Real Estate

Salt Lake City maintains one of the most versatile of markets. According to Realty Times, Salt Lake is said to be one of the nation’s finest cities in which to live. It has some of the best schools and shopping, as well as the lowest crime rates for a city of its size in the entire country. With homes that are very affordable for first-home buyers to multi-million dollar mansions, most buyers can find exactly what they are seeking.

Utah’s value of permit-authorized construction reached record highs in 2004, topping
$5 billion for the first time. The value of construction rose 12.2 percent that year over 2003, according to the Utah Construction Report, published by the Bureau of Economic and Business Research, David Eccles School of Business, University of Utah.

Residential construction led the way with a record $3.6 billion in new construction. The number of permits issued for homes, condo­min­iums, manufactured homes, cabins and apartment units exceeded 24,000, also a record. New single-family homes totaled 17,724, which broke the long-standing record of 17,424, set way back in 1977. Condominiums accounted for 12 percent of the residential market and one-half of multi-family units.

Single-family home construction in 2004 was concentrated in four counties: Salt Lake County had 4,829 new homes; Utah County 3,404 new homes; Davis County 2,602 new homes; and Washington County 2,692 new homes. Salt Lake, Utah and Davis counties are located along the Wasatch Front, with Salt Lake City as its hub. Washington County is in the southwest corner of the state, with St. George being its principal city.

Home buying in Salt Lake City tends to favor the buyer. Almost every style and price range can be found—from older homes (some dating back to the late 1800’s) to innovative new subdivisions and communities. As the economy continues to improve, prices are up slightly over 2004, but many areas are still very affordable. Salt Lake City has both city and suburban neighborhoods.

Affecting the local real estate market is Utah’s strong population growth. The state’s population grew 2.3 percent in 2004, more than twice the national rate.

The Utah Construction Report makes the following predictions: construction of new single-family homes will continue to be robust in 2005, but likely will decline somewhat from the record levels seen in 2004; construction of condomini­ums and townhomes will likely exceed rental units in 2005; total permit-authorized construction value for 2004 reached a record $5.1 billion and, in 2005, should also be near the $5 billion mark.

One notable real estate mile-marker that occurred in 2004 was the start of Daybreak, a master planned community in the City of South Jordan, located on the Salt Lake Valley’s west bench. It is being developed by Kennecott Land, a subsidiary of the international mining company Rio Tinto (headquartered in London), which owns Kennecott Utah Copper. Predecessor companies have been mining copper in the hills along the Salt Lake Valley since 1903. The company began Kennecott Land in 2001 to exploit its vast land holdings. These include 93,000 acres of land, many of which are not developable; but it has been reported that 30,000 or more acres can be developed. Kennecott Land’s holdings represent the largest amount of land owned by a private landowner adjacent to a metropolitan area in the country.

Daybreak is a 4,126 acre development that, when completed, will have more than 13,000 homes, 1,200 acres of natural open space, a large freshwater lake and more than 9 million square feet of commercial and industrial space. Sales of home sites at Daybreak began in 2004.

The apartment vacancy rate in Salt Lake County at 2004 year-end was 5.7 percent, down from 8.6 percent at year-end in 2003. Job growth in 2004 helped propel modest growth in rentals during the last year.

Salt Lake City remains affordable. Average rental rates are among the third lowest of western cities in the U.S. According to Commerce CRG, average rental rates in 2004 were: Studio apartments - $401; 1 bedroom - $529; 2 bedroom 1 bath - $586; 2 bedroom 2 bath - $698; 3 bedroom 2 bath- $793; Overall - $596.

In 2004, according to Greater Salt Lake Multi-Family Report, January 2005, published by EquiMark Properties Inc., rents per square foot in Salt Lake County were: studio apart­ments rented for $1.01 per square foot; 1 bedroom, 1 bath apartments rented for $0.85 per square foot; 2 bedroom, 1 bath rented for $0.70 per square foot; 2 bedroom, 2 bath rented for $0.77; and 3 bedroom, 2 bath rented for $0.70. Each of these categories showed a slight increase from 2003 rates, though they were all slightly lower than 2002 rates.

The local apartment market totals more than 93,000 units, and growth in recent years has been modest – about 1 percent in the number of units per year, as measured by number of new units receiving building permits.

According to Commerce CRG: “Over the next 12 months [2005] the rental market conditions in Salt Lake County should improve as economic growth picks up and the job market improves. Economic growth will lead to higher interest rates, including higher mortgage rates. As mortgage rates rise the demand for rental units will increase as fewer renter house­holds are able to qualify for home ownership.”

Although job growth and increasing mort­gage rates leave the existing apartment market poised for growth, it is also tempered by existing vacancy, entry level new home affordability, as well as the construction of newer rental units.

According to the Year End 2004 Market Review of Commerce CRG, Cushman & Wakefield Alliance, the Salt Lake office market showed solid signs of recovery during 2004. Building on a turnaround that began in the latter part of 2003, the market gained momen­tum and continued to improve. Overall, market vacancy declined 1.5 percent and the 771,000 square feet of absorbed office space easily surpassed the 492,000 square feet posted in 2003. After a lull in speculative construction, new quality buildings have been added to the Salt Lake office market’s inventory. The state experienced a jump of 7.1 percent in 2004
over 2003 in nonresidential construction, the best showing in four years. New build­ings are being added to healthy sub-markets where vacancy is lower. Additional new office con­struc­tion includes owner, build-to-suit, and institutional projects.

Tenants have taken advantage of low interest rates to upgrade their space. A 4.94 percent drop in Class A vacancy over the past year can be traced to tenants who migrated to better quality buildings while the interest rates were low. Although rates have stabilized and are expected to rise throughout the course of 2005, approximately 350,000 square feet of new speculative Class A office building construction will occur. According to the Economic Development Corporation of Utah and CB Richard Ellis, overall vacancy in the Salt Lake office market was at 18 percent in the first quarter of 2005 with an overall average lease rate (FSG) of $15.27.

Commerce CRG predicts: “Moderate decreases in vacancy are expected in the coming year [2005], bolstered by continued internal growth and some immigration of national companies. The return to speculative construc­tion will pick up speed in 2005.”

Private, Utah-based retail developers have reappeared in the market with new projects.
In the recent past, owner/user development was the driving force behind many of the new projects; however, local developers have become more aggressive in controlling development property and driving new development.

According to the National Association of Industrial and Office Properties’ publication, Utah Commercial Real Estate Symposium 2005: “It was another banner year for retail develop­ment in Utah in 2004. Salt Lake County alone added more than 1.5 million square feet of new retail construction, up over 35 percent from 2003.”

New “mega retail developments” are scheduled to begin construction in 2005.
These large, 75 to 100 acre, proposed retail develop­ments will be significant to the market and be likely to re-define existing trade areas. There is also the major construction associ-
ated with downtown’s ZCMI Center and Crossroads Plaza.

Industrial vacancy declined from 10.50 percent to 8.49 percent over the course of 2004, fueled primarily by the expansions undertaken by local and regional tenants who already have a presence in the marketplace. The overall industrial market activity has achieved the highest levels seen in this decade. Lease and sales activity in 2004 resulted in a 10.3 percent rise in the number of completed transactions.

For the first time in several years, a few manu­facturers have established new operations
in Utah. This could indicate an improving economy and stimulate demand for indus-
trial facilities.

A notable expansion project is that of KraftMaid Cabinetry, one of the nation’s largest cabinetry manufacturers. It has announced it will break ground in the second quarter of 2005 on a new 700,000 square foot production facility in West Jordan. KraftMaid will employ approximately 1,300 people at the new $106 million facility.

The Utah Commercial Real Estate Symposium 2005 predicts the absorption of existing product will continue in 2005, lease rates and sales prices will continue to increase, build-to-suit buildings will become more prevalent, higher construction costs and land prices will strongly influence lease rates and sales prices, and developers will reappear in late 2005 to take positions for 2006 and 2007.

The record pace set at the mid-year mark continued through the year to push sales volumes to new historic levels. Total dollar value as well as the total number of transactions exceeded those set in 2003. Nearly $680 million in commercial sales have closed, an increase of 10.6 percent over 2003. Consid­ering total averages for the year, Capitalization rates (Cap rates) dropped for every product category. The decrease in rates ranged from 2.23 percent to 0.26 percent with an overall average of 0.80 percent decrease in Cap rates. Salt Lake area investment properties are a good value when compared to the rates in other Western markets. Retail investments continue to lead the way with solid increases and the demand for investment properties is expected to remain strong throughout the course of the year. Competition for quality product in the surrounding markets and attractive cap rates relative to the markets is expected to continue to bring more institutional type buyers back to the Salt Lake area market.

The Utah Commercial Real Estate Symposium 2005 predicts that absorption will remain positive in 2005, and be slightly higher in 2005 than in 2004. Many of the current buildings that are under construction in the suburban market are lease and will create significant positive absorption for the Class A suburban market. The absorption downtown will also increase in 2005, it says. Completed office space during 2005 will surpass 2004, as there is already more space under construction to begin the year.

Also note that in 2004, the Church of Jesus Christ of Latter-day Saints purchased, in downtown Salt Lake City, Crossroads Mall, Key Bank Tower and the Triad Center. Plans for Crossroads Mall, along with the already church-owned ZCMI Center across the street, have yet to be made public. Triad Center, the Church has said, will be used as a location for LDS Business College and Brigham Young University’s Salt Lake Extension Center. How the Church’s rebuilding the malls and perhaps removing considerable amount of office space from the market for its schools, will affect the market for office and retail space are not yet known, but could be considerable.