Salt Lake County's office real estate market in 2008 went from being one of the best in the nation to one that stagnated, according to a report released Thursday.
Real estate firm CB Richard Ellis reported that the 2008 year-end office vacancy rate for Salt Lake County rose from 12 percent in the fourth quarter of 2007 to 13.7 percent in the last quarter of 2008.
The county had about 4.5 million square feet of available office space as of Dec. 31, compared with 3.9 million square feet at the end of 2007.
Jim Wood, director of the University of Utah's Bureau of Economic and Business Research, said that the high volume of construction in the office market in recent years has led to increased vacancies nationwide and in Utah. Rising vacancy rates are a trend that should be expected throughout the industry for at least the next year, he said.
"You have a lot of new building under way, and the timing just isn't very good," Wood said.
Some of downtown Salt Lake City's most anticipated office projects, such as the 222 Main Street Building, are scheduled to come onto the market at a time when the employment economy is the worst in about 25 years. "It makes it pretty tough," he said.
Kreg Peterson, office specialist with CB Richard Ellis, said the increase in vacancies could be attributed to fewer companies moving into the area and the firms that are already here that are downsizing. In a difficult economy, getting companies to consider relocating or expanding their operations into new office space is a difficult 'sell.'
"Everybody has taken a 'wait and see' attitude right now to see what this year is going to bring," Peterson told the Deseret News.
One of the big challenges of 2009 will be the amount of sublease space coming onto the market as businesses downsize, he said. Sublease space is office space that is leased secondarily by a client who already has a primary contract with the property owner.
"Sublease space will have a direct impact on lease rates going forward," Peterson said in a prepared statement. "The sublease space is in direct competition with new office buildings coming online."
Companies offering sublease space are discounting rates and even offering furniture to close a deal, he said.
The volume of sublease office space available in Salt Lake County increased 55 percent from the end of 2007 to the same period in 2008.
"The companies aren't expanding like they were before," Peterson said. "In 2009, absorption will likely be flat or negative."
Salt Lake County's average office lease rate in the fourth quarter of 2008 was $19.17 per square foot, compared with $18.44 per square foot in the same period in 2007, the report said.
The amount of office space under construction in the county fell dramatically, from 1.7 million square feet in the fourth quarter of 2007 to 615,240 square feet in the same quarter of 2008.
Peterson said the hard times will likely continue well into 2009 and require some tough choices for property owners.
"Landlords are going to have to give some concessions and eventually drop some lease rates to entice tenants to come to their building instead of the guy down the street," he said.
E-mail: jlee@desnews.com