Downtown SLC office vacancies are soaring, but here’s why the vibe is still alive

Downtown Salt Lake City may be forever changed by the coronavirus pandemic, with its future now less about workdays and more about nightlife.

Three-plus years after the U.S. onset of COVID-19, about a third fewer workers are commuting each weekday to a workplace in the central business district, compared to late 2019. As the pattern persists, effects of remote work and all those empty cubicles are now combining with higher interest rates, pockets of layoffs and rising economic uncertainty to produce a major slowdown in the city’s office sector.

At the same time, evidence suggests downtown as a whole is unbowed in its dramatic recovery since fall 2021 in visitation numbers even as some office workers stay home, with overall trips to the urban core now 139% ahead of pre-virus levels.

Experts estimate office vacancy rates currently as high as 25% for the roughly 12.4 million square feet of office space available across downtown, or about 1 in every 4 square feet of available space. That rate was slightly lower in the heart of the business district but climbed to 28% on downtown’s immediate periphery, where markets have veered into rare “negative absorption” territory, with large square footages of space coming on line without an active user.

Stuttering markets are rattling over the rest of Salt Lake County as well, with office vacancies in some cases as high as 30% to 50% in parts of West Valley City and in southwestern portions of the valley. Technology and call centers, in particular, have shed space, and several large employers — Discover Financial Services, eBay, Nutraceutical, Plaid — have put sizable portions of their offices up for sale or sublease since January.

The wider trend is pushing down office rents and commercial property values, and has brought new office construction along the Wasatch Front to a virtual halt, leaving an unclear picture as to when markets might turn around again.

“It’s probably the most challenging office environment that we’ve seen in decades,” said Chad Moore, founder and managing director of Salt Lake City-based Mountain West Commercial Real Estate, a leading office broker. “It’s going to take years, maybe an entire decade, to work out a lot of these challenges.”

Employers ask, ‘What’s the right size?’

National surveys suggest up to 60% of workers currently prefer a hybrid work option while most companies say they ultimately would like to see more employees return regularly to the office, with a view to building work culture, boosting productivity and enhancing collaboration.

An analysis by the Salt Lake Chamber indicates the city’s 9-to-5 workers have returned to the office at a higher rate than in most urban centers, with downtown visits in March 2023 at about 68% of 2019 levels. Factor in employees coming to the business district all hours of the day and the number rises to about 72%.

Those 9-to-5 worker visits, according to chamber data, seem to peak on Tuesdays, sometimes Wednesdays, and then taper off through Friday.

Many office employers are reevaluating their needs with that new hybrid balance and lowering costs in mind as their existing leases expire. In Utah’s capital and elsewhere, that’s producing what some refer to as a flight to quality, with managers moving to smaller but more upscale spaces designed to entice workers back to 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 commercial real estate broker CBRE in Salt Lake City. “So it’s really about figuring out: ‘What’s the right size? What’s the right location?’ And trying to create space that works well for how employees function when they do come into the office.”

Newly built and upscale downtown towers labeled as Class A in real estate parlance — places such as 95 State at City Creek, the new 25-story skyscraper completed in 2021, and the mid-rise 650 Main, which opened last year — are luring office tenants while older Class B and Class C office properties are seeing spaces languish.

Also thriving, in many cases, are smaller creative and coworking office environments boasting shared amenities, support services and flexible, often month-to-month, approaches to leasing.

Brand-new office construction of the more traditional kind, on the other hand, is largely on hold in Salt Lake City, with only a few projects underway and others less likely to enter the pipeline amid a tightening of credit for real estate projects.

Office owners having to refinance their debts, meanwhile, often face higher interest rates and diminished monthly income from rents.

“Office is definitely going through pain,” said Kip Paul, vice chair of investment sales for brokerage firm Cushman & Wakefield. “Nobody’s going to build an office building right now.”

Underutilized and older office properties in the city are being sold for demolition or for adaptive reuse as homes in light of soaring housing demand.

“Some of these buildings are transacting at literally 50% of what they would have been two years ago,” Paul said. “Lenders are very skeptical about lending on office. I’m not saying it can’t be done, but it’s really challenging.”

Key examples of making offices into homes include the remake at American Plaza 1, 77 W. 200 South; a housing project called 515 Tower inside a 1980s-era office tower at 515 E. 100 South; and Texas-based Hines’ overhaul of the white 24-story office building known to longtime residents as the University Club Tower, at 136 E. South Temple.

The office downturn is not as pronounced so far as it has been in major coastal cities such as Los Angeles, Seattle or Portland, Ore. That appears to be partly due to a more diverse employment base — one less focused on specific sectors such as technology that have been 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. Apartment construction is being buoyed to some extent by high home prices. Hospitality outlets such as hotels, restaurants and taverns are enjoying a post-pandemic upswing, brokers say, and warehouse and logistics properties as well as retail spaces are also in demand.

Downtown SLC soars beyond its competitors

An ongoing geolocation study of 62 U.S. and Canadian cities may offer other clues to Salt Lake City’s decidedly different trajectory.

Data from 18 million smartphones indicates that regular visits between December and February to a wide selection of points of interest downtown — ranging from businesses, shops and offices to landmarks, parks and community hubs — are at 139% of their pre-pandemic levels.

No large or midsize city in North America did better in that three-month period, according to findings by researchers at the Institute of Governmental Studies at the University of California in Berkeley. Salt Lake City, in fact, was the leader among only five metropolitan areas where downtown activity last winter reached higher levels than before the health crisis.

Other downtowns where visits to varied points of interest surged past their 2019 levels include Bakersfield, Calif., at 118%; Fresno, Calif., 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 cities ranged in recovery rates from Salt Lake City’s high of 139% to as low as 32% in San Francisco; 38% in St. Louis; and 40% in Portland.

The downtown area of Albuquerque, N.M., saw 98% of its pre-pandemic visits between December and February, but other regional cities lagged behind on recovery, including Las Vegas, at 81%; Phoenix at 67%; Denver at 62%.

First released in June 2022, the ongoing study has concluded that relatively low commute times and the presence downtown of jobs in key sectors such as hospitality, food service, health care and construction were a common traits for cities with recovering downtowns.

“To survive in the new era of remote work,” the researchers wrote in their most recent update, “downtowns will need to diversify their economic activity and land uses.”

Salt Lake City and three other top-tier cities for downtown recoveries in the study — Bakersfield, Fresno and El Paso — also shared a relatively lower citywide median age, at below 34.

Utah’s capital is in the midst of a spurt in population growth downtown, and that’s undoubtedly a factor, with residential construction and residents moving in from other states likely to double the number of full-time residents, from about 5,000 now to 10,000 by 2025.

Downtown goes from 9-to-5 to nightlife

“We have typically viewed downtown as an office worker environment,” said Dee Brewer, executive director of the chamber’s Downtown Alliance. “And what you see is that the majority of the visits are coming from people outside the area.”

From a total of nearly 16.6 million “customer days” in 2022 — defined as a resident, worker or visitor who spends more than two hours in the central business district — residents made up 7%; workers, 32%; and 61% were from visitors who work and live elsewhere.

Remote work is just one pandemic-related factor contributing to downtown’s shift in visitors more oriented toward nightlife, arts, entertainment and hospitality. There also has been a surge in leisure tourists seeking out Utah’s scenic vistas, helped by the new and still-expanding Salt Lake City International Airport and an additional 1,000 hotel rooms downtown.

Nearly two-thirds of last year’s top 25 peak days for visitors downtown were marked by events at the Delta Center or large conventions. Half those days saw eight or more arts and entertainment events scheduled downtown, while about a third were top holiday shopping days.

And while those visitors’ spending is crucial to economic vitality, according to Brewer, their presence is intermittent compared to the thousands of new downtown residents, whose growing numbers are likely to have a transformative effect.

“Those 5,000 new people are going to be on the street every single day,” Brewer said. “And so while they may not be huge in numbers, their frequency does make that a huge number. And it’s going to make the city feel different.”