Tech sector driving Salt Lake's strong office market

Top 10 Office Markets by Overall Net Absorption Growth

MARKET OVERALL MARKET
NET ABSORPTION GROWTH
Q3 2016-Q2 2018
Salt Lake City 11.4%
Raleigh-Durham 7.9%
Silicon Valley 7.8%
Vancouver 7.1%
Charlotte 5.8%
Austin 5.7%
Phoenix 5.7%
Seattle 5.2%
Nashville 4.7%
San Francisco 4.2%

It has been over two years since downtown Salt Lake City last welcomed a new office tower, but across the region, the office market is strong thanks to robust tech-sector employment growth.  According to CBRE’s annual Tech-30 report, Salt Lake City leads the country’s top tech markets in office net absorption growth (growth in occupied office space) among the 30 leading tech markets.  The Tech-30 report measures the tech industry’s impact on office rents in the 30 leading tech markets in the U.S. and Canada.

The report looks that the larger Salt Lake market which includes the Silicon Slopes.  High-tech employment growth, which grew 8.1 percent during 2016 and 2017, is driving most of the recent growth net office absorption.   The high absorption rate contributed to a 9 percent increase in commercial office asking rents from Q2 2016 to Q2 2018 to $23.96 per square foot.  Despite the increase, Salt Lake City’s office rents are comparatively lower than other top tech sectors as tech economies are driving up rents in tighter office markets.

The report notes that Salt Lake City rents have experienced slightly more modest growth throughout this period, growing at 9.0 percent and ranking 12th on the list.  But lower rent and steady growth of the high-tech labor pool growth make Salt Lake an attractive market for commercial real estate investors.  Furthermore, while many tech firms are willing to pay a significant premium for office space in leading tech submarkets—13 percent more on average, according to the study—Salt Lake’s top tech submarket, Tech Corridor, has just a 3.5 percent rent premium.

“Despite accounting for only 38 percent of the total suburban market size in both Salt Lake and Utah Counties, the Tech Corridor has accounted for 67 percent of total net absorption since 2017. Large tenants are drawn to the area because of low costs, availability of new product and access to talent,” said Nadia Letey, first vice president and office specialist at CBRE in Salt Lake City in a statement. “Looking ahead, the overall tech market is expected to remain healthy; vacancy in the suburbs is in the single digits and development—especially in the Tech Corridor—is strong, with two-thirds of new construction already pre-leased.”

The healthy Tech Corridor at the Point of Mountain will soon add another new company to its growing tenant portfolio.  On Tuesday the Governor’s Office of Economic Development (GOED) announced that LendingClub Corporation will expand in Utah adding up to 860 jobs, $22 million in new state revenue and an estimated $17.85 million in capital investment over the next 10 years.  The company’s new center will be located at Thanksgiving Station in Lehi, Utah.

According to a statement, LendingClub is America’s largest online credit marketplace and is the leading provider of unsecured personal loans in the U.S. More than 40,000 people come to its site daily and the company is committed to helping motivated Americans improve their financial health.

The GOED expect LendingClub to create up to 860 jobs over the next 10 years.  Under the agreement with the state, the total wages in aggregate are required to exceed 110 percent of the average county wage. Projected new state wages over the life of the agreement may be up to $543,922,175 which includes wages, salaries, bonuses and other taxable compensation. Projected new state tax revenues, as a result of corporate, payroll and sales taxes are estimated to be $22,430,269 over 10 years.

LendingClub may earn up to 20 percent of the new state taxes they will pay over the 10-year life of the agreement in the form of a post-performance Economic Development Tax Increment Finance (EDTIF) tax credit rebate. As part of the contract with LendingClub, the GOED Board of Directors has approved a post-performance tax credit rebate not to exceed $4,486,054.  Each year LendingClub meets the criteria in its contract with the state, it will earn a portion of the total tax credit rebate.

“As space availability in top tech submarkets continues to tighten, we expect large tech companies to continue to expand outside their headquarters markets—including further into secondary and even tertiary markets. Large tech company expansion into smaller markets will help foster innovation clusters, further boosting job creation and creating additional office demand,” said Colin Yasukochi, director of research and analysis for CBRE in the San Francisco Bay Area in a statement.

The Point of the Mountain area may be reaping most of the benefits of the region’s tech boom, but there are signs that momentum is expanding to downtown Salt Lake City.  This month The Gateway, the city’s largest mixed-use center, welcomed two new tech companies.   Last week Recursion Pharmaceuticals opened their new 100,000-square-foot headquarters in the former Dick’s Sporting Goods building.  And later this month Kiln, a tech-oriented coworking and startup community will open its new Salt Lake offices in a 25,000- square-foot space directly west of the Olympic Fountain Plaza.

Outside of The Gateway, City Creek’s Tower 8, a proposed 28-story office tower, and Houston-based Patrinely Group’s 650 Main development with two proposed 11-story office towers will potentially add over 1 million-square-feet of new office space downtown.

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