Industrial leasing reaches new high to lead 2017 commercial real estate growth

Industrial leasing activity reached a new high in 2017, highlighting a strong commercial real estate market in Utah at the end of 2017, according to the fourth quarter (Q4) 2017 MarketView report from the Salt Lake City office of CBRE.

Highlights of the report include:

Industrial Leasing

Total industrial lease volume reached 6.8 million square feet during 2017, breaking last year’s 10-year high record of 5.7 million square feet. While demand was strong across all industrial segments, this historically high level of activity was principally driven by large users — in particular a handful of national players who initiated large build-to-suit projects. During the year, new leases of 50,000 square feet and larger represented 65 percent of total leased square footage, and a total of 17 leases over 100,000 square feet were signed — almost three times the prior five-year average of six per year.

The bulk of the leasing activity took place in the Northwest Quadrant, which encompasses the airport, California Avenue and West Valley submarkets. At year-end, the Northwest Quadrant accounted for 84 percent of overall net absorption and 95 percent of active construction, which reached 3.6 million and 3.9 million square feet, respectively.

“Growth in the local industrial market has been monumental during this market cycle,” said Jeff Richards, senior vice president at CBRE. “Two factors have really contributed to this growth: First, the activity in the Northwest Quadrant, which brings newly available land to the market, and second, the emergence of big-box users in the overall market. Industrial users are looking for much larger spaces than has historically been the case and for the near term, Utah has the location, economy and land to meet their needs.”

Retail

Following several quarters marred by headline retail closures and timid activity, Salt Lake’s retail real estate market rebounded in the second half of 2017. Building owners have adapted to the new landscape by reconfiguring large retail vacancies into smaller blocks, initiating renovations and, in some cases, redeveloping or selling to nonretail users. Leasing was especially strong in new or redeveloped product, which helped drive 170,000 square feet of positive net absorption in the fourth quarter alone — the strongest quarter in over a year.

Demand remains strong across most retail segments. Over 941,000 square feet of retail was leased during 2017 — more than any other year since the Great Recession. More than one-third of this leasing took place in the southwest submarket. There was also a significant amount of leasing that took place in redevelopment projects in established areas. At the end of Q4, nearly 630,000 square feet was under construction — 75 percent of which was pre-committed, ensuring a solid pipeline of positive absorption in the new year.

“At the beginning of 2017, several nationwide retailers announced a number of store closures. There was a level of uncertainty regarding how this would affect the local market,” said J.R. Moore, first vice president in the Salt Lake office. “Though big-box vacancies took place throughout the year, the market has largely stabilized. Salt Lake’s retail real estate market has rebounded and retailers have become more strategic in their use of space. Throughout 2017, Salt Lake has experienced strong demographic growth, which is expected to continue in the near term, supporting a positive outlook as we head into 2018.”

Office

The downtown office market had its best quarter of the year due to growing interest in conversion and renovation projects. Historic and repurposed buildings received attention from tenants looking for a unique space with proximity to downtown amenities — often an important attribute when attracting and retaining employees. Bouncing back after a slow first half, downtown Salt Lake City absorbed over 85,000 net square feet in the fourth quarter of 2017, accounting for 65 percent of the 130,000 square feet of downtown net absorption year-to-date.

Over 1.3 million square feet of new office product was delivered during 2017, making the year a strong one for development. The final delivery of the year was a 162,000-square-foot tower in Draper, which was the only building that delivered in 2017 without prior tenant commitments. Going forward, future developments will depend on their ability to secure tenant commitments be-fore breaking ground, as the current market cycle enters a more mature phase.

“One noteworthy item that took place in the office market during the fourth quarter was an increase in the absorption of Class B and Class C space. In recent years, a significant amount of Class A office product has been developed or renovated, and as a result, a ‘flight to quality’ has taken place with many tenants upgrading their office space,” said Scott Wilmarth, CBRE executive vice president. “The fact that vacated, older spaces are being backfilled bodes well for landlords and is reflective of a well-balanced market that meets the needs of the broader client base.”