Salt Lake City is Ripe for Growth

As an investor in commercial real estate, Rising Realty Partners focuses its efforts in nine Western US markets. These markets include five in California - San Francisco/Bay Area, Silicon Valley, Los Angeles, Orange County and San Diego. They also include Seattle, Portland, Denver and Salt Lake City. While the fact that California is the 5th largest global economy lends strong support for our California focus, we are often asked why some of our other markets make sense in terms of real estate investment. In the past we have written posts about what we see in Denver, but here we are outlining the positive investment signs and opportunity we see in Salt Lake City.

The business and cultural center of Utah has experienced several booms over the years but it was the 2002 Winter Olympics that moved SLC from a tertiary, second-tier city for investment to a nationally important, headquarter city that is a favorite for millenials. Today, the city boasts affordability, top-tier tech universities, low crime rates, world-class ski resorts and a family-friendly environment. With a metropolitan population of over 1 million and a robust economy, we think this business-friendly environment will quickly become one of the nation’s hottest real estate markets.

As of July 2019, Utah’s 2.8% unemployment rate ranked the fifth lowest in the nation. Last year, the state experienced the highest employment growth in the country. While all major industries experienced expansion, the information technology sector grew the most, followed by mineral and logging and then leisure and hospitality. With the fifth most concentrated millennial market in the nation, Salt Lake has no shortage of young, skilled workers to contribute to its growing tech hub.

Another sign of future economic prosperity is signaled by Utah’s rapid population growth due to strong net migration - the third fastest in the United States at 1.9%.  With net migration expected to increase, a bright future outlook for the capital is evidenced by the massive $3.6 billion Salt Lake City International Airport redevelopment project.

The office market in the Salt Lake is experiencing record absorption with supply and demand levels in check.  Vacancies are decreasing and tenant commitments are serving as a catalyst for new developments, as opposed to speculative development efforts.  As of the second quarter of this year, the Salt Lake City office market vacancy had fallen to 7.1%, the lowest level in decades.

These downtown tenants are increasingly looking to sign within coworking spaces for lease flexibility, culture and amenities that attract and retain talent.  67% of coworking space leases were signed just last year alone and tech accounted for more than half of all commercial leases. This year, over 241,000 SF of much-needed flexible space will be operating or opening in downtown Salt Lake including Hines' recently launched coworking business, Hines Squared. Limited inventory in the CBD downtown office market, has caused many companies to relocate to suburban areas of the state, resulting in a decline in suburban vacancies.

Labor supply shortages could pose a threat to business expansion during record high demand in Salt Lake.  The labor supply is limited due to an extremely low unemployment rate, applying upward pressure on wages and therefore increasing construction costs and tenant improvement packages.  The threat of stricter immigration policies that could exacerbate labor supply issues and tariffs that could raise the price of imports, may increase development costs constraints (though the commercial market will likely follow waves made by more direct economic and political forces).  

Overall, we are optimistic about future growth in the Salt Lake City area.  Investment sales volume hit a record $2.6 billion in 2018, surpassing 2017’s record by 18%.  While multi-family has always been the headline asset class, the industrial asset class saw a 30% increase in the number of industrial sales and an 88% increase in dollar value.  $502 million of the $2.6 billion total investment sales activity was derived from industrial office classes. Cap rates are still compressing in Salt Lake, despite interest rates rising and it being near the “end of the cycle”.  Since the city is less saturated than Los Angeles, San Francisco or New York, many investors like it as an investment that can offer higher yields - this sentiment has allowed cap rates to remain low despite the fundamentals, although many believe there isn’t much more room for further compression.  We believe attractive and affordable office space will continue to draw companies, creating an appealing option for investors looking to buy properties in a burgeoning market.