Utah’s commercial real estate industry is experiencing a significant slowdown, like most industries across the state. Though bracing for the stalling to continue, the state’s commercial real estate leaders remain cautiously optimistic. Our group of experts discussed major developments still on track, financing issues that have stopped other developments, and opportunities presented despite the economy. They agree that though the industry is experiencing its fair share of troubles, the government has positioned the state to weather the storm.
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.
Jacob Crockett, Holland and Hart;
Martin Lewis, Utah Business magazine;
Brandon Fugal, Coldwell Banker Commercial;
Steve Peterson, Millrock Park;
Rick Woodbury, Woodbury Corp;
Bruce Bingham, Hamilton Partners;
Donald L. Blackwelder, Prudential Utah Real Estate;
John Dahlstrom, Wasatch Property Management;
Fred Barth, Pentad Properties;
Bob Fox, LDS Church;
Don Whyte, Kennecott Land;
Andrew Bybee, Thanksgiving Park;
Greg Shields, Pentad Properties;
Jed Millburn, Apartment Realty Advisors;
Jeff Edwards, EDCUtah;
Bill Martin, Commercial CRG;
Mark Bouchard, CBRE;
Vasilios Priskos, InterNet Properties;
Michael Falk, NAI Utah CRE
What is the current state of commercial real estate in Utah?
WOODBURY: If you ask a developer whether the glass is half empty or full, most would say it is at least half full. However, the real question that developers debate is will the glass be totally full tomorrow? I’m on the hopeful range, but I have an optimistic attitude.
We have two leading economic indicators in our office that we use for the local economy. One is our hotel business (we run eight or nine hotels). When business picks up, people start travelling and we see a rise in our hotel occupancy. When we see a rise in our hotel occupancy, we usually see a change in Utah’s economy, too. We haven’t seen a rise in hotel occupancy, yet. We are still lingering below where we thought our budget would be. It’s better in downtown than it is out in Sandy, but we are not seeing a rise, yet.
The second indicator is inquiries from local tenants. Not national tenants, because local tenants usually react a little bit faster. With this indicator, we are seeing something a little bit hopeful in that we think things are picking up a bit. So, it’s an indication that there’s at least some optimism out there, and maybe it’s the first sign of something swinging up.
FUGAL: I’m cautiously optimistic. There is no doubt that sale activity is down across the board as a direct result of the banking crisis we are currently caught up in. But we are still observing a pretty steady flow of lease transactions across the Wasatch Front. Again, it’s being driven by local companies for the most part. While we are fortunate to still have a few Fortune 500 national credit tenants that are evaluating leases and closing right now, those deals are few and far between. Whereas your local tenants still seem to have a very upbeat positive attitude.
In talking to my peers outside of Utah—in Phoenix, California and Las Vegas—they continue to be amazed at how the fundamentals of the Utah market continue to hold fast in the wake of the major economic crisis across the country. Right now what we are witnessing is a true example of how Utah is thankfully not participating in the extreme downturn that some of our neighboring markets are experiencing.
SHIELDS: Going back to what Rick [Woodbury] said about hotel occupancy being an economic indicator, we have a large hospitality division at our firm and we saw a lot of hotel transactions until about June of last year, and then they went dead through about December. And then from December through, we saw the number of transactions increase dramatically, which usually happens about six to nine months before the lingering rates start to come up.
PRISKOS: We [InterNet Properties] are coming off the best year ever in our brokerage in 2008, so it’s hard to say that things are really bad. Of course, there’s a lot of bad news out there, but I think we’re a little insulated because most of our business is downtown. And with so much investment happening downtown, it’s kind of hard not to make money there right now. So maybe I’m a little off on the entire market, but I’m still pretty euphoric and I like where we are going. And when the country turns around, I think we are poised to do really well, especially in this market.
MILLBURN: I don’t think Utah will really see an extreme bottom in multi-family real estate. Vacancy rates have risen, but they are still 7 percent, which is not bad in comparison to the rest of the nation. As for transaction volume, we [Apartment Realty Advisors] had the best year we have ever had in 2008. We had $300 million in transactions. So we are optimistic, as well.
Going forward, though, is going to be tougher. We’ve got a lot of new apartment supply—probably 2,300 units this year in Salt Lake County, which is going to flood the market. In addition, we’ve got some shadow markets that seem to be sort of jumping out at us that I don’t think a lot of people were really prepared for. We didn’t have a lot of condo, high-rise construction; but in single family, town-home style product is being rented.
One of the biggest concerns I have going forward is how are all of the foreclosures going to impact the rental market? I think that there’s sort of a general point of view that with all of the foreclosures, the people who are losing homes will move into rental properties. There’s truth in that except that a lot of those homes that are being foreclosed on are actually going to be rented until the market turns around. So there’s this artificial supply that no one can track and no one knows exactly how bad it’s going to get. That’s probably the one wild card in my sector that no one really knows exactly how to deal with and no one knows how to track. But overall, I still think that multi-family, especially the affordable side, is very strong.
BOUCHARD: Utah doesn’t have the extreme highs and lows you are going to see in Phoenix, Las Vegas and Southern California. We aren’t going to see the extreme lows, primarily because we are a local dominated market with a user, in lieu of a national credit market. The market is somewhat insulated to the extent that the state itself is fiscally responsible. Even though the state went through trials with our budget, we balanced the budget and came out of the session with $200 million in the rainy day fund. Those fundamentals help the state in a lot of different areas where users are concerned that take space in the marketplace.
Utah is also a state that’s going to expand in health care and in technology. Traditional services, financial services and things that are more susceptible to recessions are slowing and we are seeing that in the marketplace. But I’m optimistic about where Utah is positioned right now. I do think we are in the shallow end of the pool right now in the recession and there are a lot of fundamental reasons that we can look forward to improving as the year goes on. Utah is positioned to come out of this healthier than most states that we compete with in the West. I think it’s going to help us in our business development efforts at the state level. And it’s going to help the local brokerage companies that have arms in other states, because this is really traditionally an in-bound market. We don’t export business here; the state generally is a receiver of business. I think all of those fundamentals help us in terms of growth.
The last observation I have is that there’s probably not a market in the U.S. today that has more going on in CBD than Salt Lake City. I think the project that the [Church of Jesus Christ of Latter-day Saints] has undertaken and 222 S. Main is important and is going to make Salt Lake City one of the most vibrant in the western United States.
CROCKETT: I would echo the optimism. That’s not to say I’m happy where things currently are, but I see a lot of reason for hope going forward. Prior to working for Holland and Hart, I was at a firm in Columbus, Ohio where we represented a lot of the country’s biggest retailers and tenant representation. Before the retail market and commercial markets really started to struggle, we saw these big national retailers essentially pull back overnight from doing 40 and 50 deals at a time to doing zero deals at a time, which I think only exacerbated the problems. As we look across the country in markets like New York and Boston, the commercial real estate in those places is still extremely valuable, but developers can’t get the funds to develop the projects. As we compare situations with what’s going on here in Salt Lake, we see a lot of the similar problems but I don’t think they are to the same degree. And, given the investment that’s going on, we have great reason for hope that once things do bottom out, if they haven’t bottomed out already, we will see the gains we have seen in the past few weeks and the positive indicators over the last month will continue to hold and we will be in good shape.
MARTIN: As the weather turns into the 60s and 70s, people begin to feel better which leads to people seeing things optimistically, putting up buildings and making changes. And in the last couple of weeks, we have seen some optimistic individuals and some good things happen. But there have to be more people getting on this train and starting to say, “Yes, I’m positive. I’m OK. I’m settled. I’m happy. I’m going to make this. We can see the end of the tunnel.”
Have you seen more national firms leaving the market because of the downturn?
FUGAL: I would say we haven’t seen anyone flee the market; it’s been constant, which is refreshing. We saw people pull back when the dot-com market had its major correction. Right now, I’m frankly surprised that we don’t see more large blocks of sublease. If you are representing a large tenant, let’s say hypothetically you are representing a 100,000-square-foot tenant in this market and you are willing to look at the entire valley, your options are very limited even still.
FOX: The LDS Church deals in an international, world-wide market. Hope-fully the things that are happening in Salt Lake are significant. I have had the opportunity of being in areas such as Dubai and Abu Dhabi as well as Frankfurt and London in the last four weeks, and the issues are quite staggering and quite different than they are here. In the United States, in the real estate section alone, the LDS Church put together 450 leases. We are optimistic and hopeful that the things that we do in this community are positive.
How is the state’s retail sector doing?
BARTH: I was on a conference call with GM a few weeks ago and I learned that there are more cars coming out of service now in the millions of units than are being put back into service. Manufacturers have just really cut back. And this is maybe four or five million units this year that will be in the net loss for cars. They are saying that corporate fleets and car rental agencies are holding onto cars an extra year or two to get more mileage out of them. And the average person, who used to hold onto a car for about four and a half years, now holds onto their car for more than nine years—almost double. And this is very similar to electronics and clothing, and you just go down the retail list. People are just holding off a little bit.
From a brokerage standpoint, we are seeing more inquiries and more tenants that are at least out doing site tours now; whereas in the last few months, we were hard-pressed to get people to come into town. So we are positive and hopeful, but also very cautious.
WHYTE: I think this was a time when a lot of national commercial users had formulas they could follow. When there are so many rooftops in the area we can come in. What we have seen is that’s evaporated in the last two years and now those formulas don’t apply at all. They will actually cancel on deals that were written based upon those kinds of formulas. I think that we are going to see more and more that the national retailers have been over-retailed in terms of the whole country, and they will have to reduce their storefronts. And so what we focused on is more the boutique retailers—the people who value place in terms of their overall business model. And, there’s still room for quality retail to continue to grow. It’s just that we have to turn it into less of a commodity and more of something that the intrinsic value in locating in that particular location can be appreciated. That’s why places like City Center can do very well.
I am optimistic, but the reason is a little different: It’s the fact that Utah is a place where money is being spent on infrastructure. We came out of a session in the legislature where we got a commitment to funding of things like widening I-15 and the Mountain View Corridor. My experience has been that when infrastructure gets funded like that, what happens is private money tends to go after it. I think those kinds of forces will, in fact, create a turnaround.
What is the current state of Utah’s residential development?
WHYTE: What we [Kennecott Land] focus on is trying to create a place that is special, that people want to be at and want to transact business in. We are just getting into the multi-family business, and we think that the multi-family is such a natural fit for a master-planned community.
About a year ago we realized that there was a change happening in terms of affordability for housing. We were starting to see that people were not able to qualify for the kind of home that they were aspiring to. So we sat down all of our builders and said, “You need to redesign all of your products. You need to take out granite countertops and you need to get to things in the house that will all appraise out. So when someone appraises a 2,000-square-foot house, you will get that number to match up with what that house is selling for.” We shrunk our lot sizes, went to more multi-family projects and the result is we were able to increase market share through the down market. As much as we all want to distinguish ourselves in terms of any product offering in real estate, what’s been successful in Daybreak is having the variety of products, so the person who wants to get into single family housing can find a place they can pay $200,000 for. If you look at what’s happening in the marketplace, the real challenge has been the houses that are more than $400,000. So, it’s nice to have that flexibility to go ahead and adjust and meet what the demand is.
Are you experiencing trouble securing financing?
PETERSON: We have used our re-lationships with the local banks and the credit unions as alternative sources of financing and found that there are some opportunities out there to get creative and finance at yesterday’s underwriting criteria. In today’s market, you have to think outside the box and you have to be conservative. You also have to be very concerned because with the amount of spending that we are doing, inflation just has to go up in the future, which means interest rates will go up—it’s just a matter of time. If you don’t have your long-term financing in place immediately, the longer you wait, the more difficult it is going to become.
Do you see any opportunities in light of the downturn?
BLACKWELDER: Six years ago I sold a Utah-run company and invested the proceeds in the stock market. What happened in 2001, 2002? The stock market went down significantly. When it just got back to where it was at its high point last year, and then it began its slide again. Though it’s a cycle, I thought to myself, “I don’t have time to wait for this thing to recycle because I need to draw on my trust funds to live on.” So I took my money out and bought three commercial condo spaces with leases in Salt Lake City, even though I’m from Utah County. And it’s probably the best thing that I ever did personally for my portfolio—to stick it in real estate. I have been working in real estate for 40 years and we know that the market cycles. It doesn’t cycle as deep and as high in Utah. Now I’m getting about an 8 percent return on these three leases. So I think real estate has always been a good hedge and a safe place to invest your money. And now’s the time when you can get in at a price that you could not build the structure for with those kind of dollars in today’s market. Even in today’s depressed prices, you still couldn’t duplicate this real estate. So there’s great opportunity out there for people who are looking for good investments. And we can be part of it and we can profit by it, and so can our clients.
PETERSON: We find ourselves excited about the opportunities that are out there—not about building new products, but about acquiring products. With the FDIC liquidating over a trillion dollars of assets in the commercial market in the next 18 months, there’s going to be a lot of opportunity to buy product at a very low cost. One local example is the Cottonwood Corporate Center, which is on the market. What we are seeing is that you will be able to go out in the next couple years, if you have dry powder, and be able to find real good values. So we think there is going to be a game of musical chairs, but we also think the future looks good.
BYBEE: We [Thanksgiving Park] have signed about 75,000 square feet of tenants in the last six months. So we are seeing concessions on the rise, but our face rate has stayed right at $24. We are doing $24 deals in the suburban market in north Utah County. So we are very optimistic about building. If we can land the two deals that we are working on now it will put us above the 80 percent mark. On the financing side, we will go after extending a construction loan right now just to see what happens in the permanent financing world. So we are optimistic and hopeful.
We are also working with a Fortune 500 company right now, and the only reason we are in front of these guys is because of the LEED silver rating that we put on the building. They came right out from the chute, right in the proposal, and said, “What LEED rating are you?” And I think we were the only park that they sent a proposal to that even had one. So we were pretty pumped about the decision [to become LEED certified] that we made 18 months ago when everybody told us we were going to overspend and wouldn’t get any value out of it. We probably paid an extra 2 percent to get it there, but in the end, this tenant alone will pay all the costs of that.
Discuss some of the major developments taking place along the Wasatch Front.
PRISKOS: What the LDS Church has done is just unbelievable downtown. It has been the impetus for a lot of things that are currently happening. For example, seeing Hines open a development office here in Salt Lake City and TIAA-CREF sniffing around has been amazing. They are big national players and they are looking in downtown Salt Lake.
WOODBURY: Falcon Hill is pretty unique situation. Hill Field had a problem—they had excess land. We saw the potential of doing some type of aerospace park up there centered around defense contracts. Falcon Hill was created with the cooperation of so many groups—it was pretty much unbelievable. We have five municipal entities up in Weber and Davis County that joined together and formed their own quasi-governmental unit. We had the state supporting us, and of course the local Base supporting us. We had to get the Air Force and then really the Congress to back the situation. So it’s now off the ground. We are hoping to be able to announce a private building with at least one major tenant within the next couple months.
Why do you think Utah’s commercial real estate industry remains stronger than in many other states across the nation?
DAHLSTROM: I think the reasons that we are in a better position in Utah go back to what our government has been doing, the state government in particular. The government has made our state a comfortable place for business to be done. We will benefit from that as opposed to other states that have higher taxes or less favorable approaches to business, and that will attract more of what we have had in the past. Utah has led the nation in job creation and overall economic development.
EDWARDS: It is a remarkable time in the history of economic development in this state. In the EDCU [Economic Development Corporation Utah] office right now we have 256 projects. Those are companies of all different varieties from all over the world that are looking at Utah. That’s an all-time record for us. We will have more than 130 site visits this year. When I joined EDCU in 2001, there were 12 site visits that whole year, so we are a hundred fold now beyond that. It is really amazing to see how that has all changed. Governor Huntsman talks about Utah as being a safe haven and it is a safe place [for businesses] to come to. When you get away from the state, you realize how unique our marketplace is.
FALK: That echoes a lot of things I’m hearing—that Utah is a real unique place. With all the upheaval and lack of financial discipline that other places have had, Utah is a great example of why it’s the safe haven.
BINGHAM: As we look at the influence of the national economy on us, the economic hypothermia that normally is part of a recession, where activity leaves the extremities and comes to the heart of things, it’s going to affect some of Utah’s smaller communities. It may affect Utah as a whole as well, but the quality of life in Utah is going to overcome some of the national tendencies for negativism and downturn. I think we are going to see more activity come here because of the quality of life. You just get more value, more bang for your buck out of people who work here, who distribute from here, who office here. With the electronic world you can be anywhere, and Utah is a very good place to be because when you leave the office, the warehouse or wherever, it’s a nice place to be. And I think that’s going to overcome a lot of the difficulties.
DAHLSTROM: Mayor Watt, from Logan, was on CNBC a couple weeks ago. I was shocked to see him on national TV, but there he was. And the reason they were interviewing him is the fact that Logan is leading the nation in economic development per capita. And part of the reason is because they have a closed system and have a very conservative ethic up there; they do deals the old fashioned way. And that is what is prevailing in this market. We are getting back to the basics and Logan finds itself leading the way in that.
BLACKWELDER: Provo was just nominated yesterday as the number one city to live in for communities around 100,000 people. So they are feeling happy to get that designation again.
SHIELDS: But will companies say, “Because things aren’t so good, I’m moving my corporate headquarters to Utah because I get more bang for my buck?” And so on and so forth. How much counter-bump do we get out of the poor situation nationally? I think we get some. Utah is still is a good position.