Utah steeling itself for continued growth; Utah construction will continue on a tear through the end of the decade, but looming tariffs could complicate timelines

Utah has once again claimed the top spot as the fastest-growing state in the nation in terms of population. At 2 percent, Utah’s solid growth rate is nearly three times the 0.7 percent seen nationally. This has helped bolster Utah’s rapid employment and economic growth in a number of industries. For example, Salt Lake County has seen job growth at nearly 20 percent and Utah County has taken the top spot at nearly 30 percent. 

This healthy growth has fueled record-breaking construction completions. For example, in 2017, nine office buildings were completed, adding 1,388,422 square feet to the market. These buildings were all housed in Utah suburbs. Part of this growth is the continuing trend of national and global companies strategically locating offices and satellite offices along I-15 with close proximity to TRAX and FrontRunner stations. Four such buildings were completed last year, including View 72-CHG Healthcare, SoJo Station, Vista Station 8 and Sandy Tower East. What is interesting to note about these buildings is that they were considerably preleased before any ground was broken. By the time they were completed, they were 87 percent preleased.

Looking forward, of the office buildings already under construction, 85 percent of the square footage is already committed. In the downtown Salt Lake City area, office construction will heat up again in the coming years and the cranes will stay in the air longer than in the suburbs because delivery time is typically 18-24 months for these larger buildings, as opposed to 12 months in the suburban area, which are smaller on average. Several sites have either been purchased by developers who are now looking to prelease commitments to begin construction. 

According to the Cushman and Wakefield research team, overall market absorption in 2017 reached nearly 1.1 million square feet, with 631,700 square feet of absorption in the fourth quarter of 2017 alone. This is only the second time in the market’s history that overall positive absorption climbed above 1 million square feet. Large expansions of companies such as CHG (281,000 square feet), Solar City/Tesla (150,000 square feet) and Lucid Technologies (120,000 square feet) largely attributed to the strong year of growth.

This flurry of construction activity will round out the decade on a high note, but in the meantime, this level of construction has brought some interesting challenges to the market. These include labor shortages, component costs, lumber costs and the increasingly complex issue regarding steel. 

Volatile Costs

A developer in Salt Lake City recently shared his frustrations with the availability of materials. His group is developing an office building in Salt Lake County. For large developments like this, they have to plan ahead so that many of the steel components are pre-ordered. This gives them a cushion to meet constantly pressing deadlines. 

One of the issues is that the pricing for steel is open to change, which is the normal state of things; however, now, with potential steel and aluminum tariffs looming out of Washington, this situation has become much more volatile and the pressure is increasing. In order to meet deadlines, developers need commitments to get the steel ordered to get a decent price and to just get in line to get their hands on the steel. 

The developer said builders and developers across the country have been under pressure and have been applying pressure on their suppliers to fast-track the materials and components they need before the tariffs really start to kick in and prices skyrocket.  

With rising costs, it would follow that the lease rates would go up accordingly. However, while lease rates are indeed moving upward, they are not in the exorbitant range yet, nor are they going up as fast as might be expected to be commensurate to the rising labor and materials costs. Lease rates in Salt Lake County have an overall asking rate of $24.32 per square foot. This is compared to a national average of $28.71. The past five years in Utah has shown an increase of $4 per square foot for Class A and B average asking rates. 

The Salt Lake County and Utah County markets are forecast to remain strong, with a slight slowing of construction as companies continue to “rightsize.” Salt Lake County has just over 900,000 square feet currently under construction, with 700,000 square feet of that slated to come online in 2018. Utah County has just under 1 million square feet under construction, all predicted to come online this year. New construction is currently 60 percent preleased in Salt Lake County and 51 percent preleased in Utah County. These lower preleased totals reflect the slight slowing in the quickly expanding Salt Lake County and Utah County markets as companies assess their current footprints. 

Salt Lake and Utah County continue to see an influx of out-of-state companies enter the market looking for access to the educated workforce, tech talent and lower costs of real estate. For example, recently, a Utah-based company chose to move their headquarters south from Davis County to the Point of the Mountain, where Salt Lake and Utah counties converge. Office users continue to follow this trend of locating near the I-15 corridor with access to employees from both Salt Lake and Utah counties. 

Another key driving force is access to transit. Many developers have purchased sites along the I-15 corridor that are considered part of a transit-oriented development, marketing their sites for expanding company headquarters. Within the Sandy City limits, there are four developments working to get out of the ground to take advantage of mass transit, freeway connectivity and the concentrated workforce. These developers sense the slowing of the market and will wait to build until they have a portion of their project pre-leased, especially with the looming potential cost increases. 

Salt Lake and Utah counties continue to face a thinly stretched construction workforce and an increased time for permits, which is tacking on additional time for new buildings. The construction workforce is consumed with many large projects, such as the Salt Lake City International Airport. The result is there is so much work to be had that many construction workers are not even interested in taking on incentivized overtime. 

Overall, we predict the development outlook in Salt Lake and Utah counties continue to appear strong through 2018 with an adjustment in tempo of new construction due to uncertainty of interest rate increases, rising steel prices and smart company decisions.

Aliison Beddard is the senior director/office and investment and Annastasia Kaessner is an associate at Cushman & Wakefield in Salt Lake City.