April 16, 2013

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Washington County Commercial Real Estate Market Warming Up

Heather Stewart

April 16, 2013

The commercial real estate market is tightening in Southern Utah—but not enough to cause an immediate uptick in new construction. That’s according to a first quarter market report from NAI Utah Southern Region.

“It’s very active. There’s a lot of interest,” said Neil Walter, managing director of NAI Utah Southern Region. “If you’re an owner of commercial real estate, overall we’re seeing lower vacancy rates and higher lease rates.”

The industrial sector is seeing the most activity. The vacancy rate has dropped to 8 percent, down from 9.4 percent in the fourth quarter of 2012 and down from 12 percent at the end of 2011. With the vacancy rate declining, lease rates are on the rise, from a low of $.32 per square foot to $.37 per square foot.

If the demand for industrial space holds strong, new spec construction may be likely in the near future, Walter said .

But while the industrial sector is showing the most growth, that is only because that sector was hit the hardest by the recession. At one point, he said, lease rates had fallen to $.25 per square foot. “That type of drop in lease rates is brutal. The strong recovery is just an indication of how far it had dropped.”

In the retail sector, the vacancy rate jumped from 6.2 to 7.2 percent from fourth quarter 2012 to the first quarter of 2013. According to the NAI report, “a significant component of the change in vacancy was due to retailers postponing closures until after the holiday season.” Soon after the holidays, Hollister, American Eagle, Big Lots and Office Max all closed locations in Washington County.

However, population growth and improving economic conditions are keeping the retail sector active in Southern Utah. New retail in the area includes Chick-fil-A, Mattress Firm, Freddy’s  Frozen Custard & Steakburgers, and Victoria’s Secret.

Although retail vacancy rates are not dropping, lease rates are on the rise overall. And national retailers are scouting out space in the area for inline, mid-box and big-box locations, according to the NAI report.

Walter said there is not much vacant space available for retailers and “it’s going to create an environment where new construction is going to make sense.”

The office sector remains the softest segment of the commercial real estate market in St. George. Walter noted that St. George office tenants tend to be service-based companies like attorneys, accountants, title search companies, et cetera. “They’re the last to recover in the cycle because their clients have to recover and get back on their feet,” he said.

The office sector saw a .5-percent increase in the overall vacancy rate, while the lease rates remain low. The overall vacancy rate for office space is 13.5 percent, but some sub-segments are much higher. Suburban office vacancy is at 22.6 percent—a sharp contrast to the 9.6 percent in the downtown St. George area.

“The next development in the market will be developers building spec space,” said Walter. “Nobody is actually doing that today.”

According to Walter, the residential real estate market is leading the recovery in St. George. New homes are being built again and “that construction is creating jobs and a whole bunch of economic activity that’s spilling over into other sectors.”

“We think there is a really bright future for Southern Utah, and we’re going to see growth. And even though we are in a recovery, price are still really great—you can still pick up retail, industrial and office space at pre-boom prices,” said Walter.

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