A warehouse-building frenzy drove up industrial vacancy in 2023

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A record amount of storage and distribution facility space became available in the last two years, showing the attractiveness of the Salt Lake metro market to industrial real estate investors.

Not surprisingly, that flurry of building activity has also created a glut of vacant space, according to the Q4 Industrial and Logistics report by CBRE released in January.

50% of that square footage delivered in 2023 remains available. That is one of the lowest absorption numbers seen in the market in over a decade.

Yet leasing rental rates continued to rise in 2023, driven by properties in Salt Lake City’s Northwest Quadrant, fueling optimism for the local industrial market into the future.

Let’s check in on CBRE’s bullish report for Salt Lake City’s rapidly maturing industrial market.

Boom in online retail and demand for “logistics parks”

The spike in vacancy driven by a rush of supply may only be temporary, according to CBRE.

“Salt Lake County’s geographical position, economic strength, and population growth will continue to spur demand in industrial space,” CBRE said in its report.

Given the tectonic shift to online consumer activity and the state of Utah creating a new mechanism for TIF collection and issuing bonds for logistics parks, CBRE’s confidence seems warranted.

Since its creation in 2016, the state has transferred the TIF model designed for the Inland Port Authority in Salt Lake City to three other sites around the state, with three others in the pipeline. One of those is in the Salt Lake City metro area, a 140-acre site in Tooele County. Another is proposed in Weber County, on the shores of the Great Salt Lake.

New construction and completions

The CBRE report highlights the rapid rise in construction completions and thus availability and vacancies, a trend begun in 2022 and which marched through 2023.

6.2 million sf of new product was delivered to the market last year, which also saw just over 4 million square feet of groundbreakings.

Slide through the slideshow above.

Salt Lake City’s Northwest Quadrant made up nearly three-quarters of total space delivered (74%) as well as 79% of the leasing activity. These were properties in or adjacent to the state’s original Inland Port.

Absorption

As would be expected after such a strong construction year in 2022, absorption in 2023 began with two consecutive quarters in the negative.

A strong second half of the year for leasing pushed absorption numbers into the positive to the tune of 800,000 square feet.

That number may be modest in isolation, but it is impressive in context, the CBRE report asserts.

“Although this figure fell short of the 2022 total, over 5.2 million square feet of vacant space was listed in 2023, so 2023 finishing with positive net absorption highlights the strength of the market,” CBRE said.

Challenge awaits the leasing market in 2024. 7 million square feet is currently vacant, by CBRE’s count.

Buildings built since 2022 account for nearly half of all vacancies.

“With available space at an all-time high,” the report’s authors note, “leasing activity is expected to remain strong throughout 2024 as tenants have a multitude of options compared to just 12 months ago.”

Sales

The second half of the year started to see some sales activity, as interest rates stabilized and economic uncertainly receded from a pandemic spike. Take a look at the top sales:

Lease rates

Market-wide, the average achieved weighted lease rate rose 8.6% year-over-year. Set that against a backdrop of a 35% lease rate swell since year-end of 2020, and one sees the source of optimism for investment watchers.

CBRE national has listed Salt Lake City as a market to watch in their U.S. Real Estate Market Outlook 2024, calling it the Mountain West’s “primary distribution hub.”

Sublease activity breaks record

2023 brought “the largest amount of sublease space listed in a single year in market history,” the authors report. Over 3.7 million square feet was listed with 2.9 million square feet still available at the time of publication.

That torrid pace slowed in Q4, with only 300,000 square feet of new sublease offerings. CBRE hopes that is an indication that fewer tenants are currently downsizing than in the recent past.

But they recognize that the story is yet to play out: “the rate at which the available sublease space fills as new listings slow will be a strong indicator of the health of the market.”

We’ll keep an eye on upcoming Q1 and Q2 numbers and keep you apprised.

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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.