A conversation about commercial real estate in 2021



T
his month, we hosted a roundtable event featuring Utah’s commercial real estate leaders speaking on the impact of working from home, development hotspots, and changing tenant needs post-pandemic. Moderated by Lindsay Cleverley, executive director of NAIOP Utah, here are a few highlights.

How did Utah’s commercial real estate fair in 2020? What do you think this coming year will look like?

Eli Mills, CCIM | SVP, Institutional Properties | CBRE

Last year when COVID-19 hit, From an investment standpoint, no one knew how to make decisions or what to do. Everything kind of hit the brakes from about March 15th until about early July, but then it picked up and it was really, really hot. 

Interest in Utah has actually become even stronger from investors during COVID because a lot of money was now starting to flee larger markets and wanting to come here. 

Office sales were strong last year and they’re strong this year. Leasing office has been challenging because people are still waiting to know what to do, but a lot of office investors want to be in Utah even now during COVID because they think after COVID, it will be one of the strongest markets coming out of it.

Michael Jeppesen,  SIOR, CCIM, LEED AP | President, Managing Broker | IPG Commercial Real Estate

In the industrial market, we had another record year in terms of supply and absorption. Rental growth is above normal, the levels in the market and in general, I would say we’re at equilibrium in the industrial market with maybe a slight favor to landlords. We see that continuing into 2021.

Tanner J.M. Bowman | SVP, Real Estate Operations | Kensington Investment Company

With COVID shutting down a lot, the office market was hit particularly hard. Most people [were staying and working from home], but as we’ve seen more COVID vaccinations coming online, we’re also showing an influx of people into cities again, and that is helping strike back up the downtown and office markets. I think [it will be] a slow recovery, but I can foresee getting back to the levels that we were at pre-COVID, if not exceeding those, in 2021.

George Arnold | Partner | Hamilton Partners

When the pandemic hit back in Chicago, it was all hands on deck. Are we going to exist? Since that period, we were collecting a normal 95 to 100 percent of rents across all different groups on the office, multi-family, and industrial sides. Retail groups, obviously, were having a bit more trouble. Here in Salt Lake, we saw the same thing of just caution and it worked out well as rents continued to be paid.

From the developer side, what was amazing is that it went on without any click. Other than thoughts like, “what is this COVID? How is it going to affect us?” The construction groups kept moving. So I’m cautiously optimistic that this region is going to thrive because of the new normal that’s occurring.

Wes Christensen, CCIM | Hospitality Brokerage | Mountain West Commercial Real Estate

2020 was officially the worst year for hotels in the history of hospitality. RevPAR, revenue per available room, dropped statewide 40 percent year-over-year. And downtown actually dropped 53 percent. Demand just went totally flat. It went away completely because of [the state] issuing stay-at-home orders.

So this year, it’s all about how quickly corporate and group demand comes back. Leisure has come back really strong. In fact, some of the national park markets did better last year than they did previously, which is pretty outstanding.

Work from home, return to work, it’s heavily discussed. A lot of subleases have come online. What do those numbers look like? When will they start to be absorbed?

Andrew Bybee | Owner | Stack Real Estate

This isn’t the first time we’ve seen this. Back in 2015, we had a bit of a sublease glut, and that was not macroeconomic but it was tenants who had taken up a lot of space with the idea of expanding into it and multiple tenants all at one time had not expanded so there were a bunch of subleases that came on. It took about a year to work through.

This sublease again, obviously it’s macro and it’s probably twice that size―and it’s challenging, it’s pushing rates down. People are looking for COVID deals, but it’s been encouraging the last 60 days. It’s probably just the conversations about the vaccine so people are starting to think about expansion again. We’re seeing a lot of the subleases, at least in North Utah County, helping to fill those gaps. And not just 5,000 or 10,000 square foot gaps, but 30,000 or 45,000 square foot gaps. I think we really have a healthy environment to bring new inventory on. Otherwise, we’re going to push rates even lower. 

Nate Boyer | President | The Boyer Company

When this all hit, about 2 million square feet was dumped on the market from a sublease standpoint. Anyone who says they know how the new workplace is going to look is kidding themselves―no one knows. We do think there is a desire to be back in the office, whether it looks like a three-day hybrid, is yet to be determined. 

So we have seen optimism in the last 60 to 90 days and it has been encouraging and we are seeing tenants like Fidelity Investments, big nationals, saying that they’re going to start bringing people back slowly in our downtown office. National tenants, they’re saying we’re going to expand in Utah because of how well we’ve fared through this. But not a lot of new product is being thrown on the market, so I think that does help absorb these subleases.

Daniel Thomas | Partner | St. John Properties

At the peak of COVID, we had about 150,000 square feet of sublease space on the market. And I think we’re down to about 10,000 square feet, so it is getting absorbed. A lot of that square footage was absorbed at discount rates and some pretty advantageous terms for groups that were able to take advantage of it. But at least down here, in the mid-Utah County market, there’s not a lot of subleased space left on the market. 

If anything, 2020 taught us how to listen to our clients and I think that’s probably going to be even more important going forward. I’m not sure anybody really knows what the workplace looks like going forward, or even what retail looks like going forward. And I think it’s going to take a little patience and a lot of communication with our clients to figure out what those needs are.

Before the pandemic, Utah was experiencing high levels of in-migration. It seems that the pandemic spurred even more flight to Utah from major metros. How will this dynamic impact Utah’s commercial real estate? 

Wes Christensen, CCIM | Hospitality Brokerage | Mountain West Commercial Real Estate

It’s great for hospitality. Although performance may have dropped, pricing has dropped maybe five to 10 percent year-over-year because of this influx of capital and this influx of people coming in, particularly from California. And so it’s been a testament to how much Utah has really benefited from our economic diversity and population diversity from the influx.

[I don’t see more hospitality being developed.] In fact, from an investor perspective, it makes a whole lot more sense to buy rather than to build hospitality right now. Lumber costs, driven primarily from single-family and multi-family development, are so expensive that it actually doesn’t pencil to build a hotel right now in most markets. As an investor, you’d be better off coming in, buying a hotel at a 10 percent or 15 percent discount year-over-year than building that asset right now. 

Long term, we’ll actually have a bit of a supply shortage here over this next cycle, kind of akin to what we saw in single-family residential over the last 10 years or so. I could see that happening in the hospitality space where nothing is going to get built, but demand is going to increase.

During our latest monthly roundtable, our experts gathered to discuss what commercial real estate looks like in 2021.

What’s the next hotspot for development in Utah? What’s the hot product and what’s that next hot area of development, geographically?

Nate Boyer | President | The Boyer Company

I cannot believe the industrial market in Utah. It is amazing to see land that traded for $3.75. I talked to the landowners the other day, they said they just got an offer for $15.50 a foot, so it’s office pricing. Office land and retail land pricing has now caught up with industrial land in some cases. People are waking up and realizing that there is a scarcity of land positions in the industrial sector. And I don’t see that industry slowing down just because of the large requirements and the scarcity of land in the Northwest quadrant.

Monica Rafferty, CCIM | Commercial Real Estate Agent | InterNet Properties, Inc.

When I moved here from California 20 years ago, I was just so struck by the divide between East and West at I-15. And you have areas, specifically like West Valley City, that are 10 minutes from downtown, 10 minutes from the airport, 10 minutes from the Point of the Mountain, and nobody wanted to be there. I think that the West Valley City and the surrounding West-side cities have finally found their time. They’re being recognized for the advantages that they bring and the affordability compared to so many of the East-side locations. 

Tenant needs and wants are always changing, but within the last year, with the pandemic, those have radically changed across all product types. What are tenants looking for and how have those changed over the last five years?

Paul Skene | Managing Principal | Cresa

Obviously, the pandemic has accelerated the notion of remote work and we don’t see that going back. We think there will be a massive transition where companies that were resistant to remote work have now had to solve those security and productivity issues that were holding things back. But what most tenants now are looking for is a lot of flexibility within their workspace. We anticipate a shrinkage in demand for office space, somewhere between 20 and 30 percent moving forward. 

Lee Dial | COO/CFO | Cowboy Partners

One of the key amenities that we look at for new product going forward is actually conference space or even work-from-home-type space in a common area setting. People want a quiet space where they can work and they’re not interrupted by other distractions. 

So there is some demand for that quiet space or a den, but I think the challenge comes with the cost that space comes with and whether they can pay that rent, because I think residents across the board in the Salt Lake Area are already struggling a little bit with rent and how high the prices have gotten. But I don’t think that’s going to slow down, either. 

During our latest monthly roundtable, our experts gathered to discuss what commercial real estate looks like in 2021.

Andrew Bybee | Owner | Stack Real Estate

[As an office landlord] a couple months in, there was a lot of, “what are you doing to try to get the tenants to come back? How are you trying to make it comfortable or safe?” And honestly, there’s not much that we can do. It’s so macro that whether we’re cleaning every surface or putting the right filters in the air to clean the air, it’s not bringing people back. 

I don’t subscribe to the 20 to 30 percent reduction in office. In fact, what we see happening is employees demanding flexibility from employers but not less of what they had before. Once we get something more, we don’t want to give up what we had. I don’t believe we’ll ever see it like it was. I think we’ll see a new normal, but I think that how the office in Utah develops over the next 10 years is going to surprise a lot of people.

Trevor Ellis | Acquisition & Development Manager | PEG Companies

We’ve tried to find a way to make tenants, not only comfortable, but also confident in their living spaces. And some of that is with the work environment. We’ve talked about conference rooms. We’ve also built―we call them phone booths―small offices that are the size of a phone booth that people can go and take a phone call. We designed one that had Zoom walls. And so we’ve developed a few of those in our apartment communities to allow tenants, to not only feel comfortable, but confident when they jump on these phone calls. I do think that we’re all going to go back to the office, but there will be some days where I work from home and other days where I’m in the office. 

There was a trend over the last couple of years to build smaller units. Developers would try to create more density in our projects by building more micro-units like studios and one-bedroom apartments. And I’ll say that as we’ve looked at our projects that have come online in the last couple of months, two- and even three-bedroom units are some of the first to be leased. Because of this, we’ve looked at building larger units with bigger footprints so that people have that flexibility.

There’s so much multi-family going on. A lot of people not in the industry just have the assumption that we’re going to be overbuilt, no one’s ever going to live here. True? False?

Lee Dial | COO/CFO | Cowboy Partners

We still have a steady influx of in-migration, and COVID has only highlighted that. I don’t know that I do see an overbuild. Maybe in the short run, certain pockets [are] overbuilt as projects are coming online and they need to get leased up, so it may take a little bit longer to lease those products up. In the long run, I think they’re all going to lease up and they’re going to do fine.

This number isn’t exactly right but last year, around 3,400 homes in the five-county area along the Wasatch Front were in inventory. This year, that number has decreased 68 percent, which is an astounding amount. We are down to 1,100 total homes on the market in inventory in the five-county area. That’s incredibly low. So if you have that low of inventory in single-family homes and you still have the same amount of in-migration plus natural increase, wou can’t buy a home.

So then where are you going to go? You’re going to lease an apartment until you can buy a home. You hear about the craziness in homes where even to buy a home you’ve got to make a full cash offer with zero contingencies. There’s a lot of people that can’t do that. There’s still plenty of demand out there. Even with all the apartments coming online. It’s just going to be in short spurts where you’re going to see some concessions being offered.

James M. Williams | President | AE Urbia

The cost of single-family housing is just going to go up and up. It’s not affordable to a lot of people now. And so the multi-family has been especially attractive to the younger generation, they’re all about sustainability and what’s better for the environment. For our environment, it’s better to have multi-family housing and to build up. Because the land is so restricted here, we’re at the point where we need to start building taller to try to maintain open space for parks and to make our cities attractive. [The new generation wants] to trade yard work for amenities and they want to be able to go downtown to enjoy restaurants, go to movies or shows, and to live right there.

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