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Office vacancy rate may climb to 20%

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An uncertain Salt Lake real estate market will continue to cloud 2002 as office vacancy rates are projected to climb to 20 percent by summer.

All markets across the nation are experiencing the effects of the slowing economy, according to Mike Richmond, vice president of office properties for CB Richard Ellis, a Los Angeles-based commercial real estate organization with offices in Salt Lake City.

Richmond's remarks Tuesday, before more than 500 real estate professionals and developers, were part of the eighth annual Utah Commercial Real Estate Symposium at the Salt Lake Hilton Hotel.

Vacancy (including sublease space) in the Salt Lake metropolitan area climbed to 17.8 percent at the end of 2001, a 45 percent increase over 2000.

The sharp rise, the largest in 10 years, was mainly the result of a high level of new construction, a large increase in sublease space and slowing demand, Richmond said.

"Landlords are no longer kings. Tenants and buyers are in the driver's seat," said Zach Anderson, an industrial property specialist for New America International Utah Commercial Real Estate.

And the outlook for the remainder of the year remains bleak, with vacancy rates expected to stabilize around 17 percent to 18 percent by December, Richmond said.

"The vacancy rates are some of the highest we have seen in 14 to 15 years when we began recording statistics," Richmond said.

Yet downtown asking lease rates ended 2001 at $18.77 on average, up from $15.84 a year earlier, mainly due to the addition of the Wells Fargo Center.

Asking lease rates, however, do not reflect incentives or free rent offerings to entice new leases. And they do not include sublease rates, sometimes as much as 10 to 20 percent lower than the asking rate, Richmond said.

Canyon Park Technology Center, in Orem, is one area bucking Salt Lake's high-vacancy trend.

The campus, formerly owned by Novell, has more than 1 million square feet of office space in 15 buildings and is 95 percent leased, said Allen Finlinson, general manager.

"We're in the process of signing two tenants. I came to see where the market is heading. It's a big concern to us," Finlinson said.

In Salt Lake City last year, 18 multi-tenant buildings were completed, adding 1,230,989 square feet to the market. With the exception of The Gateway's office space in downtown, all of the construction occurred in Salt Lake's outlying suburbs, and nearly 90 percent of that construction was started in 2000, prior to the start of the current recession.

But as the economy cooled, most companies — not just technology businesses — began subleasing and vacating their office space, leading to last year's high rates.

However, the real estate industry's unsettled turn can be viewed in a positive way, said Robert Anderson, senior vice president of real estate for Zions Bank, especially for investors and tenants who can capitalize on the market conditions.

From a lender's perspective, Anderson singles out apartments, grocery retail strip centers and industrial property as the best investments in the current economic downturn.

On the retail front, vacancy rates showed smaller gains, up 1.96 percentage points over 2000. But overall, retail centers are experiencing the highest vacancy in the past seven years, according to Tim Simonsen, retail property specialist with Prime Commercial Inc., a Midvale-based commercial real estate brokerage.

"For example, California, which is a lot bigger metropolitan area, is in the 7 percent range (retail vacancy). They get hit a little harder than we do. Utah is just slow and steady," Simonsen said.

Despite the increases, retail development in the Salt Lake area continues to be healthier than other locales throughout the country.

"Utah's increasing population will continue to demand the entry and expansion of national chains," Simonsen said, adding other national retailers are closely watching The Gateway project to see if "high-end and high-fashion retail growth will continue."

In addition, the change in the state's advertising of liquor is prompting a major expansion by national restaurant chains.

"Big-name restaurants never before seen in this part of the West are entering Utah," Simonsen said, including House of Blues, California Pizza Kitchen, Z'Tejas and the Elephant Bar and Grill.

E-mail: danderton@desnews.com