Utah Commercial sector's pulse faint after 2009

Utah Commercial sector's pulse faint after 2009
Real estate » Full recovery in 2010 unlikely, but some projects are pumping life into S.L. Valley.

By Lesley Mitchell
The Salt Lake Tribune
Updated:01/22/2010 05:13:48 PM MST

The economic downturn has given Utah's commercial real estate sector a beating, and despite some signs of life, the pain will linger through much of 2010.

Companies curbing expansion plans -- or worse yet, shutting down altogether -- have emptied buildings and driven up vacancies in office, retail and industrial space. Rents are down, and construction of new projects has slowed, or stopped altogether in some areas.

In a time of cutbacks in consumer spending, the retail sector has been hit particularly hard.

"There were a few bright spots, but 2009 was probably the worst year in 25 years for retail leasing and tenant expansion," said Chris Monson, a retail and investment specialist with commercial brokerage Mountain West Retail and Investment in Salt Lake City.

The biggest news in Utah retail last year was the entry of grocery chain WinCo Foods, which in October opened its first warehouse-style stores, in Midvale and West Valley City. The company has announced plans to build three more stores in the state, in Ogden, Clinton and Orem.

A handful of expansions by big-box retailers such as WinCo helped compensate for virtually no development in other areas of the retail sector. Mall development -- or redevelopment -- generally came to a grinding halt last year, with a couple of notable exceptions.

The rebuilding of Cottonwood Mall remains stalled, even as owner General Growth Properties has emerged from bankruptcy. Other malls are delaying large capital improvements and struggling with tenants closing shop or electing not to go through with expansion plans.

But in Farmington, the long-stalled Station Park retail-office complex is showing signs of life. The Harmons grocery store chain recently announced plans to start work on a 68,000-square-foot store this spring. California developer CenterCal Properties said it also plans to build a 14-screen Cinemark movie theater; if all proceeds as planned, both could open in early 2011.

But progress on the rest of the large project remains uncertain given the state of the economy. At buildout, the shopping center could have as much as 800,000 square feet to 1 million square feet of retail and office space.

Last week, the Trolley Square shopping center announced that a 42,000-square-foot Whole Foods Market will open in February 2011. Trolley's owners had filed suit against Whole Foods in an effort to force the natural foods grocer to proceed with plans to build a large store as part of the mall's revitalization effort, but the sides settled.

Another key rejuvenation effort under way is at Valley Fair Mall. The West Valley property is adding a 3,400-square-foot In-N-Out Burger by summer, as well a 30,000-square-foot Ross Dress for Less, a 13,500-square-foot Petco, an 8,000-square-foot Famous Footwear, and a 3,000-quare-foot NYPD Pizzeria and 2,100-square-foot Farr's Fresh Ice Cream and Frozen Yogurt Cafe.

Fewer companies expanded their brands into Utah last year, but the popular In-N-Out fast-food chain was an exception. It entered the market with eateries in Draper and West Jordan. Colorado-based competitor Smashburger opened its first Utah location in August, near Valley Fair. Another hamburger chain, Five Guys Burgers and Fries, also came aboard last year, adding locations in Midvale, Sandy, West Valley, Bountiful and Orem. A Layton outlet is coming soon.

As with the retail sector, goods news was hard to come by in the market for office space.

In Salt Lake County, vacancies topped 17 percent by the end of last year, up from just under 14 percent in 2008, according to a report by CB Richard Ellis. That's the highest level since 2004.

"Overall, it was a very difficult year for landlords," said Wesley Tab Cornelison, an office specialist with CB Richard Ellis in Salt Lake City. "If you're a tenant, however, it's great."

The gleaming new office building at 222 S. Main in Salt Lake City, on which construction started before the state and national economies headed downward, opened for business in December. For owner Hamilton Partners, filling the 425,000-square-foot downtown structure will be a challenge, but there is progress.

The Denver-based law firm of Holland & Hart, which agreed to lease the building's top three floors covering 67,000 square feet, is the anchor tenant. Another law firm, Brinks, Hofer, Gilson & Lione, will occupy about 8,000 square feet on the 19th floor. CB Richard Ellis, the building's exclusive listing agent, is occupying the fourth floor, with about 13,000 square feet of space.

Hamilton Partners Principal Bruce Bingham expects the building to be about 55 percent leased by early February after an unnamed tenant signs a lease for 150,000 square feet.

Speculation among those in the city's commercial real estate industry has centered on Goldman Sachs being the tenant. The banking giant operates at the University of Utah's Research Park but is looking for new, larger digs to accommodate an expansion. Bingham would not specifically comment about prospective tenants.

As a landlord, Bingham will be grateful to put a "painful" 2009 behind him.

Several other office buildings opened last year. The new square footage, combined with a high level of space emptied by companies scaling back, has substantially increased vacancies.

Tenants are getting lower rates, significant amounts of free rents and moving allowances, among other perks.

But in a twisted bit of good news, office-building construction in many areas of the Wasatch Front has stopped, giving the market time to absorb the surplus space available.

In the market for industrial space -- which encompasses warehouse, distribution and manufacturing concerns -- development also has virtually halted because of a surplus of available space.

The slowdown in development is helping the situation, said Greg Hunter, an industrial specialist with Salt Lake City-based Commerce Real Estate Solutions in Salt Lake City.

Many companies have postponed, scaled back and even shut down industrial operations, a trickle-down effect tied to the downturn in consumer spending and housing construction.

Home Depot, for example, closed a distribution center in Salt Lake City and delayed construction of another.

Cabinetmaker KraftMaid, which mothballed its 840,000-square-foot building in late 2008, hasn't made any efforts to sell it given the economy, commercial brokers say. Hope remains that as the economy improves KraftMaid will reopen. Hunter thinks the sector should show some signs of improvement in mid-2011.

Despite the challenges Hunter and other said Utah's economy is in better shape than most, with an unemployment rate well below the national average.

The state also is in the enviable position of having the LDS Church drive construction activity with its massive City Creek development in downtown Salt Lake City.

When completed during the next couple of years, the project will include an outdoor shopping mall anchored by Macy's and Nordstrom, as well as residential space and office space.

Utah also is getting another big boost in the form of a 1-million-square-foot National Security Agency Data Center at Camp Williams, which is scheduled to break ground this year. The massive project will cost an estimated $2 billion to build and employ thousands of construction workers.

"Utah is much better shape than many other parts of the country," Hunter said. "Just look at Detroit. Things could be a lot worse."

lesley@sltrib.com