Despite Record Deliveries, Salt Lake County Holds Its Own on Vacancy

Salt Lake City--Last year saw more units delivered to Salt Lake County than the market has seen in the past 20 years.

Salt Lake City–Last year saw more units delivered to the Salt Lake County than the market has seen in the past 20 years. Last year, 2,574 units were delivered into the market, reports Jed Millburn, principal of ARA Utah, who says the annual market-wide average is roughly 700 to 800 units.

“A lot of those were HUD deals that were in application from ’06, ’07, ‘08 and actually got built in 2009 and 2010,” Millburn tells MHN. “Our market didn’t have a huge drop in vacancy—our lowest vacancy point was 8.6 [percent] in the beginning of 2010; for that reason, HUD kept lending dollars on new construction,” he recalls.

Despite this, however, the beginning of 2011 saw a decline in vacancy, to 6.2 percent. “We not only absorbed the 2,574 new units, but we absorbed another roughly 3,200 units in the market,” Millburn points out.

Demand factors include the mentality shift of would-be home-buyers to renters, as well as job growth; 2010 saw a 1.3 percent increase in jobs. Goldman Sachs recently expanded in the last 18 months, with estimates that the financial firm added over 1,000 professional jobs. Additionally, the government is building a National Security Agency facility, which has added 4,000 temporary construction jobs and is expected to add 1,200 permanent jobs upon completion.

“The biggest driver is the educated workforce,” says Millburn. “There’s a lot of very smart young people that go to the University of Utah or BYU or UVU, and they are willing to stay here and take less money than if they move out of state. Companies are realizing they might as well come to Utah.” Additionally, he notes, the tax laws in Utah “are very kind to businesses.”

Meanwhile, the last two quarters of 2010 saw rent growth—1.2 percent—for the first time in three years, Millburn reports, estimating that 2011 will see an additional 3 percent to 4 percent rent growth.

Unlike many markets where lower-tier apartments have struggled the most, Salt Lake City sees its Class A apartments under-performing, mostly due to all the new supply that has recently been added to the market.

At the same time, properties in downtown Salt Lake City, as well as along the I-15 corridor and those that are transit-oriented, are performing better than those communities that are further away from public transportation. And newer areas, such as the southern quadrant of the city are a bit softer—again, due to the new supply.

The new $1.5 billion City Creek development, a mixed-use community that is projected to be complete in 2013, is enlivening the downtown area. “A lot of apartment communities downtown are bulging right now, waiting for more and more of a downtown crowd,” Millburn tells MHN.

Meanwhile, the transaction market has been very anemic, Millburn reports, noting that only five or six deals over 100 units have traded in the last 18 months. Cap rates have compressed and are down about 75 bps, across the board, since last year. And with the projection of rent growth on the horizon, Millburn believes they will compress further.

As for the future, positive job growth is one of the area’s greatest bright spots, reports Sage Sawyer, multifamily specialist at ARA Utah. “We’ve been the third-fastest growing state in the nation, and that rate is supposed to keep up with strong population growth. We have the youngest demographic in the nation, so a lot of that will translate into renters,” he adds.

Millburn adds, however, that the Class A market “has to hunker down,” particularly as new supply continues to be delivered. “Based on what is currently under construction and what is being proposed, he says, “we will see above-average deliveries for the next five years, and it’s to the tune of 50 percent to 75 percent above average.”