A tight Wasatch Front office market lingers as construction growth is unable to keep pace with demand.
That’s the conclusion of a Salt Lake City metro area market report recapping the first quarter of 2019 compiled by Marcus & Millichap, which indicates that “unwavering tenant demand persists” and that economic growth in the area is resulting in “vibrant” leasing.
Salt Lake City continues to lure new companies and is seeing expansions from existing businesses, resulting in the absorption of 10 million square feet of office space during the past three years.
“The volume of firms occupying initial or additional floor plans during the 36-month span negated the impact of supply additions, which increased the metro’s stock of office space by 10 percent,” the report said. “Entering the second quarter, the Wasatch Front is home to one of the lowest vacancy rates in the nation, with space availability at or near cyclically low levels in all major submarkets.”
That comes despite office inventory expected to grow by 3.3 percent this year, driven by some large-scale developments of more than 100,000 square feet each — many being speculative projects in Lehi, Pleasant Grove, Layton, Draper and Salt Lake City.
“These locales’ growing populations of well-educated residents should encourage existing and new companies to occupy these newly completed floor plans, confident in their ability to bolster payrolls with talented professionals,” the report said. “Business expansions coupled with completions throughout the metro should lessen the impact development has on vacancy in individual submarkets, allowing the metro to remain one of the nation’s tightest office markets.”
About 3.1 million square feet of office space will be added to the market this year — a three-year high — with 1.7 million square feet being in Lehi and Salt Lake City.
One element affecting the local office market is growth in the number of office-using jobs. The Salt Lake City metro area has seen growth in that group of 2.4 percent this year, while the U.S. average is 1.7 percent. Total employment in the metro area grew by 2.7 percent year-over-year.
“Job creation in Salt Lake City over the past four quarters was nearly in line with the additions posted in the prior 12-month period as employers bolstered payrolls by 33,300 positions. Recent hiring reduced metro unemployment 10 basis points to 2.9 percent,” the report said. “The financial activities and professional and business services sectors added a combined 7,500 jobs during the past year, supporting a 2.9 percent increase in office-using positions.”
Still, construction is unable to keep up. About 2.3 million square feet was added in the first quarter compared to a year earlier, including nearly 1.2 million square feet in Utah County. Construction has begun on 4.6 million square feet, with completions extending into 2020. A large project in development is a 498,000-square-foot high-rise in Salt Lake City’s central business district called 95 State at City Creek.
In the first quarter, the year-over-year vacancy rate fell 200 basis points, or 9.2 percent, in the metro area. “Metrowide, tenant demand was strong for all office space,” the report said. “Class A availability recently compressed by 250 basis points, while vacancy in the Class B/C sector fell 180 basis points.”
Of the various submarkets listed in the report, Tooele County had the highest vacancy rate, at 14.4 percent, while the lowest was 3.4 percent in the East Valley.
The vacancy rate in 2019 is expected to be down 40 basis points. “Robust absorption outpaces an influx of office space for a second consecutive year, lowering vacancy to 8.6 percent. In 2018, availability compressed 190 basis points,” the report predicted.
Average asking rents increased 4.8 percent from a year earlier. It reached $21.78 by the end of the quarter, climbing by more than 4 percent for a fourth consecutive 12-month period. “The recent uptick registered was double the national rate of increase,” according to the report.
The average asking rent ranged from $15 in Tooele County to $24.10 in the central business district of Salt Lake City. Rents were up 6.8 percent, to $22.70 per square foot, in the South Valley, and to $19.70 in the East Valley. But the biggest gain was 21.7 percent, to $20.28 per square foot, in the Davis-Weber area.
Asking rents for 2019 are expected to be up 4 percent, to $22.40 per square foot. Rates are growing strong in Class B and C properties, while growth in Class A building supply is hindering rate gains there.