Finding office space in Salt Lake County became much harder in the first quarter as vacancy rates dropped to their lowest levels in nearly seven years, according to a report released Tuesday by Commerce CRG.

The office vacancy rate in Salt Lake County fell to 9.69 percent for the first three months of the year, down from 10.28 percent in the previous quarter and 10.81 percent in the first quarter of 2006.

The report noted that premium office space in downtown Salt Lake City is nearly nonexistent, as the vacancy rate for class A properties in the central business district fell to 0.70 percent in the first quarter, down from a 1.35 percent average in 2006.

"In downtown, I think a lot of the competition comes from law firms," said Chris Kirk, office specialist with Commerce CRG. "Law firms are committed to downtown, and they are being very competitive right now for premier space."

Kirk noted that Salt Lake City is on the verge of an urban renewal, as more people choose to live and work in the city, which in turn drives commercial development.

"Urban is cool," he said. "You also have this great alternative for housing now. More and more people are looking at downtown as where they want to be."

Lease rates for premium class A office space in downtown Salt Lake City averaged $22.92 to $25.01 a square foot in the first quarter.

The search for office space will be eased somewhat when Fidelity Investments vacates its 175,000 square feet of downtown office space and moves into a new, eight-story office tower encompassing 230,000 square feet at The Gateway shopping center this fall. The next class A office building to be completed in downtown also will be this fall, as a 63,000-square-foot building known as Gateway 5 is completed at The Gateway.

In addition, the 20-story Walker Tower at 175 S. Main is undergoing a $10 million renovation that will restore the building to its original high-end status. The building is expected to be finished by this summer.

While the downtown market continued to be defined by a lack of quality office space, the real action was in the southern part of the county, where suburban office parks continued to fill with tenants and new buildings were added to the skyline.

The Commerce report noted that 1.5 million square feet of new office space, most of it in the outlying suburbs, will be added to the Salt Lake County market by the end of this year. Nearly half of that space is pre-leased.

"We're seeing not only record new construction in the suburban market, but we're also seeing a continuation of record positive absorption," said Brandon Fugal, vice president at Coldwell Banker Commercial NRT. "The hottest suburbs are centered in the South Towne area and the Cottonwood submarkets."

Jeff Edwards, president and chief executive of the Economic Development Corp. of Utah, an agency contracted by the state to bring new jobs and capital to the state, said consistent job growth is fueling the demand for space.

"Most notably in the office and industrial sectors," Edwards said. "At times, demand can limit opportunities for growth, but we haven't seen that yet. We are fortunate that Salt Lake City's future is bright with the reopening of the Walker Center, plans for the City Creek development and Downtown Rising."

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The Commerce report noted that the industrial vacancy rate dropped to 6.42 percent, down from 7.40 percent in the previous quarter and 7.14 percent a year earlier.

The report said the industrial market could be regarded as "unhealthy" because no new buildings have been built except in the big box market.

"Every segment had a decline, and the big box sector had the largest drop," according to the report. "This has been a normal trend for the last three years."


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