The U.S. office market remains on solid ground, but growth is subsiding in most markets as we reach the late stage of an extended cycle. Major markets such as Boston, Manhattan and San Francisco may grab the headlines as outperformers, but the Salt Lake City metro is currently one of the most dynamic office markets in the nation.
Chris Kirk, managing director of Colliers’ Downtown Salt Lake City office observes, “Utah is the crossroads of the West. The state has incredibly strong business fundamentals, a commercial-friendly environment, a healthy, vibrant office market. The emergence of tech has escalated Utah’s growth trajectory. Capital wants to come to Utah. As investment dollars are seeking more yield potential, many investors are seeing Utah as an emerging secondary market that is here to stay for the long term.”
A Strong Local Economy
Utah’s economy has consistently ranked as one of the healthiest and fastest growing in the U.S. The Utah Department of Workforce Services estimates that unemployment in the state hovered around 2.8% for the first two quarters of 2019, almost a full percentage point below the national average.
Positive economic performance in Salt Lake City has become a constant, putting Utah on the national radar. Forbes ranked Utah number one in their Best States for Business in six out of the last nine years and number two in 2018. CNBC ranked Utah among America’s Top States for Business multiple times over the last five years. Inc. ranked Utah the Second-Best Place in America to Start a Business in 2018.
Job growth has been consistently steady for the better part of a decade. The U.S. Bureau of Labor ranked Utah among states with the most job creation between February 2018 and February 2019. At a growth rate of 4%, Utah ranked second in the nation overall — adding 50,900 jobs to the state during a 12-month period.
Businesses operating within Utah’s burgeoning aerospace, technology, life sciences and healthcare industries are experiencing rapid growth. Top global companies like Boeing, Adobe and Merit Medical have significantly invested in Utah’s favorable business climate and talent-rich labor pool through major corporate expansions. Additionally, leading financial and business services-oriented companies such as Goldman Sachs and American Express also have found Utah the ideal environment for corporate expansions.
Current Office Market Context
As of Q2 2019, Utah had a metro office vacancy rate of 9.2%, while the national average was 11.5%. Downtown Class A vacancy rates totaled 8.6% in comparison to the U.S. national average of 10%. As out-of-state businesses look to Utah as a viable option for relocation or expansion, Salt Lake City is seeing an increased tech presence, especially in the downtown market where there’s a walkable and vibrant entertainment community centered around business.
However, it is not just the Salt Lake City central business district (CBD) that is outperforming. Utah’s suburban vacancy rate is nearly half the current national average — totaling 6.7%, as compared to the national average of 12.1%. Available Class A office space is in limited supply within the Salt Lake City market, so many tenants have resorted to pre-leasing new projects — whose asking rates attract a premium at $33.65 full service, per square foot.
Since 2014, Utah has seen approximately 17.2 million square feet of newly constructed office space enter the market across its core business district — the Wasatch Front. This region of the metro is posting record numbers — there is currently 4.1 million square feet of office space under construction within this area alone. This equates to 7.8% of existing office inventory, far ahead of the national average of 2.3%.
Not only has new construction surged within the Wasatch Front, but vacancy rates are relatively low and stable — hovering around 8% overall. These rates have remained low because the vast majority of new Class A office space is pre-leased before completion. With new office product entering the market at record rates, pre-leasing activity will remain a critical metric to watch moving into the second half of 2019 to determine how economic momentum will continue through 2020.
Emergence of Silicon Slopes
South Salt Lake County and North Utah County, otherwise known as the Point of the Mountain, have become the home of what is known as Silicon Slopes. This area houses most of Utah’s top technology companies and sets the tone for office development throughout the state.
Silicon Slopes has been on an absolute economic tear over the past five years. The Point of the Mountain region has been the center Utah’s record growth, the driving force behind top national rankings, a catalyst for innovation and the primary cause behind why the Salt Lake City metro has become one of the fastest-growing economies in the U.S.
Homegrown companies (such as Pluralsight, Qualtrics, Vivint, Domo, Ivanti, Divvy, Health Equity and Podium) and top national companies (such as Adobe, Facebook, Microsoft, EMC and Micron) have selected corporate headquarters within the core Silicon Slopes real estate cluster.
Tech companies absorbing office space within the Point of the Mountain region have accounted for approximately 75% of all new office construction delivered to the Salt Lake City market over the past three years. Chris Kirk observes, “The Silicon Slopes phenomena has put Salt Lake City on the map, and Utah’s commercial advantages are now known around the world. Salt Lake City’s competitive advantages are being recognized and many see the market transitioning from a tertiary market to an expanding secondary market.”
Downtown is Strengthening
Downtown Salt Lake City is also undergoing revitalization. The CBD is introducing new high-rises across its skyline. Vacancy within the CBD is down from 9% in the second quarter of 2018 to 8.3% at midyear 2019, following a pattern of overall decline over the past six years.
“With strong development of the multifamily sector in expanding downtown Salt Lake City, world-class tech talent is finding an attractive live, work and play environment,” Kirk comments. Sugarhouse is another urban market creating tremendous opportunities for businesses to experience the “cool factor” that Salt Lake City’s urban growth offers expanding companies. These markets provide excellent walkability, access to mass transit and entertainment. Continued growth should continue to transform Utah’s urban core into a destination place where businesses can find many amenities for their employees and centralized access to a productive workforce along the Wasatch Front.”
With strong growth and favorable economic conditions, there are reasons for cautious optimism moving forward. As long as lease rates, fiscal planning and wages stay the course with the rising costs of construction and doing business, Utah should continue its upward growth trajectory.
Despite strong economic optimism, there are areas of concern for the Salt Lake City market. Utah has become an attractive destination for companies looking to lower operational costs while providing an ideal environment for employees to thrive outside of the office. Affordability and quality of life have been two major reasons why Utah has located top companies to the state. However, these strengths have quickly become challenges in the face of growth.
Utah’s employment reached historic lows in 2019. The state’s labor force remains strong, but even with one of the highest birthrates in the United States, in-migration by employees from other states will play a key factor for long-term, sustainable economic growth. The price of housing in Utah has already ballooned as a result of short supply and increased demand. The cost of owning a home in Salt Lake City climbed 67% over the last five years.
Notwithstanding these challenges, Utah has been historically one of the quickest states to rebound from a recession. This is in part due to significant economic diversity in the state. When certain industry sectors slide or experience stress, diversity powers Utah through times of challenge. If Utah can maintain economic momentum into 2020, the Salt Lake City metro should be on solid ground for continued commercial expansion.
In closing, Chris Kirk identifies another area of opportunity. “Despite record levels of new construction across the greater Salt Lake City metro, there is also significant vacancy within second-generation space. Tremendous potential exists for investors who are looking to create enhanced value in these assets within a market that continues to offer solid growth. Utah is here to stay, and we are witnessing a commercial renaissance right before our own eyes.”
About the author:
Bryan Welch directs public relations and communications initiatives for Colliers International | Utah. He has played a critical role in supporting commercial growth and development within the greater Salt Lake City market for the past decade. Prior to joining Colliers, Bryan worked in the office of Governor Gary R. Herbert, and has privately advised growth strategy for businesses within the real estate, manufacturing, transportation, retail, technology, national defense, education and nonprofit sectors.
Chris Kirk is Managing Principal of Colliers International | Utah. As an office specialist, Chris believes in the value of long-term relationships, with close attention to client requirements being the foundation of his career in the commercial real estate industry. He is particularly interested in locating businesses new to Utah market, and is also the current Utah Chapter President and Trustee for the SIOR Foundation.
Stephen Newbold is the National Director of Office Research for Colliers International, where he focuses on analyzing office property trends, compiling Colliers’ thought leadership and delivering timely market projections to provide clients with a leading edge in our industry.
Lana Howell is the Senior Director of Research & Marketing for Colliers International | Utah. With an extensive work history in the real estate industry, Lana oversees the planning and implementation of real estate statistics and market study projects by analyzing market data and economic statistics for client projects.