Market Reports
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Office 2nd Quarter 2018
Industrial 2nd Quarter 2018
Investment 2nd Quarter 2018
Retail 2nd Quarter 2018
Land 2nd Quarter 2018
2018 Colorado Springs Forecast
Residential 2nd Quarter 2018

Market Reports

OFFICE

Absorption
Net absorption for the overall Colorado Springs office market was positive 127,555 square feet in the second quarter 2018.  That compares to negative (24,241) square feet in the first quarter 2018, negative (36,711) square feet in the fourth quarter 2017, and negative (20,191) square feet in the third quarter 2017.  The Colorado Springs office market showed strong absorption for the second quarter for the first time in several quarters.  As discussed in our first quarter report, there were some anomalies in the first quarter that brought the absorption below what it would have been normally.  The numbers reflect the slow but steady absorption of space that we predicted in our annual forecast.

Vacancy
The office vacancy rate in the Colorado Springs market area decreased to 10.5% at the end of the second quarter 2018.  The vacancy rate was 10.9% at the end of the first quarter 2018, 10.8% at the end of the fourth quarter 2017, and 10.7% at the end of the third quarter 2017.  We expect vacancy to continue to fall as office space is absorbed and there is little new product introduced to the market.

Rental Rates
The average quoted asking rental rate for available office space, all classes, was $15.44 per square foot per year at the end of the second quarter 2018 in the Colorado Springs market area.  This represented a slight decrease in quoted rental rates from the end of the first quarter 2018, when rents were reported at $15.46 per square foot.  Over all gross lease rates remain flat although Class A office rates have seen significant increases over the past few years in specific submarkets.

Deliveries and Construction
The largest projects underway at the end of second quarter 2018 were both part of Victory Ridge - 10855 Hidden Pool Heights, a 109,169-square-foot building with 0% of its space pre-leased, and 1818 Spring Water Pt., a 16,950-square-foot facility that is 0% pre-leased.


Overview
We expect more slow but steady positive absorption over the next several quarters.


INDUSTRIAL

The Colorado Springs Industrial market has recorded all very positive indicators and statistics though the second quarter 2018 and with the increase in construction/ contractors, as well as auto body repair tenants, the demand for Industrial and Flex spaces does not show signs of easing up. 

The overall Industrial vacancy rate recorded a substantial drop from 9.4% at the end of the first quarter 2018 to 8.5% at the end of the second quarter 2018.  The Flex sector recorded a vacancy rate of 14.2% at the end of the fourth quarter 2018, a minimal drop from 14.8% at the end of the first quarter 2018.  The Warehouse sector recorded a vacancy rate of 7.1% at the end of the second quarter 2018, which is a sizable drop form 8.1% at the end of the first quarter 2018 and remains one of the stronger sectors of our market.

The overall net absorption for the Colorado Springs Industrial market recorded positive 288,409 square feet at the end of the second quarter 2018, with the Warehouse sector alone totaling positive 245,792 square feet, whereas the Flex sector recorded positive 42,617 square feet.

Rental rates for the Industrial market are continuing on a very steady trend of increases through the second quarter 2018, with the overall Industrial market being recorded at $8.20 per square foot (NNN).  The Flex sector quoted rental rate was $9.91 per square foot (NNN) and the Warehouse sector recorded a quoted rental rate of $7.44 per square foot (NNN) at the end of the first quarter 2018, which all of these are slight increases over the quoted rental rates compared to the first quarter 2018.

The second quarter 2018 recorded a total of eight Industrial building sales transactions, over 15,000 square feet total, recording an average an increased price per square foot of $69.68. The largest transaction in the second quarter was the sale of the 68,370 square foot Industrial building at 2050 Cygnet Heights, which sold for $84.83 per square foot.
There were two buildings completed at the end of the second quarter 2018 totaling 30,025 square feet, giving a year-to-date total of 190,065 square feet. The trend of new construction is expected to continue as the demand remains high for quality product in desirable locations with the smaller projects, 25,000 square feet and less, to be an ideal project for most users and investors. 

There has been a large increase in the need for Industrial space for both contractors/ construction companies and automotive body repair shops, which can be attributed to hail storms and weather that have impacted homes, building and vehicles.  These types of groups require large spaces that can accommodate a large amount of inventory, which this demand may lead to more new construction of larger facilities.

All aspects of the Industrial market appear to be positive, which this trend has been ongoing over the past few years with warehouse leading the market.  There has been steady growth and demand resulting in steady increases in rental rates, new construction and sales prices along with a decrease in vacancy rates.
 
 
INVESTMENT

The recent sale of Academy Professional Campus to a California investor is a strong indication of investors’ willingness to acquire older, well located assets that have been renovated and stabilized.  The four-building portfolio recently sold for $9,265,000 ($132.65 psf).  The properties were acquired in January 2017 for $5,000,000 ($71.58 psf) and were upgraded and stabilized with new tenants.  As construction prices continue to increase, replacement costs for new office buildings are now at all-time highs.  Investors are willing to pay higher prices for older, stabilized properties in good locations.
 
Sales of multi-family properties continue at a strong pace in Colorado Springs.  Vacancy is still below 4% and rent growth is accelerating.  Strong population and job growth continues to foster demand for more apartments.  Investors perceive multi-family assets in Colorado Springs as a better opportunity for higher returns and less risk when compared with the Denver market.  With 25,000 new units under construction, the risk of overbuilding is much higher in Denver.  The recent portfolio sale of seven Class B and C apartment complexes to a Denver investor for $102,250,000 is a clear indication of the attraction of investors to the Colorado Springs multifamily market.

Medical office buildings (MOB’s) are attracting investors for a variety of reasons.  Most MOB’s have credit tenants with solid financials.  Investment in tenant finish and expensive medical equipment also promote long term leases.  MOB’s typically have a lower turn-over of tenants that reduces the amount of leasing commissions and tenant improvements. The aging population is fostering more construction of medical assets, a trend that will continue well into the future.

Strong job growth and improving economic conditions is expected to continue in Colorado Springs.  There are predictions by some economists that Colorado Springs will continue to have the strongest population and job growth of any of the front range cities.  Investors are aware of the current and future strengths of the market which influence buyers’ decisions to invest in Colorado Springs.

Cap rates are very specific to asset classes, age of property, location and stabilized income.  The lowest cap rates are achieved in multi-family, medical and industrial assets.
Colorado Springs is well positioned to continue to attract well capitalized investors due to the forecast for continued strong population and job growth and improving market fundamentals.

Forecast

• Strong population and job growth combined with improving market conditions will continue to attract investors to Colorado Springs.
• The Colorado Springs multifamily market will continue to attract investors who perceive less risk and higher returns when compared with the Denver market.
• Older, well located assets will continue to attract investors looking for the oportunity to upgrade the asset and obtain higher returns when compared with newer, higher priced assets.
• Cap rates will remain low for institutional quality assets such as medical office buildings and large multifamily investments.

RETAIL

The retail market in Colorado Springs continues it’s improvement. Overall retail vacancy decreased to 5.4% by the end of the 1st half of 2018.  This is a 2% improvement over Q1 of 2018 and is just behind the 5.1% vacancy rate at the end of 2017.  The market is stabilizing although the overall trend is still downward.

Net absorption was a positive 39,862 rentable square feet, while sublease supplies decreased by 23,263 RSF.  This is a much better showing than Q1, and traditionally, this is an expected seasonal trend.  Contrary to these slight improvements, asking rental rates decreased slightly. $13.73 at the end of Q1 ‘18, at midyear they had dipped slightly to $13.64.  Again, these are signs of a stabilizing market.

One new retail building of 7,040 RSF was delivered to the market in Q2, with 203,226 RSF remaining under construction.  Over the last year, 275,941 RSF of new retail construction have been added to the market.

Interesting sales and leases for the quarter include Sears selling their 141,130 RSF store at Chapel Hills Mall and then leasing it back.  Chapel Hills Mall itself was sold to Mason Asset Managment and Namdar Realty, who also own the Citadel Mall and hence, control all malls in the Colorado Springs Market.

City retail sales tax collections are always a good reflection of how individual retail market segments have performed in the last quarter.  For the latest available results from May, 2018 (published in June, 2018) Auto sales tax receipts have decrease by 1.08% from April, but year-over-year from 2017 have risen .35%.  The largest monthly drop came in Department and Discount stores down 10.35% since April, .2% in the last year. Medical marijuana sales dropped 15.53% since April, 6.64% in the prior year.


LAND

3nd Quarter Highlights 

♦ The most notable trend in the 2018 residential market is the focus on providing for more affordable housing ($300,000 and less) throughout the market.  Home builders are creating new plans and beginning construction of more high-density attached homes (townhomes and duplexes) and introducing higher density detached single family residential homes (6 to 10 units per acre single family homes) to address this need in the market.

♦ Demand for new homes remains extremely high but increases in building permits will be limited for the year because the labor shortage for both lot development and home construction continues, thus resulting in continued increases in prices for new and resale homes. 

♦ Single family building permits at the end of the 2nd quarter increased by 22.5% over the same time-period from January to June in 2017.  The number of permits pulled should exceed 4,000 in 2018, which will be the first time since 2006.

♦ Apartment rental vacancies remain at approximately 6.3% and lease rates continue to increase.  The average rent of $1,156/per month in June was a new record for Colorado Springs.

♦Industrial land sales are starting to pick-up and are expected to continue to improve because of the lack of available existing industrial space throughout the entire market.
 
High-density attached and detached single-family homes has been one of the most discussed market segments of the residential market during the past 12 months. This product type is expected to be the most rapidly growing segments in the local market for the next 3 years because of the pressure from consumers for dwellings that can be purchased in the $220,000 to under $320,000 range.  Nearly all of the area’s large builders will be introducing smaller, more affordable homes by 2019.  Construction defects ordinance reform which is being address, has improved but has not been completely resolved and is still considered a risk by many builders.

Residential land, platted and finished lots remains very tight and is expected to remain that way for the next couple of years.   The tight market is a result of entitlement approvals taking a year or more and the labor shortage has extended the lot development process to over 6 months.  Land and lot prices continue to rise because of the tight market and this is expected to continue because of the increased demand from home builders trying to keep up with consumer demand for new homes. 

The need for apartment land continues to be strong in specific market areas of Colorado Springs with new properties going under contract for new apartment projects with out-of-state developers at market rate prices of $6.00/sf or more and vacancy rates in the 6% range.  The downtown rental market will be a growing segment in the immediate future with new projects under construction and recent announced.

The industrial land market may be the next “best real estate opportunity” in the Colorado Springs/El Paso County real estate market.  Demand for modern, functional and updated industrial space has increased during the past 18 months with little to no new product to satisfy the market demand, especially in north Colorado Springs and the north El Paso County market.  Lease rates have slowly begun to move up which will ultimately lead to the financial justification for new industrial projects to be built.  The office land market has lagged since 2006 and is not expected to show much improvement anytime soon because of the excessive vacancy rates in this market segment. 

The Colorado Springs/El Paso County land market continues to be considered one of the best values in Colorado and the western United States, as it has been for the past 36 months.  The area continues to attract new home building companies, buyers, investors and developers into the market from other large US markets that have become saturated and over-priced.  The local market has proven it is at a sustainable growth rate because the market has yet to hyper-inflate. The 2nd half of 2018 looks to continue its upward trend at a steady pace which is expected to do so for the next couple of years.


RESIDENTIAL

2nd Quarter Highlights

♦  2018’s 2nd Quarter reflected the steady demand from buyers in our market with 5,246 homes selling in El Paso County.  This is a little less than 2017’s 2nd Quarter of 5,365 home sales.  This does not reflect reduced demand, as much as it highlights the lack of supply. With a steadily increasing median home price, there are fewer homes coming into the market at a price that first-time homebuyers can afford.

♦  U.S. News & World Report ranked Colorado Springs as #2 in their 2018 Best Places to Live report. In 2017 it ranked #11.  Much of this they attribute to the low cost of living, the low unemployment rate, and the variety of recreation and entertainment options.  This demand amongst buyers continues to fuel our market.  Last year a home stayed on the market for an average of 25 days during the 2nd Quarter.  This year that time has been cut by 12% with homes selling after 22 days on average.

♦  Along with increased sales volume and an increased pace, the median home price has increased by nearly 13% from 2017 to 2018.  Only a year ago at this time it was $269,000 and has rocketed to $304,000.  This has reduced the amount of affordable housing available to first-time homebuyers.  As the market has steadily heated up, homebuyers and investors alike have reassessed what it takes to be a competitive buyer.

Statistical Summary

Reduced inventory and the subsequent increase in home prices has made affordable housing a challenge to find for first-time homebuyers.  Engaging an experienced Realtor  will aid them in reevaluating what they can bring to the table to make their offer stand out against the melee of competing offers, let alone the cash offers coming to the table.  Our heating market has required investors to increase their spending limits as well, desperate to add rental properties to their portfolios.