Office vacancies are increasing rapidly, but oddly enough, downtown SLC is attracting more and more visitors

Downtown Salt Lake City could be forever changed by the coronavirus pandemic as the future is less about workdays and more about nightlife.

More than three years after the outbreak of COVID-19 in the US, about a third fewer workers commute to a workplace in the central business district each day of the week compared to the end of 2019. This pattern continues, the impact of remote work and all those empty cubicles linger. Combined with higher interest rates, numerous layoffs and increasing economic uncertainty, there is now a significant slowdown in the city’s office sector.

At the same time, there is evidence that downtown as a whole has sustained the dramatic recovery in visitor numbers since fall 2021, even as some office workers remain at home, with total trips into the city core now 139% above pre-virus levels.

Experts estimate that the office vacancy rate is currently up to 25% with around 12.4 million square meters of available office space in the city center, which corresponds to about 1 in 4 square meters of available space. That rate was slightly lower in the heart of the business district, but rose to 28% in the immediate downtown periphery, where markets have entered a rare area of ​​“negative absorption” and large square feet of space with no active occupants is coming online.

Markets are also booming in the rest of Salt Lake County, with parts of West Valley City and the Southwest Valley seeing office vacancy rates as high as 30% to 50%. Technology and call centers in particular have lost space, and several large employers — Discover Financial Services, eBay, Nutraceutical, Plaid — have put large parts of their offices up for sale or sublease since January.

The overall trend is leading to falling office rents and commercial property values ​​and has resulted in a virtual halt in new office construction along the Wasatch Front, leaving it unclear when markets may recover.

“It’s probably the most sophisticated office environment we’ve seen in decades,” said Chad Moore, founder and CEO of Salt Lake City-based Mountain West Commercial Real Estate, a leading office brokerage firm. “It will take years, maybe a decade, to overcome many of these challenges.”

Employers ask, “What is the right size?”

National surveys suggest that up to 60% of workers currently prefer a hybrid work option, while most companies say they would ultimately wish for more employees to return to the office on a regular basis to build work culture, increase productivity and improve productivity to improve cooperation.

Analysis by the Salt Lake Chamber shows that the city’s 9-to-5 workers have returned to the office more frequently than most urban centers, with downtown visits in March 2023 at about 68% of 2019 levels. When you factor in the 24/7 staff coming into the business district, the number jumps to about 72%.

These 9-to-17 worker visits appear to peak on Tuesdays, sometimes Wednesdays, and then taper off into Friday, according to the chamber.

Many office employers are reassessing their needs for the new hybrid balance sheet and considering cost cutting as their existing leases expire. In the Utah capital and elsewhere, this is leading to a so-called flight to quality, with managers relocating to smaller but more upscale spaces designed to lure employees back into the office with more appealing decor and amenities.

“Office isn’t going away, and hybrid is here to stay,” said Nadia Letey, first vice president at Salt Lake City commercial real estate brokerage CBRE. “So it’s really about finding out, ‘What’s the right size?’ What is the correct location?’ And we try to create a space that is well suited to the way people work when they enter the office.”

Newly constructed and upscale downtown high-rises, known as Class A in real estate parlance — places like 95 State at City Creek, the new 25-story skyscraper that was completed in 2021, and the mid-rise 650 Main that opened last year — Offices are attracting tenants, while older class B and C office properties are shrinking.

In many cases, smaller creative and coworking office environments are also thriving with shared amenities, support services, and flexible, often monthly, rental rates.

New construction of more traditional office buildings, on the other hand, has largely stalled in Salt Lake City, with few projects underway and others less likely to enter the pipeline as lending for real estate projects tightens.

Office owners who need to refinance their debt often face higher interest rates and lower monthly rental income.

“Office is definitely in pain,” said Kip Paul, vice chairman of investment sales at brokerage firm Cushman & Wakefield. “Right now nobody is going to build an office building.”

Underused and older office properties in the city are being sold for demolition or adaptive reuse as housing in the face of increasing demand for housing.

“Some of these buildings are literally getting 50% of the transactions they were two years ago,” Paul said. “Lenders are very skeptical about lending to offices. I’m not saying it can’t be done, but it’s really a challenge.”

Notable examples of office-to-apartment conversions include the redevelopment at 1 American Plaza, 77 W. 200 South; a residential project called 515 Tower in a 1980s office tower at 515 E. 100 South; and Texas-based Hines’ renovation of the 24-story white office building known to longtime residents as the University Club Tower at 136 E. South Temple.

The decline in office space has so far not been as pronounced as in large coastal cities such as Los Angeles, Seattle or Portland, Oregon. This appears in part to be due to a more diverse employment base that is less concentrated in specific sectors such as technology that are more likely to allow and retain remote work.

And while offices are struggling, other segments of commercial real estate are doing better, particularly in Utah. Residential construction is being boosted in part by high real estate prices. Gastronomy businesses such as hotels, restaurants and taverns are enjoying an upswing after the pandemic, realtors report, and warehouse and logistics properties as well as retail space are also in demand.

Downtown SLC outperforms its competitors

An ongoing geolocation study of 62 cities in the US and Canada could provide further clues as to Salt Lake City’s distinctly different development.

Data from 18 million smartphones shows that regular visits to a wide range of downtown attractions – from businesses, shops and offices to attractions, parks and community centers – are at 139% of pre-pandemic levels between December and February.

No large or medium-sized city in North America performed better over the three-month period, according to researchers at the University of California, Berkeley’s Institute of Governmental Studies. In fact, Salt Lake City was the leader among just five metro areas where downtown activity reached higher levels this past winter than it did before the health crisis.

Other downtown areas where visits to various attractions increased above 2019 levels are Bakersfield, California, at 118%; Fresno, California at 115%; Columbus, Ohio at 109%; and El Paso, Texas, at 106%, according to the study titled “The Death of Downtown?”

The study’s most recent comparisons found that recovery rates in cities ranged from a high of 139% in Salt Lake City to just 32% in San Francisco; 38% in St. Louis; and 40% in Portland.

Downtown Albuquerque, New Mexico, recorded 98% of its pre-pandemic visits between December and February, but other regional cities lagged behind on the recovery, including Las Vegas at 81%; Phoenix at 67%; Denver at 62%.

First published in June 2022, the ongoing study concludes that relatively short commutes and the presence of jobs in key sectors such as hospitality, food service, healthcare and construction are common characteristics of cities with recovering inner cities.

“To survive in the new era of remote work,” the researchers write in their latest update, “downtowns need to diversify their economic activity and land use.”

Salt Lake City and three other cities listed in the study with the highest inner-city recovery—Bakersfield, Fresno, and El Paso—also had comparatively lower median ages for the entire city, at less than 34 years.

Utah’s capital is in the midst of rapid downtown population growth, and that’s no doubt a factor, as housing construction and out-of-state immigration is likely to double the number of full-time residents, from about 5,000 currently to 10,000 by 2025.

In the city center is the nightlife from 9am to 5pm

“We have typically viewed downtown as a neighborhood for office workers,” said Dee Brewer, executive director of the Chamber’s Downtown Alliance. “And what you see is that the majority of the visits are from people outside of the region.”

Of a total of nearly 16.6 million “customer days” in 2022 — defined as residents, workers, or visitors spending more than two hours in the central business district — residents accounted for 7%; workers: 32%; and 61% came from visitors who work and live elsewhere.

Remote work is just one pandemic-related factor that is helping downtown visitors turn to nightlife, arts, entertainment and hospitality. Leisure tourists seeking Utah’s scenic vistas have also surged, helped by the new and still expanding Salt Lake City International Airport and an additional 1,000 downtown hotel rooms.

Nearly two-thirds of the top 25 visitor days downtown last year were marked by events at the Delta Center or large conventions. Half of those days featured eight or more downtown arts and entertainment events, while about a third were major holiday shopping days.

And while the spending of these visitors is critical to economic vitality, Brewer says, their presence is sporadic compared to the thousands of new downtown residents whose growing numbers are likely to have a transformative effect.

“These 5,000 new people will be on the streets every day,” Brewer said. “Although their number may not be huge, their frequency makes them huge. And it will make the city feel different.”