Office market woes get worse – here’s the latest

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First-quarter measures of the local office market show what is really starting to look like tectonic change.

Adding 1.1 million square feet to the Provo-Salt Lake market in 2022 would understandably slow absorption in 2023. Yet other numbers, published by CBRE’s research arm last week, all buttress the same narrative.

Demand is down. Analysts describe growing recession fears, causing downsizing of workforces, high interest rates curbing company growth, and the popularity of hybrid work as apparent causes.

Yet highly-amenitized Class A space is doing just fine.

The local Salt Lake City-Provo market reached a record-high overall vacancy rate in Q1 2023, at 21.8%. That number looks low compared to what is happening to some Class B suburban space, specifically in the submarkets of West Valley/Lake Park, Southwest Valley, and the Airport/International Center.

CBRE reports an overall negative absorption of 413,000 square feet in the first part of the year. That is the second highest all-time, which was just six months ago in Q3 2022. 503,000 square feet of new office space is currently under construction.

The hottest areas for new leases are Downtown Salt Lake City, Draper, and Sandy South Towne, which together accounted for half of the 444,062 new square feet leased market-wide in the first quarter.

Despite the high vacancies, rents remain stable, averaging $26.68/sf. Downtown’s Central Business District lease rates outpace that by 12%, at $30.36/sf.

Let’s look at some the figures provided in the Coldwell Banker report.

Market performance snapshot

Here are Q1 2023 absorption and vacancy rates by market. Is the current concentration in suburban Salt Lake City a blip or a trend?

An argument can be made that supply of new square footage needs to slow down. Here are numbers of construction and deliveries by market.

Rents seem to be doing fine. Although how long that will last is anyone’s guess. The CBRE report observes, “on a positive note, a surplus of competitive space in the market has encouraged landlords to prioritize tenant retention and occupancy rates. This has presented an opportunity for tenants to negotiate more favorable terms or concession packages.”

Check out the West Valley vacancy rate in the table above – 50%. Other submarkets experiencing vacancy rates at or near 30%: Provo-Orem, Draper, Central Grove, Southwest Valley, and in Salt Lake City proper, the Airport/International Center and the CBD periphery.

Subleasing also robust

Major tenants downsizing their needs under current leases is also stands out in the report. They’re concentrated in the Silicon Slopes-Point of the Mountain area.

Notable subleases on the market show significant downsizing at tech companies and call centers.

As CBRE tells it, “the widespread adoption of hybrid work has caused a structural shift in the office market, resulting in decreased demand and increased vacancy rates.” While it would be easy to overstate the changes, prone to hyperbole as is our age, it’s also becoming increasingly difficult to deny that something big has happened. How dramatic that shift will be is yet to be seen.

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Posted by Luke Garrott

Luke Garrott, PhD, has published in The Salt Lake Tribune and the Deseret News, and written features for the Salt Lake City Weekly City Guide and The West View. A former two-term councilman in Salt Lake City's District 4, he lives in Downtown Salt Lake City and grew up in the Chicago area.