As the state’s economy continues to thrive, the volume of office buildings and commercial projects under construction of late along the southern Wasatch Front is at a near record pace — the bulk of which is situated in the heart of Utah’s tech hub.
In Utah County, the amount of office space being leased has more than doubled since last year, and nearly twice the amount of 2014, according to data from commercial real estate firm Coldwell Banker Commercial Advisors.
The Utah County office market has experienced significant growth in 2016, with more than 1.1 million square feet of positive office space absorption, explained Lana Howell, director of technology services for CBC Advisors. The absorption rate is the level at which rentable space is filled or leased to a tenant.
“We’re seeing the supply increase and the demand go up at the same time,” Howell said.
This year, 1.6 million square feet of high-end space is reaching completion, with large amounts of new space on the market quickly absorbed by new and expanding tenants, she said.
Other firms are filling the majority of space left vacant by companies relocating to new space, resulting in low vacancies throughout the area, Howell added.
Data shows that Utah County office vacancy rates have declined significantly over the past five years, from a high of 14.7 percent in 2012, to a low of 4.3 percent last year.
The current rate of 6.8 percent vacancy can be attributed to the large amount of new office buildings being completed, Howell said, noting that not all the space was fully occupied at the time of completion.
Little change in trends is expected in 2017 as the market readjusts to new product and settles into itself, she said. The new space is also driving leasing costs higher, with rates jumping from $18.54 per square foot in 2015 to $21.34 per square foot this year, data shows.
Over the course of three years, the area’s landscape has changed dramatically, Howell said. Landlords continue to achieve higher rents, especially in ideal locations that offer unique space, near transit-oriented developments, and favorable parking ratios, Howell added.
The state’s burgeoning technology sector is driving most of the dramatic growth in the Silicon Slopes area, explained CBC Advisors chief communication officer Bryan Welch. However, the expansion would likely moderate in the coming New Year, Howell noted.
“We’re waiting for the dust to settle, to determine what the more normal trends are going to be (going forward),” she said. “By midyear (2017), we’ll start seeing where things are moving.”
In Salt Lake County, commercial development is strong, with growth levels expected to “be tempered somewhat” as the overall economy adjusts to market demand, explained Darin Mellott, southwest region director of research and analysis for commercial real estate firm CBRE.
However, analysts will monitor the supply of new office construction to determine if there is a potential for overbuilding, which could produce an economic imbalance, Mellott said.
“Right now, things are looking pretty good,” he said. “We’ve seen very robust demand … and we’ve seen market fundamentals continue to strengthen and vacancies continue to drop.”
The current commercial market in Salt Lake County is fairly positive, Mellott said, with cautious optimism continuing in the first few months of 2017.
In 2015, the local market had about 734,000 square feet of new construction completed over 12 months, he explained, while the first three quarters of 2016 have already yielded 1.2 million square feet of completed construction — up 63.5 percent so far with final numbers expected to be even higher.
“By all accounts, we’re expecting things to remain fairly healthy over the near term (as it relates to) supply-demand balance,” Mellott said. “The market is now responding to the demand that has been out there.”
The commercial real estate market has completely recovered from the Great Recession, he said, and is in the process of catching up to pent-up demand.
“The (market’s) supply response matches fundamentals quite well with no major red flags at this point,” Mellott said. “The Utah economy is good and has been good for a while. We expect that to continue.”