The office market is dying. Or maybe not – SLC continues to outperform

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Of all the market headwinds currently being experienced in commercial real estate, some of the nastiest have been in the office sector.

The Covid-driven trend in remote work and looming recession fears have dramatically lowered demand, transforming the central business districts of some downtowns from bustling to busted.

Office-to-residential conversions are up, and negative absorption tops the news – but new office product is still getting leased. Whether there’s a permanent market shift underway to contraction is yet to be discerned.

In some markets, like Salt Lake City’s, new office buildings are filling up nicely despite the foul weather. And market climate nationwide points to the continued desirability of new office product. So say the latest data as crunched by market watchers.

Here’s what we found in the Q4 2022 reports from JLL and CBRE, released last month, with additional comments from local leasing agents.

Leasing volume

Nationwide, Coldwell Banker reports that leasing activity is down 23% quarter-over-quarter, and 39% year-over-year – reflecting a sustained drop since Q4 2021, a banner year for leasing, second only to 2015 in the last decade.

Courtesy CBRE.

In Utah, leading the way are the capital city’s Central Business District and Utah County – North (the Silicon Slopes district) in producing both new product and new leases. The CBD and periphery (areas like the Granary, Sugar House, and South Salt Lake) have recently delivered just over 900,000 square feet of new office space to the market. Recent completions in Utah County – North are up 141,000 square feet.

And those new office cribs are getting leased. JLL reports that local leasing volume was up 35.8% in Q4 2022 quarter-over-quarter.

Utah County – North had the largest leasing volume in 2022 with 641,471 square feet leased, followed by SLC’s CBD with 511,662 square feet. Sandy and Utah County – South were nearly tied for third this year – each with just over 340,000 square feet of office newly rented.

The Downtown market’s most recently-completed large buildings, 650 Main and 95 State, were at 27.7% and 55.5% leased, respectively, at the end of 2022 according to JLL. Since then, those numbers are up.

95 State. Photo by Luke Garrott.

At the 515,00 square foot 95 State, they’ve passed the 2/3 mark in lease-up, reports leasing agent Dana Baird, Executive Managing Director at Cushman & Wakefield.

650 Main, a 332,000 square foot project built largely on spec by Patrinely Group, is currently approaching 50% lease-up.

650 Main. Photo by Luke Garrott.

“We recently signed a couple of leases on the 7th floor for approximately 18,000 SF with two more leases out for signature on the first and second floors that will put us at just under 50% leased,” Roman Bernardo, Senior Associate at CBRE, told us.

Vacancy

“Office demand turns negative in Q4” was CBRE’s bracing February headline. And exodus was the theme.

Nationwide vacancy hit a 30-year high of 17.3% at the end of 2022, with Salt Lake City area rates at 17.7%, according to JLL. CBRE has that SLC vacancy number at 21.9%.

Negative absorption is modest in the capital city’s CBD, reports JLL, to the tune of -10,000 square feet. Another hopeful indicator locally is that vacancy growth has slowed for the second year in row.

Courtesy CBRE.

Subleases are also heading out rather than in. JLL reports that locally “Sublease vacancy reached yet another record level this year. Year-to-date negative absorption was due to tenants vacating one million s.f. of sublease space in 2022. This was largely the result of tech, call center and mortgage industry firms downsizing space. Tech companies have halted growth, and call centers operations are now largely remote.”

Yet while negative absorption rules in much of US, the Salt Lake City market is outperforming most areas in the country.

Courtesy CBRE.

While notably down from last year, in aggregate the SLC market is bucking the negative absorption trend. New product on the market is likely the explanation.

Rent growth

Before we get to that lonely bright spot, rent growth year-over-year was a modest 1% in the office market, both nationally and locally. CBD rents of new product are now averaging just over $30/SF, with a market average of just over $26, JLL reports.

Are these numbers enough to entice new builders to the market?

Office outlook

Rumors of its demise might indeed be exaggerated.

There’s no question that new product is leasing. CBRE notes that most negative absorption and vacancy is being driven by product completed in 2010 or earlier.

Nationwide, “Office buildings built before 2010 accounted for all the negative demand in Q4, while demand for newer office buildings remained positive” the end-of-year report concludes.

Why such strong demand for new office space? It’s the amenities, says Dana Baird of Cushman, who is part of the leasing team for 95 State.

“Tenants are continuing to focus on buildings that are highly amenitized to attract and retain employees. Office space is now more than just a seat!”

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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.