NAI West recently released its 2012 midyear report, evaluating data from across the state. By detailing the ups and downs of the Utah commercial market, the report provides pertinent information regarding vacancy rates, absorption and other market indicators.

In 2012, several key components continue to impact the commercial real estate market in the state, such as:

• Forbes Magazine again ranked Utah the #1 Best State for Business and Careers, CNBC ranked Utah #2 For the Best State for Doing Business in 2012, Forbes magazine listed Provo and Ogden as the #1 and #6 Best Cities for Business and Salt Lake City ranked among America’s 15 Hottest American Cities of the Future according to Business Insider.
• Utah is ranked in the top third in the nation for the lowest unemployment rate at 6.0% (down from last summer’s 7.3%) compared to a national average of 8.2%.
• As a whole, Utah’s economy continues to outperform and maintains its status as one of the most sound economies in the nation.
• Utah remains high on the list of firms looking to relocate or expand. The number of firms looking at moving to the state continues to be steady, if not increasing. 

Industrial

Described as a “gem” within the nation’s economy, the Salt Lake industrial market continues to outperform most of its national counterparts. Some examples of this growth include:

• Five properties comprising 911,848 SF have been delivered on speculative construction.
• The total number of lease transactions so far this year totaled 167, a 27.48% increase from midyear 2011.
• Although new construction increased the vacancy rate to 6.42%, there has been a positive net absorption of 713,572 SF over the last four quarters
• At $.38, overall lease rates are at the highest they have been since the second half of 2008.
• The total number of leases in the first half of 2012 are at their highest levels in 4 ½ years.
• Year over year industrial investment dollar volume is up 79.3%.

Rental growth should continue but it could be years before rents reach the same levels found during 2006 and 2007. And although interest rates remain low, more buyers are exploring the option of build to suit (BTS) because of the lack of quality products available to purchase.     

Industrial land prices have increased due to geographical limitations and a growing population, reducing the number of options while prices are firming. The trend of the industrial investment market is a severely supply-constrained market. But as quality assets become available, steady growth is projected for the foreseeable future.

Office

With Utah’s growing economy in the tech and services industries, the demand for office space is expected to increase. Companies like Adobe, Ebay and Savage Industries have created an epicenter for tech projects in Southern Salt Lake County and Northern Utah County. The state’s dynamic economy will lead to continued modest improvement in the office sector. 

• The overall direct vacancy rate at midyear 2012 is 13.98%, the lowest it has been since 2007, including the “A” vacancy rate which has dropped to 9.43%. This drop has caused an increase in asking lease rates.
• Due to an anomaly caused by the redirection of tenants to the BTS market, overall leasing activity dropped 50% from the second half of 2011.
• The amount of square footage purchased for owner-occupied buildings almost doubled from the second half of 2011. This trend should continue due to the extremely attractive financing options available for owner occupants.
• Three new buildings, totaling 307,000 SF were delivered in the first half of 2012, all of which were BTS projects. Six buildings (595,298 SF) are currently under construction.

The net absorption of office space remains positive but is focused on BTS or owner-occupied projects. It is predicted that the limited supply of new speculative office projects will lead to a slight improvement in the office industry.

Retail

For the retail market, the worst may be over. As the market continues to improve at a sustainable pace, net absorption is positive, vacancy rates have stabilized near 9% and average lease rates have increased nearly $2 per square foot to $15.45 from the end of 2011.

• Lease rates are at the highest level since 2008.
• Transaction value has dropped to its lowest level since the first half of 2010, down 30%.
• Lease transactions have dropped 27% compared to mid-year 2011, the lowest number of transactions since 2009.
• Cap rates have steadily compressed since the peak in 2009.

The flight to quality is fueling investment sales transactions which have increased substantially. Overall, it looks like a welcome recovery is ahead for retail commercial real estate.

Investment

The demand for investment properties in Utah far outweighs the supply and now is a great time to sell with low lending rates and high product demand. Since last year, investment sales have improved in terms of number of transactions, cap rates, dollar volumes and pricing.

Housing starts, through April 2012, indicate the fastest building pace gain since October 2008, yet only half of that number is considered healthy. Improvement in sales across all regions seems to indicate the national housing market has reached bottom. With the Supreme Court upholding President Obama’s Affordable Care Act, medical office development and leasing has the potential to create new jobs, driving investment sales.

Some of the strongest indicators in the investment market include:

• Number of investments is up 14% year over year.
• The number of industrial investments showed the largest increase, up 72.20% year over year.
• Largely due to the Novell transaction in Utah County, office dollar volume increased 154% compared to mid-year 2011.
• The number of square-feet sold increased 27.67% compared to mid-year 2011.

Commercial real estate seems to be the safest and most viable alternative for investors as the market recovers. With the creation of 25,000 new jobs over the last 12 months and a low unemployment rate, economic growth has fueled an increase in housing starts and actual home price appreciation in some areas.

Land

Since 2007, land sales activity has been in decline. Acreage sold during the first six months of this year is much less than 2011. With residential activity increasing, land sales should experience slight growth and some activities such as land for apartments or industrial uses should increase demand.

• Land sales in the retail industry remain flat, apart from a select few regional retail players and convenience store development.
• Office land has reported a significant increase during 2012. National companies have increased their presence in Utah, translating to demand for BTS and sales of land for class “A” office space.
• Residential construction is on the upswing. Inventory in the Salt Lake Valley has been absorbed, creating a demand for raw land by homebuilders.
• People looking for deals should look at properties with difficult challenges or undefined development timetables.

In the end, Utah’s strong economy and business-friendly environment should help its market recover better than neighboring states. With the state’s growth, lifestyle and population growth, Utah is still a great place to invest.

To view the complete 2012 Midyear Report, which provides an in-depth analysis of specific real estate trends in Utah, visit NAIWEST.com.