Commercial real estate pros expect market to slow, but say deep recession is unlikely

Work crews with K. Burrows Construction Inc. prep the subfloor to lay down concrete on PrinterLogic's new headquarters on Tech Ridge, St. George, Utah, Nov. 1, 2019 | Photo by David Louis St. George News

ST. GEORGE — Although commercial real estate agents believe Southern Utah will experience a slight leveling out this year, it is not considered a bad thing, rather a healthy response to avoid an overheated market.

Since coming out of the Great Recession in 2010, new construction and leasing of existing industrial, office and retail buildings have risen sharply.

Across the board, companies like Linx Commercial Real Estate say the economy in Washington County continued to demonstrate strength last year, but a softening is expected.

Company partner Tom Callister said looking forward he would expect 2020 to be a slower version of 2018 and 2019.

There are several indicators to pay attention to, Callister added, including job growth, an increase in average wages and growth in sales. All of these factors have slowed slightly during the past two quarters.

Although the numbers are still healthy, the rate of growth has started slowing.

So far, the long-awaited recession has not materialized. If it does, Callister said he doesn’t believe it will be as severe as the 2008-10 “Great Recession.”

Downtown St. George, Utah, July 21, 2019 | Photo by Mori Kessler, St. George News

Callister added that the growth curve Washington County has experienced during the past few years will temper and shallow out somewhat.

“With that said, we believe growth will continue,” he said. “But there are some challenges that we have in the commercial market.”

The cost of construction is at a record high. Impact fees, a “fancy” way of taxation, also plays a factor in sustaining or limiting growth, and the record-high cost to purchase land can also make development unrealistic, Callister said.

“This is a tough combination to make projects work,” he said. “At the end of the day, a project is only going to work if it fits inside a proper investment module.”

The nut of it always comes back to a healthy economy.

“We’ve been hearing about a recession for years now, and everyone agrees some type of correction is going to happen,” Callister said. “When you say the word ‘recession,’ everyone automatically bounces back to 2008, but I don’t see how that can ever be possible now.”

With low vacancy rates and commercial business loans being harder to obtain, Callister said the conditions are just not right to repeat the past, at least for now.

“Let’s say the market tips over tomorrow,” he said. “We are already in a much better position than in 2008. Right now we don’t have all that empty space sitting out there.”

In Washington County, commercial development ebbs and flows follow residential development by about nine to 14 months. When residential falls, you can anticipate commercial building to follow suit within about a year.

Although industrial and office space growth has certain indicators that developers consider, it is a little bit different for retail development.

According to a 2019 market report prepared by Linx, retail lease rates have remained strong.

Grocery stores anchored retail and existing businesses occupying less than 5,000 square feet, but new restaurants planned for development next to Lin’s Grocery store on Mall Drive and 3000 East is expected to add to the mix.

“Linx anticipates vacancy, lease rates and transaction volume staying relatively stable,” according to the report. “Look for continued expansion in the smaller retail segments such as grocery … retail, restaurants and other small retail businesses.”

One fly in the ointment to retail growth is e-commerce, or direct sales to consumers such as Amazon, Walmart and Target.

Stock photo by
Kerkez/iSTock/Getty Images Plus, St. George News

“Larger businesses have jumped on the e-commerce bandwagon to protect their sales numbers,” Callister said. “We have seen this change the face of retail and expect that to continue.”

As a result, there is some hesitation for even large companies to relocate, Callister said. Washington County, he added, hasn’t had a big-box retailer move into the region in several years.

“People throughout the county want to know when are we going to get a Hobby Lobby or a WinCo Foods,” Callister said. “A lot of these companies are scared. E-commerce scares them. It is in this segment that we are just not seeing the expansion we enjoyed back in 2005-07 when e-commerce wasn’t a threat.”

For now, expansion in retail will remain the domain of mom-and-pop businesses and smaller popup companies that occupy less than 5,000 square feet of space. The key location attracting these types of businesses will be located next to grocery stores.

“This is where we’ve seen most of the growth,” Callister said. “It’s about location, location, location.”

Retailers and consumer goods manufacturers will need to adapt quickly to changing patterns in e-commerce, local business conditions, shifting suppliers and closing stores as demand activity shifts, the Linx report noted.

One strong segment of continued strong growth is in office space.

New construction proposed throughout the St. George region including a regional office for Mountian America Credit Union located next to Texas Roadhouse, office space at Desert Color off of Exit 2 on Interstate 15, as well as a building across the street from SunRiver, Callister said.

“I think we will see office space lead the charge in new construction throughout the year,” he added.

Copyright St. George News, LLC, 2020, all rights reserved.

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