John McCloud is editor of Industry Property Journal, from which this article is excerpted.
Salt Lake City—Investors are looking for industrial property opportunities in secondary and tertiary markets like the Great Salt Lake Basin. The region is especially popular with Southern California companies in search of lower price alternatives close to their home bases. Alere Property Group LLC and the Koll Co., both of Newport Beach, CA, bought their first properties in Utah recently. Other investors are exploring similar possibilities.
Investment sales increased more than 300% in the past 12 months, with more than 3.3 million sf of product sold between January and June this year, according to statistics from the Salt Lake City office of CB Richard Ellis. Even user-buyers, who typically pay the highest prices for properties, can't compete with investors. CBRE reports there were only 345,528 sf of user deals in the first six months of 2006, a decrease of 13% from the same period in 2005.
"Salt Lake City is a dynamic, fast-growing area with a very educated and entrepreneurial labor base," says Koll managing principal Alan Airth. Koll bought two light industrial business parks near Salt Lake City International Airport in July for $12.5 million. Airth says the price was lower than replacement cost. "That means we'll be able to get the yield we want, something that's hard to do in a lot of markets today," he explains.Koll bought Redwood Business Park, a three-building complex totaling 78,880 sf on 4.48 acres and Broadbent Business Park, an eight-building complex totaling 118,896 sf on 8.35 acres from Malas Holdings LLC of Salt Lake City. Alere purchased a 159,924-sf building, also near Salt Lake City airport, for an undisclosed price. Both companies say they are scouting the area for additional opportunities.
Four tenants fully occupy the Alere property. The two Koll properties have a combined occupancy of more than 90%. Airth says the properties face no direct competition from new construction, even though the market is undergoing a small boom of industrial development. As CBRE notes in its mid-year market report, "The biggest news of the first two quarters is construction, construction, construction." The brokerage reported 2.98 million sf of construction activity for the first half of the year, including 1.6 million sf of construction starts. In contrast, only 1.17 million sf of construction occurred in all of 2005. Only 2.62 million sf was built for the entire period between 2003 and 2005.
A substantial number of new buildings are speculative, indicating solid developer confidence in market fundamentals. However, there is some question whether such confidence is justified since leasing activity is declining. CBRE reports there were 1.8 million sf of new leases in the first half of 2006, compared to 2.25 million sf for the same period in 2005. Investors argue that the number of new leases still exceeds new construction starts. More significantly, the average rental rate in June was $0.34 per sf, up 36% from the same period in 2005. That represents one of the highest percentage jumps in any market nationwide. Sale prices have also climbed, though not as steeply as rents. They rose nearly 19% in the 12 months ended in June 2006 to $44.42 per sf, according to CBRE.
The list of developers with projects underway gives a clear indication of the market's changing status from an afterthought to a mainstream venue. Along with local builders like Freeport West, Sorenson Development Inc. and Roderick Enterprises, it includes regional players like Sacramento's Buzz Oates Real Estate and global companies like Denver's ProLogis. The investor list is also growing. In October, Chicago's First Industrial Realty Trust Inc. bought three buildings totaling 475,717 sf at the city's Ninigret Technology Park. The purchase price was not disclosed, but NAI Utah brokers Zach Anderson and Bryce Clanchard, who participated in the transaction, report it exceeds $25 million or $52.55 per sf.
Like the Koll and Alere properties, the First Industrial complex is multi-user. It has seven tenants. Airth describes Salt Lake City development as heavily focused on high-cube distribution product. However, he says the market also has a significant small business segment that needs smaller spaces. "This is where we see the greatest opportunity," he adds.
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