Salt Lake City is progressing through a healthy apartment sector recovery as large developments near completion and major employers ramp up hiring efforts. The opening of the 700,000-square-foot City Creek Center in Downtown Salt Lake City brings upscale retailers such as Nordstrom, Tiffany & Co. and Brooks Brothers to the state, generating a number of retail jobs. More than 4,000 positions are expected to be added in 2012 in the trade, transportation and utilities sectors, which includes retail workers. With elevated gas prices, many of these employees will seek rental housing near work, including residences at the 125-unit Providence Place, which was completed in the central Salt Lake City submarket this year. In addition, more than 800 apartments and 775 condos are in the planning stages in this submarket. In outlying areas like West Jordan, which have received the bulk of new development over the past five years, slower construction activity is allowing demand to catch up. The fourth-quarter completion of the Adobe campus in Lehi should boost demand for apartments in the Orem area as the company is expected to employ 1,000 staffers at the site.
Looking at fundamentals, the development pipeline in Salt Lake City is among the West Coast’s strongest. During the most recent 12-month period, 1,242 units were added to inventory, following the completion of 1,756 apartments in the preceding year. Just 125 units were completed in this year’s opening period. While developers have nearly 1,900 units under construction, just 675 of these units are scheduled for delivery this year. Further strengthening of operations could accelerate start dates for some of the 3,900 planned rentals. Providence Place Apartments is the only project expected to open in the first quarter of 2012.
In spite of the increase in construction, vacancy ended the first quarter at 4.4 percent, down 140 basis points from the same period last year. Heightened demand has pushed vacancy lower for nine consecutive quarters even with significant supply growth. Despite inventory additions, Class A vacancy dipped 30 basis points to 5.4 percent in the first quarter, an annual decline of 110 basis points. Vacancy in the top tier rose 10 basis points in the previous 12-month period. Class B and C vacancy tightened 40 basis points to 3.9 percent in the first quarter after contracting 140 basis points over the past 12 months. Higher rent growth in top-tier properties drove apartment demand down the quality ladder.
Increased renter demand has generated six consecutive quarters of rent growth. Average asking rents increased 2.3 percent year over year to $752 per month in the first quarter, while effective rents climbed 2.9 percent to $709 per month. Asking rents in the top tier have jumped 2.7 percent in the past four quarters to $891 per month, which is higher than pre-recession levels. Class B and C rents moved up 1.6 percent to $682 per month during the past year. Property vacancy improvements, coupled with effective rent growth, have increased apartment operating revenues in the metro. Over the past year, average revenue increased 4.4 percent.
Strong apartment operations are attracting investors to the Salt Lake City apartment market, but a lack of listings is holding back buying opportunities. Many outside investors are eager to get a foothold in the traditionally stable metro, indicated by last year’s 80 percent increase in out-of-state buyers. Despite intense buyer demand, many owners are choosing to hold and refinance if necessary, rather than sell, as exchange options remain limited. As a result, buyers targeting stabilized Class A and B+ assets will be forced to expand their target cap rates for these transactions into the high-5 percent to the mid-6 percent range. Further down the quality scale, Class B and C assets trade in the mid-7 percent to high-6 percent range, depending on deferred maintenance issues and asset location. Value-add opportunities should present themselves in older properties surrounding major developments, particularly in central Salt Lake City, though competition for these deals will also remain intense.
— Danny Shin, senior associate, Marcus & Millichap’s Salt Lake City office