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Surge in expansions, job growth fuel Wasatch Front office sector

Published September 2, 2012 6:42 pm

Real estate • Vacancy rates begin to see turnaround, several new buildings rise.
This is an archived article that was published on sltrib.com in 2012, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

After five long years, the Wasatch Front's commercial real estate market is showing signs of life. And nowhere is that more apparent than in the office sector, where companies of all sizes are snatching up available space in existing buildings or purchasing raw land to construct new ones.

Activity is by no means where it was at height of the economic boom, in 2005 and 2006. But it's gaining a momentum not seen in many other states, thanks to a host of companies such as Orem-based software maker Xactware Solutions Inc. that are growing despite the continued credit crunch in the U.S. and economic conditions in much of the world that seem to be weakening by the day.

Xactware provides software used by contractors, insurance companies and others to estimate building repair costs. It employs 460 people and is projected to add another 40 by the end of the year, which means the company needs more space than the 90,000 square feet it leases.

"We couldn't find enough space to accommodate our needs in Orem," said President and CEO Jim Loveland.

As a result, the company is partnering with a developer to build a 210,000-square-foot office building in Lehi, a facility that would accommodate a planned expansion of as many as 1,000 workers in the coming years.

The company is part of an increase in corporate expansion and job creation in Utah that is absorbing a lot of the vacant office space and encouraging the construction of new buildings. Although the pace has slowed in recent months, Utah is ranked 10th nationally for job growth in a report by the W. P. Carey School of Business at Arizona State University, based on data from the U.S. Bureau of Labor Statistics.

Companies that are leasing space or purchasing land for office buildings are benefiting from unprecedented concessions from building landlords and developers, said Brandon D. Fugal, director of corporate services for Coldwell Banker Commercial in Salt Lake City, who has worked with Xactware and several other companies seeking to expand.

Concessions such as months of free rent and other perks — even free office furniture — won't be around forever, Fugal said. "Landlords right now are willing to go the extra mile. But in another six to 12 months or so, it's inevitable that the concessions will definitely be scaled back."

It all boils down to the Wasatch Front's comparatively strong job growth and the fact that it's projected to continue, according to a recent joint report by the Salt Lake Chamber and commercial brokerage CBRE.

For now, though, the perks are a benefit of expanding during an economic recovery that is still rough around the edges.

The developer who is constructing the office building Xactware will lease, for example, kicked in a bunch of extras that weren't seen in the boom years, including free rent for several months, a gym, volleyball courts and other amenities.

Peter Bookman, CEO of V3 Systems Inc., is negotiating a lease on 30,000 square feet of space in a Cottonwood Heights office building. Although his space needs are much smaller than that of Xactware, he is pushing for concessions as well. The cloud-computing company projects it will expand from about 55 employees to more than 100 in coming months, having already outgrown the 15,000 square feet of space it leases today.

Bookman is negotiating to get expansion rights, which require a landlord to either keep additional space vacant or give the tenant the first right of refusal. This perk is especially valuable to a fast-growing technology company, but often is available only when tenants have the upper hand.

John W. Walker, an executive with Utah technology startup Cypher, recently moved into 8,000 square feet of space into the newest office building at RiverPark Corporate Center. Cypher's landlord threw in all the equipment, furniture and electronics left by the previous tenant. Cypher also was able to score some free rent as well.

Like Xactware, Navitus Sustainable Industries, a recycling and renewable energy company, is constructing its own building. The company, which has offices in San Jose, Calif., and Salt Lake City, selected Utah as the site for a new 160,000-square-foot, renewable-energy facility. The exact location will be announced soon.

The company, which employs 20 people in the state, projects employment will rise to 100 in its new building, said CEO Heidi M. Thorn.

For now, concessions are readily available and both lease rates and land costs remain near five-year lows.

But several reports suggest that may be fleeting. The vacancy rate for office space in Salt Lake County fell to 15.4 percent in the second quarter, down from 16.4 percent at the same time last year, according to the Salt Lake City office of commercial brokerage CBRE. Utah's above-average job growth probably will push down that rate even further in the coming months.

Since the office market began to sour in 2008, vacancies have been increasing as some companies scaled back and others went out of business. Office absorption — the amount of space that's leased minus the amount that's vacated — was actually negative for a time. Now it's positive again, and that excites Fugal of Coldwell Banker Commercial and others.

"We have an impressive amount of office construction and leasing activity going on right now." he said. "It's an exciting time."

lesley@sltrib.com

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