Q&A: commercial real estate.

• Position: Industry Outlook: Commercial Real Estate

Dana Baird

Cushman & Wakefield/Commerce

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Jim Balderson

JLL

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Nate Ballard

Wadsworth Development Group

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Bruce Bingham

Hamilton Partners

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Bryce Blanchard

Newmark Grubb ACRES

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Jake Boyer

The Boyer Company

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David Broadbent

Holland & Hart, LLP

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Andrew Bybee

STACK Real Estate

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John Dahlstrom

Wasatch Commercial Management

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Brandon Fugal

CBC Advisors

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Bret Mackay

DLM Development

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Vasilios Priskos

InterNet Properties

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Kyle S. Roberts

Newmark Grubb ACRES

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Mike Roderick

Roderick Enterprises

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Raju Shah

Vectra Management Group

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Paul Skene

Cresa

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Jeffrey Woodbury

Woodbury Corporation

Utah's commercial real estate market is experiencing record highs in lease activity, investor interest and new development. But do those highs indicate a bubble? Our panel of industry veterans peer into the future to address that question.

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A special thank you to, Melissa Cline, executive director of the Utah Chapter of the Commercial Real Estate Development Association (NAIOP Utah), for moderating the discussion.

Q&A

At the very beginning of the year, the market was going crazy. How are you all feeling about the market now?

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It's an interesting dynamic. In a market with record construction and even some of the first significant speculative development in a long time, we're seeing increased positive absorption and exciting activity and growth.

~BRANDON FUGAL

BOYER: I keep telling the younger people in our business that this is not the way the real world is. This past year has been unbelievable in terms of development opportunity. We have finished or are under construction on 1.2 million square feet in Draper and about 400,000 square feet in Lehi. And that's just this year. When have we ever seen anything like that in our careers?

I hope the momentum continues, but I don't see it continuing at that pace. But I think we're going to continue to chug along at a good pace. It may slow down a little bit because of a couple things. One is unemployment. Our unemployment numbers are down to roughly 3.6 percent. We've heard of companies that are a little bit concerned about coming into the market because of that.

FUGAL: These are historic times. We're seeing 3.6 million square feet under construction right now. And when people ask me whether we are observing an overheated market or a bubble, I have to honestly inform them that the majority of that space is pre-leased and already absorbed.

It's an interesting dynamic. In a market with record construction and even some of the first significant speculative development in a long time, we're seeing increased positive absorption and exciting activity and growth. And it's not all attributed to technology; it's from a diverse range of industries, which is encouraging.

Last year was a record year, and we've launched into 2016 with even more significant office developments and headquarters under construction--CHG Healthcare, Overstock.com, Ancestry and a host of others are under construction, along with a list of companies that are close to being announced as anchors for some of the buildings currently under construction. Combine all of that activity, and it appears to be a repeat of last year's record-setting trends.

BALDERSON: My concern for '16 is the labor markets and all this building. I mean, 11 buildings under construction or delivered in Lehi and then six or more in Draper. Who's going to fill those buildings?

And the perspective that we see the market with a lot of Fortune 500 companies and national tenants from out of state-our phone is not ringing as much with clients looking to add 200 people, 300 people in this market. So concern is over labor. Do we have the labor to fill all of these millions of square feet that are being built?

BAIRD: In the last 18 months, we've done almost 5 million square feet of deals and transactions that are 50,000 square feet and above. We look back on our records and it's definitely a record for high watermark. I'm a little concerned about sustaining that amount of tenants that are looking for 50,000 square feet or over. The deals we're seeing now are in the 8- to 10-thousand-square-feet range. I'm getting calls for that more often.

With regard to labor, we had a meeting with NAOP last week where we brought Workforce Services in, and they said local companies are able to attract the employees. But it's the national tenants coming in who are getting scared, and they're just saying no.

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A lot of these tenants who their last go-around on their lease was negotiated maybe in a down cycle, they're seeing some significant sticker shock right now.

~ PAUL SKENE

SKENE: There's another phenomenon going on right now, more so from the tenant's perspective. With the heated market and the amazing amount of development that's going on, the costs for construction have gone up dramatically. What's happening is a lot of these tenants who their last go-around on their lease was negotiated maybe in a down cycle, they're seeing some significant sticker shock right now. It's not only on lease rates, which have gone up substantially in certain submarkets, but it's also from a tenant improvement contribution perspective. So a lot of these tenants are coming into the market and they're seeing the limited options, and they're all at a completely different pricing level than they were the last go-around. Combine that with a huge CAPEX number for them to pick up and move their operations or expand and write a big check for a contribution to the construction of the premises. That's another dynamic that some of these tenants are really struggling with.

DAHLSTROM: We also continue to see some consolidation and efficiency gains with tenants as they renew their leases. They'll see that the space that was built out 10 or 15 years ago when they first signed their lease no longer meets their business model with their national footprint. So they're going from eight-by-eight system furniture settings down to a smaller four-by-six and adding more people per foot in...