Record industrial construction leads still-hot commercial real estate

The Salt Lake City office of commercial real estate firm CBRE has released its MarketView report for the second quarter (Q2) of 2018. The report highlights the industrial construction sector, which has reached its highest point in recent years, as leading the way in a continued strong commercial market. 

Industrial

More than 2.4 million square feet of new industrial construction was completed during Q2, 63 percent of which was speculative space (spec), meaning that construction began before any tenants had committed to lease space within the developments. Three new big-box spec projects also commenced construction during the quarter, bringing active spec construction to 2.7 million square feet and marking the highest level yet in the current cycle. This is significant, CBRE said, as it is a reflection of the confidence that investors and businesses have in the local economy and highlights recent demand levels. 

“Industrial construction and leasing has been phenomenal during this cycle,” said Tom Dischmann, senior vice president of CBRE in Salt Lake. “At mid-year, there were 4.2 million square feet under construction, which is a substantial total for our market. This is even more impressive when considering that 2.9 million square feet of new product has already delivered year-to-date. This total for the first half of the year surpasses the annual delivery totals for four of the last seven years.” 

Building off a robust first quarter, a surge in leasing activity during Q2 pushed Salt Lake’s industrial market to one of its best first halves in the current cycle — second only to 2017. Totaling 2.8 million square feet of leased space by mid-year, this robust activity was headlined by a 336,000-square-foot lease by Packaging Corporation of America, an international paper and packaging company. 

Retail

New construction and strong leasing reignited Salt Lake County’s retail market in Q2, reversing a slow start to the year and spurring the best single quarter for market growth in over five years. Mountain View Village, which added nearly 285,000 square feet of new retail product to the Southwest and was 73-percent leased at the time of delivery, was the largest contributor to this growth. Though this was a boost to the market, there are no additional major projects which are expected to break ground this year.

  “Though construction has tapered off for the year, there is still a large amount of product available in the market — particularly when considering vacant big-box space, said JR Moore, CBRE first vice president. “Though big-box vacancy decreased 11 percent quarter-over-quarter, there’s still 1.38 million square feet of big-box available in Salt Lake County. This offers great potential for redevelopment or repurposing of space to fit the needs of various retailers — or other business models as well.” 

Office

Office leasing in downtown Salt Lake City has been robust. Over the past year, downtown vacancy has decreased 70 basis points to 14.1 percent in Q2. This is due to both steady lease activity and a lack of downtown development. Though these are signs of a healthy market, this dynamic has affected users seeking large blocks of space. Very few contiguous blocks of space 50,000 square feet or larger remain available downtown. While there is no new development currently underway, there are several planned projects which could break ground if they obtain tenant commitments. These proposed new developments would add an estimated 1 million square feet of new office space to the downtown market.

“Though demand for high-end product was robust both downtown and in the suburbs, suburban Class A space championed quarter activity, accounting for 78 percent of total net absorption,” said Nadia Letey, CBRE’s vice president. “In addition, demand for high-end users is steadily increasing in Salt Lake’s office market, fueled by our strong local economy and current workforce preferences. Class A properties rich in amenities and providing access to transit have been the most sought-after space for some time and this is a trend we expect to persist as density in Salt Lake City continues to increase.”