The Greater Salt Lake City market is turning a corner. Following the most painful and costly recession since the Great Depression, Salt Lake has returned to growth mode. In 2010, the American Legislative Exchange Council (a membership organization of state legislators) voted Utah first in the State Economic Competitive Index in regard to its economic outlook.
Consider the job market. In the past six months, job growth in the country has improved from -3.3 percent in January 2010 to -0.2 percent in June 2010. In addition, Salt Lake’s unemployment rate of 6.9 percent continues to rank well-below the national average of 9.7 percent. What’s more, Salt Lake’s natural advantages as a Western hub with an educated workforce and desirable business tax climate have attracted many new businesses over the years. Numerous companies have recently announced expansions into the Utah market, including ebay, Goldman Sachs, Microsoft, Disney Interactive, Procter & Gamble, and Hershey Co.
Additionally, the state is expected to see significant population expansion over the next 20 to 30 years, with growth rates projected to be twice the national rate. Currently, the state’s population is at approximately 2.9 million; it is projected to reach 5.2 million by 2040. This population increase is largely organic—65 percent is natural growth, while 35 percent comes from net in-migration. And with the youngest median age in the country (28.7 years) and the country’s largest average household size (3.1), Utah’s population growth is projected to remain strong.
These basic fundamentals—job and population growth—have many apartment investors eyeing Salt Lake City with interest. And that interest will only grow in the coming years.
Banking on Construction
The Utah economy is expected to continue to improve for the remainder of 2010, with several significant construction projects that will directly improve job growth and fundamentals, while driving the demand for new apartment housing.
First, The Church of Jesus Christ of Latter Day Saints is in full swing with the construction of a mixed-use development known as City Creek Center, located in the heart of downtown Salt Lake City. This $2 billion development is positioned on 20 acres of land and will be completed in 2012. Currently, the project contributes an estimated $1 million a day to the local economy. Upon its completion, City Creek will boast approximately 1 million square feet of retail and two large condominium towers. The development will likely create several thousand new jobs for the local economy.
Second, the National Security Agency recently announced a $1.6 billion data center that will be built near Camp Williams, a National Guard training facility, located in Bluffdale City on the south end of Salt Lake County. The project is estimated to employ more than 4,000 people during construction and will deliver approximately 1,200 full-time jobs upon completion.
Additionally, the Falcon Hill development, in conjunction with the U.S. Air Force, began construction in December of 2009. This office/industrial development is expected to create approximately 20,000 new jobs over the next five to seven years. Residential construction is expected to supply housing for the new jobs, though no noteworthy developments exist right now. Finally, the Utah Department of Transportation (UDOT) and the Utah Transit Authority (UTA) have approximately 10 transportation projects worth several billion dollars under construction, including the TRAX light rail, FrontRunner, and the Mountain View Corridor.
This construction is expected to drive new development in the apartment sector as well. In the first part of 2010, new apartment development in Salt Lake County reached its all-time peak, with approximately 3,100 units delivered from January 2009 to June 2010. This represents about a 3 percent increase in total rental units in Salt Lake County over the past year and a half.
Another 1,700 units are expected to hit the market in the next 12 months, with an additional 1,800 units proposed for the following 24 to 36 months. The most active developers in the market are Wasatch Advantage Group and Miller Development. Wasatch, based out of San Diego and Logan, Utah, built approximately 1,200 units in the past 24 months and currently has an additional 500 units under construction. Their most notable project is the 700-unit Bingham Junction development located in Midvale, Utah.
Meanwhile, Miller Development, based in Murray, Utah, has built more than 1,100 units in the past 24 months and currently has an additional 800 units proposed or under construction. Their largest development is the 800-unit Farm Gate and Timber Gate Apartments in Herriman, Utah.
Still, even with all the new apartment supply, vacancy rates have declined over the first two quarters of 2010. In January 2010, the county’s vacancy rates were 8.6 percent and declined to 7.2 percent in June. Overall, with the absorption of the already-delivered apartment units, it appears that the apartment market should be able to handle the additional 1,700 units that will be coming online within the next 12 months. What’s more, the vacancy rate is expected to continue to decrease moderately through 2010 as the single-family housing market stabilizes and households continue to expand. The vacancy rate for year-end 2010 is projected to be approximately 6.7 percent.
The average rent in Salt Lake County as of July 2010 was $737 per unit, or $0.88 per square foot. Average rents for Class A communities alone are nearly $200 higher at $932 per unit, or $1.00 per square foot. Rental rates dropped on average by 4.1 percent over the past 12 months as the market absorbed new units and landlords attempted to sustain occupancy levels.
The majority of the rental rate decrease occurred in the last half of 2009, as the first half of 2010 only showed a rental decrease of 0.3 percent. Going forward, rental rates are projected to steadily increase as the overall economic conditions improve and the new inventory of apartment units is likewise absorbed. Salt Lake’s apartment market is expected to report positive rent growth over the next 18 months.
What’s more, with the market on the rise and attractive debt terms available, investor demand has improved dramatically over the first half of 2010 as well. Cap rates dropped an average of 50 basis points in the past six months. Cap rates are 6 percent to 6.5 percent for Class A product; 6.5 percent to 7 percent for Class B product; and 7 percent to 7.5 percent for Class C product.
Though little product has traded hands in 2010 to date, transactions are expected to ramp up as investors watch Salt Lake City job growth, construction, and fundamentals turn the corner and make bounding improvements in the coming years.