Record industrial property delivery leads strong commercial real estate year

Utah commercial real estate had another strong year in 2018 across all property types along the Wasatch Front, according to the 2018 Year-End Market Report from commercial real estate firm Newmark Grubb ACRES. The report breaks down how each property type performed in 2018 and gives some insights on what 2019 might have in store.

In the industrial sector, new construction continues to just keep pace with demand, with the overall direct vacancy rate remaining at a near-record low of 2.8 percent. Last year was the largest yearly delivery of industrial product in history at 5.2 million square feet (SF) with 82 percent already committed. The overall achieved average lease rate was relatively stagnant from 2016 to 2017 and many wondered when there would be an increase to match construction costs, Newmark Grubb said. That change finally occurred in 2018 with a 5-cent net-net-net (NNN) monthly per-square-foot (PSF) increase from the previous year, the largest year-over-year jump in at least eight years. 

Office direct vacancy rates dropped across the entire Wasatch Front even with the influx of new product. The Tech Corridor experienced the highest volume of leased space (1.9 million SF) and the biggest direct vacancy plunge from 8 percent to 3.9 percent in 12 months. Moving forward, direct vacancy rates should level out across all regions after such a steep drop in 2018. Construction is currently keeping pace with demand for space and developers are holding back on building speculative product without at least a good credit tenant to help anchor a building before breaking ground. 

Retail direct vacancy for the entire Wasatch Front has hovered around the 4 percent mark since 2014, only dipping below or above by a small margin.  The 0-4,999 SF retail segment continues to be the most active in terms of leased SF and number of transactions. The two largest retail SF segments — 20,000-39,999 SF and 40,000+ SF — posted large increases year-over-year. Some of the large tenants expanding along the Wasatch Front included Extra Space Storage, At Home, All Star Bowling & Entertainment, Best Buy and Burlington. As population and job growth continues along the Wasatch Front, retailers outside of Utah will bring new competition to already existing retailers and build quality new construction that will attract new customers, the report said. 

Utah investment commercial real estate recorded an all-time high of $3.18 billion in transaction dollar volume in 2018, up 44 percent from 2017, which was previously the most active transaction year. There have now been 10 straight years of transaction dollar volume increases. Average cap rates continued to compress across almost all product types even with the Federal Reserve raising interest rates four times in 2018. For the future, overall transaction levels will most likely recede as either interest rates continue north or economic headwinds begin to prevail. Furthermore, opportunity zone tax legislation will create property plays that compete with 1031 transactions and spur additional land and redevelopment prospects.

Land transactions in 2018 slowed overall compared to 2016 and 2017 in terms of transaction acreage but are consistent with historical trends. However, the total dollar volume was 13.7 percent higher than the 10-year average ending in 2018. With industrial direct vacancy remaining low and torrid net absorption continuing and Utah population growth remaining one of the highest in the nation, industrial and residential land (including multifamily) types were once again the two largest contributors to the total dollar volume in 2018 — contributing 76 percent to the total. Industrial and residential will continue to be drivers in the land market as they have for the past few years in Salt Lake County and along the entire Wasatch Front.