Commercial Real Estate Roundtable

Every month, Utah Business partners with Holland & Hart and Big-D Construction to host roundtable events featuring industry insiders. This month we invited commercial real estate specialists to discuss the multifamily market, WeWork, and the revitalization of the Salt Lake’s west side. Moderated by Brandon Duke, senior mortgage banker at KeyBank Real Estate Capital, here are a few highlights from the event.

What are some significant retail projects that are happening in 2019?

Andy Moffitt | Senior Retail Specialist | Mountain West Commercial on behalf of Vestar

We’ve been working with Vestar to transition and redevelop the Gateway mall. It is becoming a young, cool social gathering spot for Salt Lake City. Most people have the same comment: “Love the Gateway. Haven’t been there in 10 years.” Figuring out a way to change that conversation has been one of our focal points. The future of the Gateway is a live, work, play environment that takes advantage of large blocks of space where we can back fill former retail spaces with different types of uses.

Mariko Mimnaugh | Director of Retail | Cushman & Wakefield

I think retail is pivoting. There are some retailers that are downsizing. They’re rethinking how to get retail happening again and how to get the young audience to create buzz on a more traditional platform in more traditional shopping centers. You’re seeing landlords that are being really creative with how they’re going about exclusives so that they can protect their space and are thinking ahead as to what might come in to fill those spaces. They’re also paying more attention to making sure their spaces aren’t so stale.

Jeffrey Woodbury | SVP Acquisitions & Development | Woodbury Corporation

We’re trying to mix use more. It’s not about more square footage. It’s about higher sales per square foot. By adding housing to our retail mall at University Place, we increased our sales by almost $50 a foot. And it’s just bodies. Cities are fighting to keep their retail or keep their commercial versus add housing. They think housing is a bad thing and maybe in the 70s and 80s it was. But now housing is all about amenities. It’s all about creating that community and creating a living experience. The thing we’ve discovered is that more people are selling their houses and moving into apartments. It’s a matter of changing a community’s viewpoints.

How is the multifamily real estate market doing?

Lee Dial | CFO | Cowboy Partners

Most of the real estate developers are building to the top of the market because the costs are so high. So, to justify those costs, you have to get top-of-the-market rents. So that just amplifies the need for workforce and affordable housing. The challenging part of the market is figuring out creative ways to make that profitable as a developer, but also working with municipalities and federal government to make that a reality.

Bruce Bingham | Partner | Hamilton Partners

Public transit is very important in the decision making process, but not very important when it comes to actual usage. Probably a third of the people say it’s critical to be near rapid transit of some sort but only about 10 percent actually ever use it. So, we find that we want to respond to the demand even though it may be a demand that’s being fulfilled over time as opposed to immediately.

Eli Mills | Senior Vice President | CBRE

Vacancies are at four percent. Rents went up last year by 5.9 percent year-over-year from 2017 to 2018. And the reason that vacancies are going up is there’s so much new product coming online, but we’re still only at four percent. That’s a big deal when you have that many units coming online. We are barely keeping up with supply. And a lot of that is the in-migration that’s occurring.

Troy Hardy | Partner | Mountain West Commercial

The only thing I want to add is the impact that multifamily is having on retail. We’re seeing it in suburban settings, we’re seeing it in urban settings. We’ve seen a transformation that occurred along 4th south that’s driving retail rents into the stratosphere. Multifamily is becoming the retailers best friend. So, we’ll continue to see this multifamily retail marriage. We’ve always said retail follows rooftops, but we can modify that statement now: retail follows multifamily.

What are some other notable real estate projects for 2019?

Adrienne Bell | Attorney | Holland & Hart

The convention center hotel is moving forward. It will be tied seamlessly to the convention center so that there will be ease of access between both the hotel and the convention center facilities. It’ll consist of main entry level and couple of levels of conference rooms and then there will be a tower where the rooms will be located. It’ll be a real boon for downtown.

John Dahlstrom | Executive Vice President & General Counsel | Wasatch Commercial Management

Our state was wise in the way that they designated qualified opportunity zones. They put them in developed areas so that not only will it attract real estate development, but it’ll also improve the development that’s currently in those areas. You can take advantage of the tax code. The problem is that to get the full benefit of it, you really do need to deploy these funds right now. And that’s the reason that we’re getting out before the regulations are finalized.

James Endrizzi | SVP, Division Manager | Washington Federal

From a financing perspective, we discussed the concept of affordable housing being an issue. With one project we’re working on downtown, we’re required to put in some affordable housing units and because of the equity that’s coming into the fund, it pencils from an underwriting perspective for the bank despite the lower income units. So we see some opportunity there to help bring in more affordable housing in these opportunity zones. The challenge that we have is with regulations not being finalized yet, the impact on loan documentation and how that impacts us. But we’re seeing a lot of activity and it’s going to be a great solution to address some of the housing issues.

Lee Dial | CFO | Cowboy Partners

The regulation is set up to incentivize you to invest dollars into the opportunity zones that need it. But it also incentivizes you to get rid of the asset as well, because after 20 years if you don’t sell it in the 20th year, as it reads right now, then you wouldn’t get that tax benefit anymore. So we’ll see if the regulations come out and change that.

What’s going on in the industrial world?

Mike Roderick | General Partner | Roderick Enterprises

The industrial world has been very, very strong for four or five years now. The challenges are finding affordable land. We’re getting outbid by multifamily housing and even offices. The labor construction trades are also extremely tight, frustrating, and expensive.

The thing that I’m a little nervous about is that we’re getting a lot of institutional capital flooding Salt Lake City that’s never been here before. And I’m fearful that it might be a race to the bottom on pricing. A lot of these guys want to get in, get built, get leased, get out. So us guys that hang in here for the long haul, you have to decide if you’re going to compete with it, or if you want to find another niche that may fish in a different pond.

Eli Mills | Senior Vice President | CBRE

The reason their cost of capital is so much lower is that there’s so much of it they’re chasing. Their return results are just much, much lower than yours. And when they get into development, they have much lower thresholds. We’ve sold a number of properties to money that’s coming in from all over the world. And so when you get money from out of the country starting to come and compete, their cost of capital and their return expectations are so much lower.

For some of them, the goal is just to not lose their money. If they make a little bit, they’re happy. And so they really go after the big trophy assets, which then pushes everyone else down in scope. So expect that capital and expect the institutional players and out-of-state players and that foreign money, they’re coming in more and more.

Where is real estate headed?

Andy Moffitt | Senior Retail Specialist | Mountain West Commercial on behalf of Vestar

We’ve become a true secondary market and we haven’t talked about the emergence of Silicon Slopes and all the demand for jobs here from a labor standpoint and those employers looking at growing businesses inside of Utah.

Jordan Wall | Senior Executive Vice President | Colliers International

When WeWork came into the market, they decided to go to Lehi first. Then you have SAP that just came in and purchased Qualtrics, and they’re not taking these companies and then moving them to California or other major markets, they’re keeping them here because they see the talent base. And I continue just talking to tenants time and again that are expanding and growing in our market. When you talk to their head of facilities, they’re coming from outside of the market, they are continually pleasantly surprised about how the work product is much better than their counterparts in other major markets and that’s why they’re continuing to come back and expand in Utah.

Andy Moffitt | Senior Retail Specialist | Mountain West Commercial on behalf of VestarThe thing that’s unique about Salt Lake City is that our tech growth has primarily been driven by local companies. So WeWork’s coming to us as we look at the Wasatch Front and the opportunity there.

Jeffrey Woodbury | SVP Acquisitions & Development | Woodbury Corporation

It’s hard as a landlord, but WeWork has the largest tenant in a lot of larger markets. And I’m having a hard time saying to myself why is this not going to work for us? I remember going to San Francisco and touring several buildings and landlords were giving $250 a foot to companies that had never shown a profit from that standpoint and I was the biggest curmudgeon in the room because I would never do any of those deals.

Bruce Bingham | Partner | Hamilton Partners

It’s the Uber of office space.

Bruce Bingham | Partner | Hamilton Partners

It works like a master lease. If you’ve got a problem, WeWork is a good solution if it’s something you would have master leased anyway. WeWork shifts some of the risk to a certain degree.

Jeffrey Woodbury | SVP Acquisitions & Development | Woodbury Corporation

We’re going to have to do some things in different ways in the future. From a practical standpoint, that these things will evolve. And the hard thing for a company as a real estate investor, we’re kind of used to doing something a certain way. And I can see somebody with a little lower credit level or whatever saying, “Well, geeze, I’ve got to fill that space.” And WeWork is an answer to fill that space.

Jim Tozer | Managing Director, New York | Vectra Management Group

We look at it as absorption but it’s not. It’s creation of competition. WeWork doesn’t have any employees. They don’t actually occupy space. And what they’re doing is taking advantage of people who are willing to pay for their build out and then they will turn around and lease that space to the same people we’re leasing with. Guaranteed those of us that are commercial office landlords are going to discover that our number one competition is WeWork.

Paul Skene | Managing Principal | Cresa Salt Lake

I do think there’s one thing that’s driving companies like WeWork, and it’s this whole flexible work space. They’re not interested in long term transactions, particularly in markets where they don’t have a foothold. They come in, the suites are ready to go. And on the coworking side, where it’s maybe catering more to the entrepreneurial type crowd, or they’re offering smaller work spaces for much larger companies who want just a small office in Salt Lake. It’s really about offering flexibility and much less expensive investments from the companies in their office space. It’s providing flexibility. It’s giving them a turn key solution that’s ready today. They don’t have to wait for it. This whole landscape looks a lot different in 10 years than it does right now.

What’s happening in real estate outside of Salt Lake City and the Silicon Slopes?

Daniel Thomas | Regional Partner | St. John Properties

We’re playing on the bunny hill down in Pleasant Grove. It’s the southernmost end of the geographical Silicon Slopes. We have the same fear about credit. Anywhere you’re adding heads, people, houses, there’s naturally a demand for an accountant, an insurance agent, a real estate broker. And so what we’re finding down in Pleasant Grove, we’re getting some of the benefit and the flow out of Lehi, people that don’t want to be in Lehi from the tech industry.

Cameron Cook | Project Manager | Business Depot Ogden

Our park up in Ogden is mostly industrial. A lot of existing tenants who are growing markets continue to be hot. We kept thinking it would peak last year and it just keeps going really strong. We’ve also historically done mostly build-to-suit projects and the last year or two we’ve started doing more and more spec.

Any real estate topics that you feel strongly about, want to touch on, or give updates to?

Jim Tozer | Managing Director, New York | Vectra Management GroupDowntown should be a much more vibrant, regional center, but it’s not. We have under developed the attraction to downtown Salt Lake City and we’ve got transportation and lifestyle that’s competitive with any other location. It would be useful for us as the real estate community and the ones trying to provide development here that we think and encourage the attraction of a regional headquarters to Salt Lake City, and other things will follow from that.

Eli Mills | Senior Vice President | CBRE

I think you’re going to see the other side of Salt Lake City take off. You’re going to really start to see a flourish once the homeless shelter problem is gone because you have light rail, commuter rail, bus rapid transit, all sitting there right by the Gateway and surrounded by old industrial buildings that are edgy and cool. So watch that west side.

Jordan Wall | Senior Executive Vice President | Colliers International

I can’t tell you how many times I’ve toured with a real estate tenant that’s coming from out-of-state that says, “I want to be downtown.” And I’ll say, “Okay. Let’s go downtown, but all the action is going to be south valley and that’s where you want to be.” But they keep pushing, I want to be downtown, I want to be downtown. And then we’ll take them downtown and eventually, 9 times out of 10, the lease will be done in Sandy, Draper, Utah County. The action is not downtown. It’s South Valley, it’s Utah County.

Daniel Thomas | Regional Partner | St. John Properties

The culture of the people in Salt Lake City is they value family and recreation. And so, that’s why you’ll see different pockets that are so popular in the suburbs, very different from a lot of the other markets [outside investors] are used to. Many of them will come in and say, “I only want to buy downtown.” And I’ll say, “Okay, then you’re going to have very few opportunities. Let me show you what’s going on.” And afterwards they’ll look at the suburbs and they’ll say, “Can I buy between Sandy and Lehi?”

Our culture is not a downtown culture. And we’re starting to see signs of that change primarily because of out-of-state companies bringing people in that really like to live downtown and all of the downtown housing will make a dramatic difference in that.

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