So is 2020 the worst year you can remember? Well here’s some good news. I just completed a mid-year report on the Southern Utah commercial markets and was very pleased with what I found. In spite of COVID and everything else going on, including a 6-week period where the majority of local businesses were shut down, the St. George office market displayed very strong numbers for the first half of the year. To me it was a show of strength and resiliency that highlighted the growth of our local economy and hinted at the discovery that through all of this, Southern Utah is likely to come out a big winner. The worse it gets out there, especially in urban America, the better it looks here in Southern Utah. We can’t ignore the reality that we are a tertiary market tied to a national and global economy. But we also shouldn’t ignore the trends. And right now the trend for Southern Utah is growth and lots of it.
Office vacancy dropped from 5.5% at year-end 2019 all the way down to 4.1% at mid-year 2020. This 4.1% number is a 10-year low. The drop in vacancy is almost exclusively attributed to local companies growing into newer and larger spaces. This absorption of space was especially remarkable considering that almost no new leasing activity happened during a six-week period starting in the middle of March and continuing all through first of May. A good example highlighting the growth trend is Planstin and their sister company Zion Health. In February of this year they moved from a 1,000sf office space on Hilton Drive into an 8,000sf space in the ONE506 property on South Dixie Drive. Current occupancy in ONE506 is currently about 20,000sf occupied out of 32,000sf total. At the beginning of the year the occupancy of the center was 0%. Other properties adding significant square footages of new tenants include Joule Plaza downtown and Blackridge Terrace II following a significant repair/renovation. In total, nearly 60,000sf was absorbed while the one new building finished at SunRiver Commons added 24,000sf to the total market inventory.
Average asking lease rates are up to $1.26 NNN at mid-year. Finding quality office space in any size range is quite a challenge right now for buyers and tenants. This is true particularly in the Class A sector in the central business district. This strong demand for space continues to put upward pressure on rates and prices.
There is currently 144,563sf under construction including Tech Ridge/Printer Logic (60,000sf), the Revere Health building (68,351sf) and the University Federal Credit Union building on north Bluff (16,000sf). In addition to those that have gone vertical, there are a few more significant projects in the planning phase that are expected to go vertical in the second half of 2020.
We had two notable office buildings sell in the $180psf range, and while those prices are still well below replacement cost, they are also a pretty good jump up from average sales prices in prior years.
Market conditions are expected to hold steady and even tighten until fall or winter of 2020. By year-end, we will be at a crossroads and could see a shift in the market with significant new construction added to the market. The new construction will lead to increased vacancy and tenants having a few more choices for space. However, if the growing demand for space continues at this rate, we will say that those buildings were completed “just in time.”