2014 Year End Review
Industrial– Salt Lake Industrial Market is Near Historic Low Vacancy
2014 was a banner year for the Bulk Distribution segment of the market, which outperformed all other product types. Of the 4.0 million square feet leased in 2014, Bulk Distribution accounted for over half the total while almost all other product types were below 2013 levels. Across the board, the number of leases completed in 2014 was down from 2013, except for Bulk Distribution, which posted a 40% increase. The increase in Bulk Distribution activity is attributable to pent-up demand due to lack of available supply in 2013. While net absorption was positive at 2.7 million square feet, the supply-constrained market limited absorption resulting in a 17% decrease from 2013.
Overall, the Salt Lake County industrial market performed well in 2014 and was limited only by a lack of quality supply. Despite the minor setback, optimism remains strong. In anticipation of new tenants, developers will deliver well over 3.0 million square feet of product (mostly Bulk Distribution) in 2015. As smaller increment space continues to be absorbed, average rental rates will increase in 2015.
Office – Sub 10% Vacancy Shows Strong Demand for Office
The double-edged sword of a “good market” is now evident in the Salt Lake County office market. Its vacancy rate dipped below 10.0% for the first time in more than a decade, settling at 9.9% for 2014. Landlords were able to increase average asking lease rates by $1.23 psf, up 6.0% from a year ago. Annual net absorption was 667,975 square feet in 2014. This may seem moderate at first glance, but comparing this figure to the 1,061,207 square feet of absorption in 2013 reveals this perceived slowdown is actually due to a lack of product and not of demand.
In response to demand for quality space, more than 1.4 million square feet of Class A space is under construction, with anticipated completion in 2015. Office product delivered to the market in 2015 may actually exceed 1.5 million square feet for the first time since 2008.
Retail – Vacancy Decreases While Lease Rates Increase
Utah’s retail market is showing true signs of stabilization as we hit the lowest vacancy rate that we’ve had in over seven years (7.34%). This low vacancy rate has caused a higher demand for the current supply, and in return we’ve also watched the lease rates rise. Currently the lease rates are the highest they have been in over seven years as well ($17.06).
Retail centers will gain stronger stabilization as vacancy rates drop, and as sellers see that the market is continuing to close at lower cap rates they will realize that the highest return on their investment could be now.
Investment–Cap Rates at Historic Low in 2014
2014 validated the increasing and continued confidence investors have in the Utah market. Significant cap rate compression was realized across all commercial market segments as buyers competed for quality investment properties. Cap rates hit a historic low in 2014. Retail and office had the most significant year over year change in cap rates, each experiencing a drop of almost one full point pushing price limits. Multifamily continued to lead with the lowest average cap rate of 5.75%, which was more than 1.25 points lower than any other category.
With interest rates still at a historic low and lending institutions flush with cash, investors will continue their aggressive purchasing in 2015. Retail and multifamily will both remain desirable assets. Office and industrial product will see increased investor attention this next year. Utah’s strong economic fundamentals will continue to attract investors and maintain current cap rate trends across all market segments.
Land– Wasatch Front in a Vibrant Development Cycle
Along with a booming economy comes a booming land market. Virtually every land property type has fully recovered from the tough recession years. Utah and the Wasatch Front in particular are in the midst of a vibrant development cycle that has put increased pressure on available land. For the most part, property values are now equal to or better in some cases than the robust years of 2006 and 2007. The number of acres sold is surprisingly down 25% from 2013 however the number of transactions is up nearly 20% and the total sales volume is up almost 48%.
We expect the activity in land and upward trend in pricing to continue as long as we remain in a growth and development cycle.