Real Estate

Other fundamentals point to strong housing growth:

• Jobs growth totaled some 54,000 in 2006; more than 160,000 new jobs have been added since 2002.
• Unemployment rates dipped as low as 2.5 percent.
• Passenger traffic at the airport was up 23 percent in the third quarter, totaling 6 million.
• Retail sales reached nearly $25 billion.
• Third quarter taxable sales rose almost 14 percent, the fastest growth rate in 12 years.
• Third quarter vehicle sales up 21 percent to 29,800, the highest ever.
• Hotel occupancy climbed to 73 percent.

The result was housing growth that defied the national trend. The fourth quarter of 2006 saw some 7,000 new units, the biggest fourth quarter ever.

The Office of Federal Housing Oversight (OFHEO) reported in the first quarter of 2007 Utah led the nation in price appreciation at 17 percent. The OFHEO also found that Utah’s three largest MSAs (metropolitan statistical areas) Ogden-Clearfield, Salt Lake City and Provo-Orem were three of the five fastest appreciating cities in the United States.

Nonetheless the housing market in Utah softened such that 1,963 fewer dwelling units were built in 2006 than in the year prior, even while the value of the new housing stock increased some six percent to $4.95 billion and total construction value climbed north of $7.4 billion… a growth of 11 percent over 2005… according to figures from the Utah Construction Report, published by the Bureau of Economic and Business Research, David Eccles School of Business, University of Utah.

According to Jim Wood, the director at the Bureau and a long-time observer of the Utah’s construction industry, the State’s natural growth is leading to longer building cycles and shallower troughs. Utah has experienced a building boom, but it’s based on sound fundamentals. And the housing market, especially in the Salt Lake Valley, is catching up for lost ground rather than suffering from the speculative excesses that fueled home price frothiness in other Western cities like San Diego, Phoenix, and Las Vegas.

Multi-family living developments are in demand

Here are the numbers of permitted construction activity in Utah in 2006:

• Total new dwelling unit permits—26,322.
• A decline of 6.9 percent, tempered by the fact that residential valuation reached $5 billion, a 6.3 percent increase over 2005.
• Single-family homes—19,888 permits. A decline of 4.9 percent from the 2005 record, but still the second most permits ever in Utah.
• Multi-family housing including apartments and condominiums—5,658 permits. A decline of 13.8 percent from 2005. Nearly three-quarters of new multi-family housing units were condominiums, townhomes, duplexes and twin homes, a function of low interest rates.
• Additions, alterations and repairs were up more than 30 percent over 2005 to $865 million. Since 2004 this sector has risen more than 80 percent!

Utah’s most urban counties…Weber and Davis counties on the north end of the Wasatch Front and Salt Lake and Utah counties on the south… comprise 76 percent of the Utah’s population and along with Washington County in the southwestern corner of the State account for the bulk of the State’s construction activity.

In those counties new single family homes permits breakout as follows:

• Utah County; 5,329
• Salt Lake County; 4,584
• Davis County; 2,471
• Washington County; 1,701
• Weber County; 964

Salt Lake County offers downtown, urban, suburban, and semi-rural neighborhoods varying from brand new homes with all the bells and whistles to century-old classic restorations. Salt Lake City continues to bask in the glow of the 2002 Winter Olympics and “the city has grown and developed into a popular tourist and ski destination as well as a great place to live, learn, and do business” according to @Home Realty Network.

Suncrest sits high along the east bench of the Salt Lake Valley

Utah boasts nationally ranked schools (public and private), attractive shopping districts, low crime rates, nationally-respected hospitals and clinics, and longer than average life spans. Residents enjoy world-class music, dance, and theater; five major and minor league sports teams; and housing that runs from affordable cottages to luxe mansions. Within one day’s drive are 11 national parks and uncounted year-round outdoor recreation opportunities.

One of the major league teams is Real Salt Lake, which is building a $145 million stadium complex in Sandy. Completion is scheduled in time for a July 4, 2008 grudge match against the famed Spanish soccer team Real Madrid.

Apartments

“Investor demand for apartment properties significantly exceeds supply. Financing rates and cap rates remained lower than forecast, resulting in continued price appreciation spurred by increasing rental rates and the vibrant strength of the local economy. The forecast for 2007 provides for continued economic strength in all major sectors,” according to Equimark Properties, Inc., in their Greater Salt Lake Multi Family Report 2007.

The report also found that, “Salt Lake County rental rates grew 5.1% during 2006, the highest rent growth to occur in 14 years. Rental concessions have virtually evaporated except for a few communities offering reduced deposits.”

For Salt Lake County rentals the averages are:

Category        Rent ($) Size (sf)     $/sf      Vacancy
Studio             $434       406      $1.07   5.6%
1 BR 1 Bath    $586       652      $0.90   4.4%
2 BR 1 Bath    $650       882      $0.74   4.8%
2 BR 2 Bath    $824       994      $0.83   5.3%
3 BR 2 Bath    $892       1199    $0.74   4.0%
Overall            $674       837      $0.80   5.1%

Rents on the east side tend to be slightly higher than on the west side and larger complexes average slightly higher than smaller ones.

The starting inventory of apartments for 2006 was 108,380 units compared to 106,813 units in January 2004, an increase of 1.25 percent. Completed new construction was 642 units, almost a three-fold increase over 2005, but far below the 2,707 units completed in 1997. Nearly 1,050 units were under construction at year’s end.

Investor demand for multi-family properties with more than 100 units set records. The average price per unit jumped 35 percent to $85,138 compared to $63,093 in 2005, and cap rates dropped to 5.8 percent from 6.8 percent the year before. The highest price per unit was $128,378, also a record for the Utah market.

Office

Constrained by the building razings associated with the massive City Creek Center redevelopment and buoyed by new space coming on line, “the Salt Lake area office market remains strong and balanced,” according to Year End 2006 Market Review by Commerce CRG / Cushman & Wakefield Alliance. “While year-to-year direct vacancy edged down slightly to 10.28 percent over the past 12 months, nearly 800,000 square feet of new space was added to the market during the same period—almost double the amount that came on line in 2005. Vigorous levels of activity are being met with a relative parity in supply and demand.”

In 2006 Salt Lake office space market continued the trends of 2005, according to NAI Utah 2006 Year End Market Report.

• Class A space downtown rose $0.47 to $20.64 per SF.
• Class B space downtown rose $1.08 to $17.22 per SF.
• Class C space downtown rose $1.22 to $14.30 per SF.
• On average Class A space is about $1.50 per SF higher downtown than in the suburbs

For 2007 Market Review foresees “a slight increase in total direct market vacancy is expected in 2007; a limited amount of Class A office space will be available in the downtown area in the coming year; developers will continue retrofitting Class B and C properties as an antidote to the high cost of new buildings; lease rates will continue to rise
in 2007.”

RiverPark Corporate Center

Market Review notes other trends in office space:

• Office users are increasingly building their own. Fidelity, Spillman Technologies, Southern Nevada University and Myriad Genetics added nearly 500,000 square feet of office space in 2006. “Had these tenants absorbed existing office space, the total direct market vacancy rate would have been further reduced by almost 20 percent.”
• New construction prices led to a sharp increase in lease rates. Higher construction costs propelled a spike in rents, resulting in fewer concessions and a reduction in build-out allowances to tenants.
• The State’s thriving economy is attracting out-of-state office users and fueling in-state expansions. Utah’s continuing economic expansion is drawing interest from out-of-state firms looking to expand and powering the growth of home-grown companies.

Industria

In 2006 vacancy rates for both available and vacant industrial property hovered at five year lows, 6.87 percent and 6.52 percent respectively according to NAI Utah 2006 Year End Market Report.

“All increments experienced significant activity in 2006, yet total absorption lagged behind 2005. Each size increment segment experienced at least 800,000 square feet of activity totaling 5.7 million square feet of gross absorption.” 

At the start of 2007 there was only a 9-month supply of midsize multiple-tenant warehouse space, a 13-month supply of flex space and a 44-month supply of bulk warehouse.

Because of moderate land prices in the $3–$3.50 per square foot range, much of the new developments are taking place in the northwest corner of Salt Lake City. Likewise the South Valley is also active courtesy of lower land prices and low interest rates.

Twenty-five buildings totaling 2.6 million square feet are currently under construction and another 26 buildings constituting 1.4 million square feet are on the drawing boards. Despite this activity, NAI predicts
that rates will hold steady. “Utah is on a new footing and it is forecasted that these trends will continue.”

Investment

“The Salt Lake area investment market remains robust and active,” says Commerce CRG’s Year End Market Review. “Demand for investment properties showed no sign of slowing in 2006, with sales surging past the previously predicted $1 billion mark to reach $1.292 billion. Although total sales volume declined slightly from the $1.5 billion recorded the previous year, an extraordinary number of large sales closed in 2005 and sales activity levels have not actually diminished. Dynamic sales activity occurred in all investment categories.”

Like nothing else, lowering cap rates show the expanding confidence investors have in the Utah market. Figures from NAI Utah 2006 Year End Market Report show this:

Change in Utah’s Cap Rates by Property Type

Year   CBDF  Suburban
          Office  Office   Warehouse     Retail
2004   7.8%    7.6%    8.2%               8%  
2005   7%       7.2%    7.7%               7.4%    
2006   6.47%  7.1%    7.22%              6.92% 

The year ended with $1.29 billion in investment sales, less than the $1.56 billion in 2006, but still almost double the 2004 figure of $679 million. Investments in office space and apartments declined slightly, but the most pronounced drop was investments in retail spaces. There were net gains in industrial space and the ‘other’ category which includes hotels and motels, storage spaces, and the like.

For 2007 Commerce CRG forecasts:

• “The Salt Lake area market has entered a sustained run of strong investment activity. Current and projected growth in all market segments, along with benefits such as our expanding light rail lines and soon-to-be-completed commuter rail line, will continue to lure potential investors. Sales activity in 2007 is projected to exceed $1 billion for the third consecutive year.
• “The balanced nature of Utah’s economy will continue to appeal to out-of-state investors. While the state’s economy is currently best described in superlatives, Utah has maintained a long-term balance not seen in comparable western markets. The fact that the market steadily progresses, with no sudden swings up or down, gives investors comfort and confidence.
• “Quality investment product will remain in short supply. Although the selection of desirable properties has diminished, the market is so dynamic that there has been little or no decrease in demand. Investors are adjusting their expectations according.”

Retail

For retail 2006 was a vibrant year in the Salt Lake Valley.

• Overall vacancy declined from 10.3 percent to 7.8 percent during the course of the year.
• Some 2 million square feet of retail space was absorbed during the year, much of it in the South Valley.
• Lease rates stabilized after a sustained upward trend.
• The building boom and the strength of the retail sector have left little in the way intermediary retail space. That is, while Class A retail and Class C are available, there is little in the way of Class B space. Expect owners to remodel or redevelop older second generation centers in response.
• The vibrancy of the market has lead to a number of retail outlets to expand into the market in 2006 and 2007, including: IKEA, Whole Foods, Hobby Lobby Ruth’s Chris Steakhouse, Sports Chalet, Amazing Jake’s, and others.

Retail projects completed or near completion include:

• The District
• Riverton Meadows
• Rose Creek
• Quarry Bend
• Jordan Landing
• IKEA

Both Crossroads Plaza and the ZCMI Mall have been razed as a part of the $1 billion redevelopment of a two-block area to be called City Creek Center. The project, scheduled for completion in 2011, will add 800,000 square feet of retail space to the central business district.

A third mall, Valley Fair Mall in West Valley is undergoing a major $50 million renovation that leaves it an open-air mall with a new anchor, Costco. Trolley Square… housed in historic trolley barns and just east of the central business district… is being redeveloped and re-leased.