Spotlight on Salt Lake City
With the downturn from the pandemic, the current REIS baseline forecast for the Salt Lake City apartment market calls for a net annual job loss of 2.8%. As a result, REIS forecasts occupancy to decline by 400 units, which is lower than the expected new supply of 2,711 units. This will push the year-end 2020 vacancy rate up to 8.2% from 5.2% at the end of 2019. Finally, rent growth is expected to decline by 2.7% to $1,051 per unit by the end of 2020; effective rents are expected to decline by 3.4%.
Economic Overview
Salt Lake City – Growing Tech and Finance will Help Stem Deep Losses from the Coronavirus Downturn
With its high quality of life amenities and low costs, Salt Lake City had seen healthy economic growth over the last few years. Yet oddly, it has a very small leisure and hospitality sector, which employs only 8.6% of the workforce, far lower than the U.S. average of 11%. While most of these jobs are at risk with the coronavirus fallout, Salt Lake City should lose disproportionately fewer jobs than many metros with larger hospitality sectors. Still, the rest of the state of Utah relies heavily on tourism and thus will suffer far more so than Salt Lake City.
Recent Growth With 95,900 added jobs from 2014 to 2019, Salt Lake City grew 14.7%, well above the U.S. average growth of 8.6%. The office sector contributed one-third of the recent job growth with 32,000 jobs (+18%) since 2014 including 8,900 jobs added in 2019 (+4.3%). What was unique about Salt Lake City’s office sector is that growth was spread across professional and business services, finance and information (media, software publishing, telecommunications). According to searchsaltlake.com, the Lehi area, 20 minutes south of the city, had become a “haven for technology companies and startups.” Indeed, the computer systems design industry - that serves as a representative of the tech industry - added 5,000 jobs over the last five years, a growth rate of 46%.
Office Market Still, Salt Lake’s office market did not reflect this job growth as net absorption was weak in both 2019 (+174,000 SF) and 2018 (-59,000 SF). The 2019 vacancy rate of 16.6% climbed from a low of 15.7% in 2016. Rent growth was 1.5% in 2019, below the U.S. growth rate of 2.6%. Compounding the expected downturn that will hurt the office market, new office properties are expected to open this year including the Fairbourne Business Park in West Valley City with 243,200 SF. Vacancy is expected to climb.
Apartment Market Population grew 120,400 from 2013 to 2018 (+7.4%) boosting demand for apartments. Salt Lake City’s apartment supply and occupancy grew 13% and 11.6%, respectively, over the last five years. Of the 4,510 units added in the metro since 2017, 2,108 units (46%) were added in Central Salt Lake City. However, the submarket’s vacancy rate climbed to 12.1% at the end of 2019 from 4.7% in 2016 and rent growth slowed to 3.6% after averaging north of 10% in 2017 and 2018. The metro average rent of $1,079 per unit in 2019 had also increased rapidly but is still 28% lower than the U.S. average rent of $1,498 per unit.
Retail Market The retail sector lost 600 jobs in 2019 (-0.7%) but these were offset by restaurant job gains of 1,800 (+4.1%). Salt Lake City’s retail real estate sector had grown with the population. In 2018, Mountain View Village opened in South Riverton with 406,000 SF of new retail space including Home Goods, TJ Maxx and Michaels. The average rent growth of 2.2% in 2019 was ahead of the 1.2% growth rate for the U.S.
Outlook Outside of office, Salt Lake city’s education and health services added 2,600 jobs (+3.1%) in 2019 which is above the U.S. growth rate of 2.2%, but this sector employs less than 12% of the total workforce, much lower than the U.S. ratio of 16%. And although it is the state capital, its government sector’s share of total employment is 14.8%, on par with the U.S. average of 14.9%. Still, these health, education and government jobs should stabilize the economy somewhat against expected losses in the coming downturn driven by the virus, especially in tourism-related industries
Supply & Demand
With the downturn from the pandemic, the current REIS baseline forecast for the Salt Lake City apartment market calls for a net annual job loss of 2.8%. As a result, REIS forecasts occupancy to decline by 400 units, which is lower than the expected new supply of 2,711 units. This will push the year-end 2020 vacancy rate up to 8.2% from 5.2% at the end of 2019.
Rent Growth
During the first quarter of 2020, asking rents in Utah's state capital and most populous city rose by 0.5% to an average of $1,086 per unit. The average increased 3.7% from a year ago. The average effective rent increased 1% in the quarter and 3.9% over the year. Mean per-unit rents in the metro are as follows: studios $852, one bedrooms $966, two bedrooms $1,123, and three bedrooms $1,373. This quarter extended the market's streak of gains to 38 quarters, during which asking rents have climbed by a total of 45.5%. The ten-year average annual growth rate was 3.8%. All of the Salt Lake City metropolitan area's ten apartment submarkets contributed to the metro's recent rent growth.
Transactions
Apartment sales volume in Salt Lake City plummeted in the first quarter. Therefore, REIS was unable to calculate cap rates. There will likely be no second quarter closed transactions as well due to the onset of the pandemic that had a deep impact on the investment sales market. Moreover, Utah is a non-disclosure state which means that authorities do not disclose property transaction information to the public as they do in most states. The coronavirus shutdown not only stalled many ongoing negotiations and closings, but most non-government reporting sources likely closed in March as well. This has and will continue to slow the data generation for closed property transactions, especially in Salt Lake City and other Utah metros. Even when the offices open, it will be challenging to track Utah property transactions as the backlog will likely be significant. As a result, second quarter sales volume will likely be the lowest in more than ten years as the onset of the pandemic had a deep impact on the investment sales market.
