Commercial real estate: industry insiders are witnessing a groundswell of new demand that is creating a sustainable recovery in the commercial real estate market. Several high-profile developments are underway, and our experts predict positive ripple effects throughout every segment of the industry.

• Position: Industry Outlook - Industry overview - Interview

We'd like to give a special thank you to Jeff Edwards, president and CEO of the Economic Development Corporation of Utah, for moderating the discussion, and to Holland & Hart for hosting the event.

What's the state of commercial real estate in Utah?

K. PETERSON: It's actually a very exciting time. It's the general consensus that we have hit bottom. In 2009/2010, we started to come up. And this year, we're expecting some moderate growth. As far as the office market, we're starting to see some tenants say something besides, "I'd like to do a six-month extension." People hunkered down for so long just to see if they were going to get through the market, to see how things were going. But now people are trying to be a little opportunistic, to get out and take advantage of market conditions and make that change to upgrade their space and improve their image.

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SHIELDS: In addition to just the positive attitude and the turning in the market, there is a ground swell of significant change--Salt Lake City is becoming a major place to do business and not just a place to have an office. Having been in the business since 1980, I don't think I've ever seen the kind of underpinning of a foundational infrastructure, business structure and just the general combination of economic factors that bode for what appears to be a more sustained, long-term growth that is taking place now.

BURTON: On the multi-family side, we've seen almost a never-before kind of situation. More units were delivered and absorbed last year than ever in the history of the state. It was about a 5.2 percent absorption. And more units were completed.

Our concern last year was that we'd see occupancies go down, and they actually improved from 8.6 percent down to 6.2. We projected this year they'd stabilize around six, and I think we were wrong and they'll be around five.

What we've seen is something that we've not seen before: the decline in homeowner households and the mentality of owning versus renting. In 2008, that ratio of homeowner versus renters was 75 percent to 25 percent. And it dropped 7 percent from 2008 to 2010, which caused the rental market to absorb all these units that came on the market.

FUGAL: The most exciting news is a return to positive absorption. Following the greatest drop in negative absorption that we observed in 2009, to see us come out of 2010 with dynamic, positive absorption and activity in all sectors has been a real sign of recovery. If we can capitalize on that momentum and continue to make deals in order to draw companies to Utah, the future looks very encouraging.

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How is the office market doing right now?

WOODBURY: There's improvement, but people are still out looking for deals. I haven't seen a lot of rental rate increases. In fact, it may be almost the opposite. The real question for landlords is, how long can they hold out? Because we know there's positive absorption. So we know that the deals are going away, but when are they going away?

Most tenants are saying, "Now's our opportunity to get a good deal because we know the economy is improving." And the landlords are thinking, "How long can we hold out before we give the next good deal because we know the economy's improving?" So there's a little bit of a clash there, and it could be interesting to see how it works out.

S. PETERSON: If you go into a little more detail, there's different segments within the space. For B or C class office space, that's very true. There's a lot of downward pressure on lease rates and higher concessions. But in the class A trophy properties, our experience has been there's limited supply, there's high demand, and we've been able to hold rates.

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However, the B class properties are going to start increasing in demand due to a lack of availability for A class properties. If you look along the Wasatch Front--whether it be Millrock or Cottonwood Corporate, Old Mill, Thanksgiving Park, Sorensen's property across the street, or even Dave Layton's project out there at RiverPark--each one of those properties are newer properties, and most of them are pretty full, if not completely full.

WOODBURY: But I am losing deals to some of those properties because of rent rates.

FUGAL: That's the experience we're seeing. The positive absorption is kind of the price. We've seen increased concessions. You're right, there has been a little bit of rate erosion over the course of the last year. And there's been a disparity between landlords' expectations and tenants' expectations as a result of what we've come through.

But Steve's right, in that we're seeing a trend where tenants continue to gravitate toward quality while older projects in secondary locations are suffering. I do not think that trend will change. We will see more B, or secondary locations, still challenged for some time to come as a result of the correction.

BINGHAM: I agree with you, Rick. We have seen greater activity, and our pipeline is a little full. We're about 60 percent leased in the building right now, here. And I hope to be 80 percent before the year is over. We've got a reasonable expectation that will happen.

We are giving less concessions than we did. Just plain and simple: we don't feel we have to do that anymore to get people's attention. We have to do it to make a deal, but we're just not leading with, "What can we give you," the way the conversation was six or 12 months ago.

S. PETERSON: A lot of it has to do with demand. For example, down at the Cottonwood sub market, there's a 5 percent vacancy. So there's a lot of demand and low supply Timing, particularly downtown, on bringing projects out has a little bit to do with that.

But as the market strengthens, at least in our market, we're less eager to provide anything other than standard concessions. We've held on that philosophy and it's worked for us.

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