ECONOMIC OUTLOOK SPRING 20122012 Three primary issues maintain the potential to rapidly alter the trajectory of the global economy during the near-term: Europe’s sovereign debt crisis, geopolitical tensions with Iran, and U.S. fiscal policy. An Accumulation of Risk Economic Outlook for Salt Lake County Policymakers around the world continue to questions surrounding the expiration of tax cuts push politically difficult decisions into the future. and automatc spending cuts. Consequently, deferred policy decisions and their associated risks are accumulating. Three primary The fall 2011 version of this report observed that issues maintain the potential to rapidly alter the elections and transfers of power would take place trajectory of the global economy during the near- in key areas during 2012. It was also anticipated term: Europe’s sovereign debt crisis, geopolitical that political conditions necessary to address tensions with Iran, and U.S. fiscal policy. issues would be complicated due to an election year dynamic. Recent events are manifestations deferred policy of that expectation. Policymakers are unlikely to sufficiently address long-term issues in 2012 decisions and their and as a result, risk will continue to accumulate associated risks are throughout the year. accumulating. International Outlook The European debt crisis threatens the global Elections in France and Greece are complicating economy through trade ties and financial the European sovereign debt crisis. The recent channels. Developments in the Franco- election of French President Hollande reduces the German alliance and Greek elections in June possibility of a unified strategy as he is opposed will determine the course that the crisis takes. to many crisis policies advocated by Germany. In Meanwhile negotiations with Iran over its nuclear Greece, it is possible that a government opposed program will continue, but should talks fail, oil to the terms of the country’s recent bailout will prices will rise. emerge, which increases the likelihood of a Greek exit from the European Monetary Union; this At home, the United States will face increasing means the actual problems and the ability of uncertainty. Challenges that will come into policymakers to address them are both becoming focus this fall include: uncertainty dominated by more complicated. Effects of the crisis on the a presidential election, debt ceiling debate, and U.S. economy will largely be determined by the
degree of stress experienced in the financial sector. CHANGES IN EMPLOYMENT Change in Employment in Selected Western States IN SELECTED WESTERN STATES 6.0% Geopolitical tensions surrounding Iran’s nuclear 4.0% program will also affect the U.S. Should 2.0% negotiations with Iran fail, markets will drive 0.0% oil prices higher. Also worth noting is slowing 2006 2007 2008 2009 2010 2011 2012 YTD CA AZ growth in emerging markets, particularly China, -2.0% CO NV the world’s second largest economy. China is UT -4.0% ID slowing due to woes in its largest export market -6.0% (Europe), waning effects of fiscal stimulus, and -8.0% relatively tight monetary policy. Although growth -10.0% Source: Salt Lake County, Utah is expected to remain positive, it will not reach levels experienced over the last several years. The most commonly reported unemployment This further complicates the global outlook as rate is produced by looking at the number of the largest economies in the world are unable to people actively seeking work and the total size drive growth and grapple with unique challenges. of the workforce. Consequently, an improving economy will bring previously discouraged The bottom line: until policymakers adequately workers back into the workforce, which can address challenges, global economic growth will temporarily boost the unemployment rate. continue to be restrained. Although counterintuitive, in the context of an economic recovery, a rising unemployment rate US Outlook can represent improving conditions. Growth in the United States is expected to remain sluggish throughout 2012. Gas prices Utah Unemployment - Discouraged Workers Headline Unemployment Rate & Select Alternative Measures have likely peaked and will continue grinding 10.0% 9.5% 10.0% downward, but will remain somewhat elevated, 9.0% 8.3% 8.1% 9.0% 8.0% 8.0% barring any major shock to the economy. 8.2% 7.6% 7.0% 7.3% 7.0% However, questions surrounding geopolitical 6.0% 7.0% 6.6% 6.0% tensions, refining capacity and hurricane season 5.0% 4.9% 5.0% (threats to supply) could reverse the trend and 4.0% 4.1% 3.5% 4.0% 4.0% 3.1% cause fuel prices to rise. 3.0% 2.9% 3.5% 3.0% 2.6% 2.0% 2.0% On a broader level, the first quarter 2012 GDP 1.0% 1.0% 0.0% 0.0% growth estimate was revised downward from Q4 2009 Q4 2008 Q4 2007 Q4 2008 Q4 2009 Q4 2010 Q4 2011 Q1 2012 2.2% to 1.9% according to the Bureau of Economic U-3, "Headline" Unemployment Rate Source: US Bureau of Labor Statistics U-4, Unemployed + Discouraged Workers U-5, Unemployed + Discouraged Workers + Marginally Attached SOURCE: US Bureau of Labor Statistics2 Analysis. Presently the second quarter appears Note: Rates are model-based and may vary from other published reports, see http://www.bls.gov/lau/stalt.htm for details. to be somewhat soft, similar to the first three Over the short-term, Utah will be aided by large months of 2012. During the last half of the year, investments, both public and private. Notable accumulating risk including Europe’s debt crisis, public projects underway or set to commence2012 geopolitical tensions with Iran, and uncertainty regarding U.S. fiscal policy will restrain growth. soon include: the rebuilding of I-15 in Utah County, light and commuter rail expansions, NSA data Consequently, real GDP growth is expected to center, federal courthouse and rebuilding of Salt average 2.0% for the year. Lake City International Airport. All together, these projects represent several billion dollars of Utah investment. In addition to public investments, In the face of many challenges, Utah’s economy private sector entities are also investing. registered solid performance in 2011 and is expected to outperform national averages again The state’s business friendly environment in 2012. Job growth at 2.8% across all sectors and workforce are important considerations is expected, approaching the state’s long-term driving growth, particularly for high value average of roughly 3%1. However, it should be tech companies. The Association of University noted that Utah’s unemployment rate will not Technology Managers ranked the University of necessarily decline with an improving economy. Utah as number one in the U.S. for most tech
startups, followed by MIT and BYU rounding out Taxable sales increased by 10.9% in the fourththe top three. It is no wonder that a developing quarter of 2011 with double digit gains in manytech corridor extending from southern Salt Lake sectors including motor vehicles and retail sales.County into Utah County (now referred to by The massive City Creek Center completion earliersome as “silicon slopes”) is home to some of the this spring brought with it more than 80 retailersworld’s most recognizable names. Firms with and over 500 residential units and is expecteda presence in the area include: eBay, Microsoft, to be a major selling point for both tourism andOracle and Twitter, but Adobe is making a hospitality downtown. According to the Saltparticularly significant investment. Adobe Lake City Mayor’s Office, approximately 4,000is spending $100 million to construct a new jobs were created by the project since it was280,000 square foot office building, with plans announced in October 2006 and of that initialto triple its footprint in a new campus located in number, about 2,000 jobs will remain4.northern Utah County. Another factor contributing to the county’sThe contrast between economic conditions in ability to grow is the substantial expansion toUtah and the broader U.S. is clear. Nationally, Utah’s passenger rail system. The Utah Transitpolicy paralysis is restraining growth. In Utah, Authority (UTA) has three expansion projectsconsistent economic stewardship is fostering currently underway and a fourth announced ingrowth. While the state is outperforming Sugar House creating jobs for local constructionnational averages and making progress on workers. These projects will give passengers themany fronts, education continues to be an ability to use affordable public transit from Ogdenarea of concern. Leaders must adequately to Provo.invest in education to ensure the state’s abilityto continue providing businesses of the future 25.0% CHANGE IN HOME VALUESwith an educated workforce. 20.0% 15.0%Salt Lake County Percent Change 10.0%Amid lingering economic concerns and the 5.0%continuation of turmoil abroad, Salt Lake County 0.0%is poised to continue growing at a healthy rate -5.0%in the near-term. Construction and major project -10.0%completions are strengthening the local economy -15.0%and creating needed job growth. County Salt Lake Metro Home Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 18.8% 4.2% -5.7% -10.2% -4.8% 0.3%employment grew at a rate of 2.3% in 2011 and Prices Utah Home Prices 16.5% 1.8% -10.4% -9.0% -7.4% 3.0%is estimated to grow at the same rate in 2012, SOURCE: Federal Housing Finance Agency, 4 Quarter Percent Changeoutperforming the national average of 1.4%3. Salt Lake Non-Farm Employment Housing is one area that has not fully recovered April 2011 to april 2012 in Salt Lake. Continued low interest rates and 3.9% new lender incentives should stimulate activity. 2012 Government 6.8% Leisure & Hospitality According to the Salt Lake Board of Realtors 2012 1.4% Education & Health Services Housing Forecast, while home sales are projected 4.2% 3.1% Profesional and Business Services to rise 15%, home prices are projected to decrease Financial Activities 1.2% Information between 3% and 5% during 2012. As the year 1.6% Trade, Transportation, Utilities progresses and existing inventory is absorbed, 3.6% Manufacturing 8.5% Mining Loding and Construction prices should begin to stabilize. 0.0% Other Services 3.4% Total While local investments in infrastructure and0.0% 2.0% 4.0% 6.0% 8.0% 10.0% projects like City Creek Center will stimulate the SOURCE: US Bureau of Labor Statistics, Preliminary Data for April 2012 Salt Lake County economy in the near-term, continued global uncertainty and likely electionExceeding previous projections, non-residential year policy paralysis in the U.S. could slow growthconstruction grew approximately 81% in 2011 with in the latter part of 2012.much of the funding coming from private equity.
Historical Vacancy & Unemployment Rates in Salt Lake County 8.0% 25.0% 7.0% 20.0% 6.0% Unemployment Rate Unemployment Rate 5.0% 15.0% Vacancy Rate 4.0% 10.0% 3.0% 2.0% 5.0% 1.0% 0.0% 0.0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* Unemployment Rate 5.9% 5.8% 5.1% 4.1% 3.0% 2.7% 3.3% 6.7% 7.3% 6.8% 5.9% Office Vacancy 19.7% 20.5% 18.9% 12.8% 11.3% 11.7% 13.7% 17.2% 17.1% 15.3% 15.5% Industrial Vacancy 8.6% 9.9% 8.1% 5.6% 5.9% 6.2% 5.9% 6.8% 6.5% 6.2% 6.4% Retail Vacancy 7.0% 7.3% 8.0% 7.2% 6.6% 6.2% 7.4% 9.1% 9.4% 9.6% 9.6% *Preliminary Unemployment rate as of March 2012. All other rates are year-end averages over the 12 month period each year. Vacancy data as of Q1 2012 for Office and Industrial. Retail as of Q4 2011. Commercial Real Estate & improvement in vacancy will not be maintained. The Salt Lake Economy Over 900,000 square feet of single and multi- Economists at CBRE frequently refer to tenant office space will be completed in 2012. commercial real estate as the ‘economy in a box.’ Additional space from both new construction and Commercial real estate houses organizations of large users moving to dedicated single-tenant commerce and by examining the relationship office buildings will heavily influence the market. between the broader economy and commercial As such, vacancy will edge downward across real estate, much insight can be gained. In all the metro area and climb in select submarkets, property types, there is a direct relationship particularly downtown. Lease rates are expected to macro-economic indicators and the overall to stabilize, with isolated increases as demand makeup of Salt Lake’s economy. continues to be somewhat subdued and new supply enters the market. Office SALT LAKE METRO OFFICE VACANCY Salt Lake’s office market turned a corner in 2011. 20% In sectors relating to office demand, job creation over the 12 months ending in April of 2012 can 15% be characterized as healthy. Financial services expanded by 3.1%, while professional and business 10% services expanded by 4.2% over the same period5. This is significant due to the fact that sectors 5% relating to office demand are growing above the state’s overall long-term average, which is a little 0% 2007 2008 2009 2010 2011 2012 (est) Vacancy 11.7% 13.7% 17.2% 17.1% 15.3% 15.0% over 3%6.2012 SOURCE: CBRE, Q1 2012 Market View Further bolstering the outlook for office properties in Salt Lake is a developing tech Industrial corridor extending from southern Salt Lake Salt Lake’s ability to attract large corporations County into northern Utah County. The corridor is a significant factor in continued industrial is home to firms such as eBay, Microsoft, Oracle, market stability. Utah’s growing intermodal Twitter and a new campus being constructed by freight sector and high truck traffic make it an Adobe. The area’s growth will also be supported enticing home for many large manufacturers by a large number of startups and expansion of and distributors. One of Union Pacific’s largest existing firms. intermodal freight terminals is located in Salt Lake City and much of its west coast seaport freight Looking ahead, positive net absorption in the passes through Utah on its way to midwestern range of 500,000 to 600,000 square feet can and eastern destinations7. Consequently, Utah’s be expected during 2012. However, 2011’s rate of total rail volume posted major gains over the
past two years since its lowest point in 2009. RetailIn addition to rail volume, the Utah Department Indicators that help paint a picture of theof Transportation boasts, “Utah is already retail market are unemployment, housing, andthe crossroads for long-distance trucking in consumer spending. Currently at 6.0%, Utah’swestern America, having the highest truck traffic unemployment rate is among the lowest in thepercentage (23% of total traffic on Utah highways nation8. While this is still roughly double theis large trucks) of all 50 states.” Regionally, Salt rates experienced in 2007, the state is headedLake continues to maintain one of the lowest in the right direction. With respect to housing,industrial availability rates. according to the Salt Lake Board of Realtors, home sales increased 18% in the first quarter of HISTORICAL INDUSTRIAL AVAILABILITY 2012; on a year-over-year comparison, home sales 20.0% experienced 10 consecutive months of gains. 18.0% Lastly, consumer spending had a big boost at the 16.0% 14.0% end of 2011 due to increased clothing and motor 12.0% vehicle sales, although this increase in spending is not expected to maintain itself and is estimated 10.0% 8.0% 6.0% to end the year around 5.0%. 4.0% 2.0% CHANGE IN SALT LAKE COUNTY TAXABLE SALES 0.0% 2007 2008 2009 2010 2011 Q1 2012 15.0% Salt Lake City 7.7% 7.5% 9.9% 8.5% 8.8% 9.4% 12.9% Phoenix 16.2% 17.7% 18.7% 17.7% 15.1% 15.4% Denver 11.3% 11.0% 9.4% 9.6% 8.7% 8.4% Las Vegas 9.8% 9.7% 11.9% 13.1% 13.1% 13.2% National 9.7% 12.1% 13.2% 13.3% 13.7% 13.4% 10.0% 6.4% 6.5% SOURCE: CBRE, Q1 2012 Data 5.0% 5.0% 3.1%Construction continues to be a focal point for 0.0%the Salt Lake industrial market, and projectscurrently under construction total approximately -5.0% -6.7%736,000 square feet. Completions are on the -10.0%rise with over 733,000 square feet of warehouse/ -9.9%distribution space completed. Notably, projects -15.0% 2006 2007 2008 2009 2010 2011 2012that began as multi-tenant developments SOURCE: Salt Lake Countymanaged to find large single-user tenants thatrequire longer leases. For example, Sun Products Current and recently completed constructionpreleased the Landmark 7 project and Rockefeller numbers will be very healthy for the coming year,Building E will be completely preleased in the amounting to roughly 1,000,000 square feet.coming months by FedEx. Future job growth With its successful completion and opening inand a stronger industrial employment sector are March, City Creek Center is and will continue toexpected results, as major industrial tenants such be a highlight for Salt Lake retail. The center isas Boeing, OnTrac and ITT Corporation make filled with more than 80 retailers, 20 of which areplans to stay in the Salt Lake area. brand new to the Utah market. City Creek is an SALT LAKE COUNTY INDUSTRIAL CONSTRUCTION 1,800,000 outlier in the current retail environment as it is the only regional shopping center scheduled to open 2012 in the United States during 2012. 1,600,000 24% Another project of note is the upcoming 1,400,000 1,200,000 32% 3 2 completion of a new building for sporting 1,000,000 goods giant Scheels. Located in Sandy, the new 800,000 220,000 square feet store is expected to open in 600,000 September of 2012 and will be one of the retailer’s 400,000 largest buildings. Although the economy is still 200,000 in recovery, construction completions of major retailers is a positive indication of a retail market 0 headed in the right direction. 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 SF Under Construction 852,710 1,259,298 1,659,298 1,244,341 736,879 SF Completed 0 0 15,000 925,910 733,388 SOURCE: CBRE
Conclusion As long as major challenges to global growth not resolved before the election, they will need to can be contained, Utah’s economy will continue be addressed within a period of just weeks before to perform well and its commercial real estate they take effect. market will reflect that reality. At the present time, positive trends are expected to continue While there is much uncertainty, it is becoming with improvement in all property types. clear that policymakers will not retain the ability to continue delaying politically difficult decisions. In 2010, Federal Reserve Chairman, Ben Bernanke, It is often said that leaders “kick the can down said that the outlook was “unusually uncertain.” the road.” However, the end of the road is The chairman’s assessment is just as applicable approaching and the cans are piling up. The next now. As elections and transfers of power are held six to nine months will be critically important for in critical areas, new and existing leaders will have the global, national and Utah economies. little time to adjust to altered landscapes before taking action. Milestones: The following current or future Major threats to the global economy such as projects in Salt Lake County and around the state Europe’s debt crisis, geopolitical tensions in of Utah are significant indicators of both public the Middle East and U.S. fiscal policy have been and private commitment to continued economic years in the making. As sustainable solutions are growth: put off, the timeframe to deal with challenges - City Creek Center becomes more compressed. In others words, the - Regional Commuter Rail Expansion margin for error diminishes. - Sugar House Street Car - New Adobe Campus European leaders are testing market patience, - NSA project and the amount of time the market will allow is - Boeing not certain. Furthermore, it is widely believed - Business Depot Ogden that Iran’s nuclear program will be vulnerable - Family Dollar Distribution Center (St. George) only for a short time longer; meaning decisions - Campbell’s Soup Facility regarding any effective military strike must take - New Federal Courthouse place soon. In the U.S., if issues surrounding tax - Station Park Farmington Retail & Multifamily increases, spending cuts and the debt ceiling are - SLC International Airport Rebuild Accumulation of Risk2012