On the commercial front: is recovery on the horizon for commercial real estate?

• Author: Hess, Teresa Browning
• Position: BusinessTrends

IT'S BEEN A LONG, tough road to recovery for Utah's commercial real estate market. Following the record-breaking growth of the '90s, the new decade has been characterized by high vacancy, low absorption, and consolidations and closures by corporate America. For the first time in three years, Salt Lake's major commercial brokerages are reporting solid evidence that a recovery is on the way. Market studies for 2003 reveal robust activity in the retail and investment sectors and hard-fought advances in the office and industrial markets. While the improvements have been modest, they convey an optimism that may bode well for the market in the coming year.

CB Richard Ellis' latest office market update reports that 2003 was the first year of positive overall absorption since 2000, signifying a "bottoming out" of the current market cycle and a harbinger of more positive news. Although vacancy bumped up slightly to 20.49 percent over the course of the year, the substantial gains in positive absorption portend lower vacancy and some upward pressure on rents by the middle-to-end of 2004, according to the report.

Flight to Quality

The increase in overall vacancy can be traced to Class C buildings, many of which are older, functionally obsolete and lacking in sought-after amenities. Lower lease rates and generous landlord incentives have allowed tenants to upgrade and/or expand for comparable rents, resulting in a flurry of relocations. Class A buildings in preferred locations benefited the most from this activity, while their Class C counterparts suffered an exodus of tenants.

According to Scott Wilmarth of CB Richard Ellis, this "flight to quality" has eliminated many of the prime spaces and the best opportunities in the market. Improvements in the local and national economies and new job growth are expected to lead to further decreases in vacancy, Wilmarth says, and he predicts a modest recovery in rents and fewer landlord concessions by mid-year.

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The retail market continues to outperform other segments of the commercial real estate arena, exhibiting a stable balance between supply and demand. Retail construction was the only non-residential sector to exhibit healthy growth in 2003, fueled by the expansion of big box retailers such as Wal-Mart, Home Depot, Target and Costco.

Anchoring by Co-tenancy

Tenants are gravitating toward shop space and pad sites near new big box developments, leaving vacancy centered in older...