CBRE report: Commercial real estate carrying strength from 2017 into the new year
Despite the current real estate boom going beyond what was expected, Utah’s commercial real estate market just keeps on growing. That is the finding of CBRE’s Salt Lake City Real Estate Market Outlook report released last week. The publication highlights the performance of the local commercial real estate market during 2017 and provides insights into expectations for the year to come.
“We are now in the second-longest expansionary period in U.S. history, yet Utah’s commercial real estate market shows little sign of slowing,” said Lloyd Allen, managing diretor of CBRE in Salt Lake City. “Business-friendly policy, a strong economy and quality of life continue to draw outside interest into the Salt Lake market. In 2017, a record $2.2 billion in investment sales was achieved along the Wasatch Front and development and demand levels across all market segments remain elevated.”
Some of the key findings highlighted in the report include:
Investment
Driven by a continued inflow of out-of-state and institutional funds, total investment sales volume in the Salt Lake market reached a record-breaking $2.2 billion in 2017. This also marks the single best year for multifamily sales, which reached $1.1 billion. As quality product becomes more scarce, investors have begun turning to value-add opportunities, contributing to a slowing in capitalization rate compression. Buyers remain active, demonstrating long-term confidence in the local market.
Industrial
The industrial market continues to defy cyclical considerations and posted another record year for construction in 2017. Growth in 2017 was principally driven by large distribution and logistics operations. The number of new leases signed for over 100,000 square feet nearly tripled the historical average. Vacancy continued to decrease and market demand is not likely to soften anytime soon.
Office
Salt Lake’s office market has been more susceptible to cyclical maturation. Demand remained strong for quality product throughout 2017 and construction continued to boom in the suburbs, but activity was more subdued downtown. The near-term outlook, however, is positive, with a strong construction pipeline set to drive activity in both suburban and downtown areas throughout 2018.
Retail
Retail experienced the most volatility out of all property types in 2017, where shifts in consumer behavior have led to an evolution of nationwide retail, culminating with numerous high-profile retail closures early in the year. However, both retailers and landlords are adapting, and activity improved dramatically in the second half of the year. Population growth has been a primary driver of local retail activity, resulting in significant construction in the Southwest Quadrant.
2018 Tailwinds
• Utah’s population was the third-fastest-growing in the nation in 2017 at 1.9 percent. Job growth was 3.1 percent over the same period — 160 basis points higher than the national average.
• Fiscal reform, including personal and corporate tax cuts, will leave more money in the pockets of investors, employers and consumers. In the short term, this is expected to have a unique late-cycle stimulative effect on both the national and local level.
• The heightened level of commercial activity in late 2017 carries a momentum that crosses over into 2018, boosting the forecast for both real estate and the broader economy.
• Despite softening, Salt Lake will retain a position of strength relative to markets nationwide. This will continue to attract investors and businesses to deploy capital in Utah, further stimulating economic activity.
2018 Headwinds
• With Utah unemployment ending 2017 at 3.1 percent, concerns about the availability of labor continue. Utah is increasingly dependent on in-migration to extend the labor pool; however, in-migration is expected to increase in 2018.
• A shortage of skilled labor and the rising price of raw materials have driven up construction costs substantially across Utah and the nation. This further contributes to the existing housing shortage and threatens Utah’s relative affordability.
• Utah’s economy is particularly exposed to policy related to trade and immigration. Stricter immigration rules could exacerbate existing labor supply issues for critical industries like construction and manufacturing.
• The Federal Reserve is expected to raise the Federal Funds Rate three times in 2018, pressuring interest rates and potentially disincentivizing borrowing.