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February 16, 2018

Utah’s Commercial Real Estate Market, California’s Investment

Last year the top investors in Utah’s commercial real estate market were from California.


Given the economy and amount of capital in California it shouldn’t come as a surprise that investment dollars spill over into Utah. What is surprising is the profound number of Californian investors – double that of the next closest state, which happens to be Utah. California represents 37% of the top 100 investors while Utah comes in second at 18%. The remaining 48 states don’t really show up in any significance, with the exception of Washington - 8%.


Interest and cap ratesBy comparing the cap rates, which measures the rate of return on investments in Utah to that of the largest three markets in California, it is easy to see why investors place their money here. It is only part of the story however. After all, there are markets with better cap rates. But, investing in Utah over California is a sound practice. In 2017, the average cap rate in Los Angeles and San Francisco was 4.6%, in San Diego it was 5.3%. For the same time period, the average cap rate in Utah was 7.3%. That is a difference of over 200 basis points.


Investors feel safe making an investment in the top three California markets, which is easy to understand. An enormous economy and an equally large population mean that apartment buildings, office towers, retail centers and industrial warehouses will rarely be vacant. But, the same is true in Salt Lake City, where low vacancies tend to rival those of California.


Salt Lake City survived the Great Recession in good form, in some metrics better than California. Vacancy rates climbed to just below 7%. That rate is on par with Los Angeles and lower than San Francisco at 9% and San Diego at just over 10%. Meaning, Salt Lake City fared better than two of the three big California markets at retaining tenants. The only metric where the three California markets beat Salt Lake City was in the way that rents rebounded. The Salt Lake City commercial real estate market took longer to bounce back to pre-recession values. It wasn’t until 2016 that rents in Utah reached the levels where they were in 2008. Whereas, rents in Los Angeles and San Diego rebounded in 2014 and in San Francisco rents never lost momentum, but were able to climb to new heights within two years of the recession.


All of the fundamental metrics are good reasons for investment in Utah.


However, the biggest factor which attracts investment in commercial real estate is the increasingly familiar news of international corporations moving to the state. As companies like Adobe, Amazon, and Goldman Sachs locate here, the big money in real estate follows. And, it makes perfect sense. For an investor looking to purchase a building where a large corporation is a tenant, the return is much higher in Utah than California, yet the chances that the corporate tenant vacates the space, is equal. Thus with the same amount of risk, an investment might yield up to 200 basis points more in Salt Lake City than it would in San Francisco.

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