lease rates

Over the past several years, Utah’s industrial market has enjoyed strong demand, driving vacancy down to record lows despite large amounts of new construction, much of which is preleased, meaning specific users have already committed to the space before project completion. This is good news for landlords and investors, who have benefited from the macroeconomic forces at play. Strong consumer spending, a diverse economy, and the state’s growing population have all contributed to a record-breaking year for the local industrial market.

However, demand is outpacing supply. The record low vacancy, now at 1.3%, is making it difficult for users to find space within our market. Lease rates have risen to combat the supply and demand imbalance.

OFFICE Evolution amid uncertainty

The onset of the COVID-19 pandemic drove net absorption negative within the office sector for the first time in a decade. Work-from-home mandates contributed to overall uncertainty in the market, followed by a period of stalled lease activity, footprint reductions, and an increase in subleases.

Trends in office development have also shifted. Prior to the COVID-19 pandemic, headlines surrounding Utah’s office market were centered around new development in the tech-heavy Silicon Slopes. While expansion is still very much a part of the narrative, traditional suburban development is just a chapter in a much more complex story. The stock of office development within Salt Lake and Utah County now includes everything from new builds to redevelopment properties, conversions, and downtown projects. CBRE’s new publication in December 2022 called Office Conversions: A Second Chance for Underutilized Space highlights how office product nationally is finding new life as a different property type.

RETAIL

Shouldered by consumer spending Retail’s performance within the Utah market is highly dependent on product type, location, and industry. However, broadly speaking, the retail sector has proven its resiliency by evolving through numerous market shifts. At the same time, the sector has a number of tailwinds driving an overall positive outlook, namely population growth, increasing household, income, and pentup demand.

MULTIFAMILY

Historic rent growth Utah’s multifamily market continues to experience high growth and demand, both from users and investors. Although the investment market as a whole has tapered off this year, the local multifamily market continues to perform well. The multifamily market is largely driven by a strong economy and population growth; this is positive news for Utah, where a robust job market has prompted significant in-migration that continues to drive rent growth.

Utah is still 20,000 housing units below the current need, evidenced by the low market-wide vacancy rate of 3.1% and persistent increases in monthly rent averages. Current development projects are underway to address this existing need and better balance the rental market by offering some relief to the overheated demand levels. Though multifamily investment sales are projected to decrease in 2023, we expect to see continued strong rent growth and healthy demand to absorb the 14,000 units currently under construction in the area.