WHAT'S 'GOING UP'?

Author:Blanchard, Bryce
Position:INVESTMENT
 
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Our theme this year is "Going Up" so let's break down what is up in Utah's commercial real estate market in 2018.

* Transaction Volumes: An all-time record of $3.18 billion was recorded in 2018, up 44% from 2017 which was previously the most active transaction year. This is simply astounding.

* Sale Prices: As noted in Graph 1, every property category featured a higher average $PSF than in 2017 (except single-tenant retail which was just a function of the data set)

* New Construction and Major Projects: Major private ventures listed below as well as public developments such as the airport expansion, prison relocation, inland port, and the Mountain View corridor fuel a dynamic commercial real estate landscape.

** SLC Port Global Logistics Center: 6.0+ Million SF of Industrial

** Mountain Tech South: 500,000+ SF of Industrial and Office

** Facebook Data Center: 970,000 SF

** Copper Crossing @ 1-80: 4.0+ Million SF of Industrial

** Tower 8: 500,000+ SF, 26-Story CBD Office Tower

** Pluralsight HQ: 340,000 SF of Office

** 53rd Center: 1.0 Million SF of Office

** 650 Main: 640,000 SF of Office

** Price California: 2.1+ Million SF of Industrial

** Mountain View Village: 406,000 SF retail shopping center

** Innovation Pointe: 600,000 SF of Office

** UPS Regional Hub (870,000 SF) and the Amazon Fulfillment Center (2,400,500 SF) completed in 2018

* Tax Benefits - 2018 featured a roll out of state-wide opportunity zones which will provide tangible stimulus for developers and assets that can be repositioned. View map at https://ngacres.com/oz.

The previous factors that have been going up are all indicators of a robust, record-setting investment market. However, a couple of other elements that are on the rise should be noted that provide a cross-current to the overwhelmingly bullish general market conditions.

* Interest Rates - Jerome Powell and the Federal Reserve may be the commercial real estate version of a casino "cooler" that breaks a hot gamblers roll. Cap rates are correlated with interest rates and equity investors can only absorb lower returns because of rising debt costs for so long before overall pricing will be impacted negatively.

* Air of Caution - it is not lost on many market participants that we now have nine full years of asset appreciation in the books, the second longest expansionary cycle in modern history. This "late in the cycle" chatter has put a healthy air of caution in the environment as evidenced by a leading economic indicator such as the "Consumer Confidence Index" dropping every month beginning in April of 2018. Additional headwinds are outlined at the end of this article.

NATIONAL OVERVIEW

Despite overall robust market conditions in 2017, including a continual compression of cap rates, there was a slight transaction volume dip which led some to anticipate that the market may pivot in a more bearish direction. However, 2018 saw transaction volumes go up by 10.7% (Q1-Q3 YOY) with most pundits predicting a strong Q4 in tow. National cap rates also compressed further with primary markets averaging 5.3%. International capital from Canada, Germany, China, and Singapore all acquired portfolios that were in excess of $500 million in the U.S. Brookfield was the most active buyer with over $21 billion acquired through Q3. Retail giant GGP has been the most active seller over the same timeframe, shedding nearly $15 billion worth of assets. From a capital source standpoint, buyer composition featured:

Table 1 (page 54) illustrates the relative cap rates by property type for primary markets and then, very interestingly, also for secondary markets which compete for real estate capital with Utah.

This indicates that Utah still has some relative yield arbitrage in all categories except multi-family...

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