Market Reports
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Office 3rd Quarter 2017
Industrial 3rd Quarter 2017
Investment 3rd Quarter 2017
Retail 3rd Quarter 2017
Land 3rd Quarter 2017
2017 Colorado Springs Forecast
Residential 3rd Quarter 2017

Market Reports

OFFICE

The Colorado Springs office market ended the third quarter 2017 with a vacancy rate of
11.0%. The vacancy rate was up slightly over the previous quarter, with net absorption
totaling negative (35,228) square feet in the third quarter. Vacant sublease space
increased in the quarter, ending the quarter at 69,767 square feet. Rental rates ended
the third quarter at $15.61, an increase over the previous quarter. One building delivered
to the market in the quarter totaling 1,912 square feet. There were 109,800 square feet
still under construction at the end of the quarter.

Absorption
The third quarter Colorado Springs office market saw its first negative absorption in
a year at negative 35,228 square feet. That compares to positive 144,831 square feet
in the second quarter 2017, positive 107,442 square feet in the first quarter 2017, and
positive 116,739 square feet in the fourth quarter 2016. Though absorption was down
slightly for the quarter it still looks relatively strong for the year-to-date.
Vacancy
The office vacancy rate in the Colorado Springs market area increased slightly from
10.9% to 11.0% at the end of the third quarter 2017. This is still down from 11.4% at the
end of the first quarter 2017, and 11.7% at the end of the fourth quarter 2016.

Rental Rates
The average quoted asking rental rate for available office space, all classes, was $15.61
per square foot full service per year at the end of the third quarter 2017 in the Colorado
Springs market area. This represented a 1.2% increase in quoted rental rates from the
end of the second quarter 2017, when rents were reported at $15.43 per square foot.
The average quoted full service rate within the Class-A sector was $20.94 at the end of
the third quarter 2017, while Class-B rates stood at $14.95, and Class-C rates at $11.83.

Forecast
Though the third quarter numbers for absorption and vacancy were flat, positive
momentum in the office market is still expected through the end of 2017 and into 2018.


INDUSTRIAL

The Colorado Springs Industrial market saw a slight spike in vacancy rates along with
a dip in average asking rental rates at the end of the third quarter 2017. These rates,
however, contradict the overall strength of the industrial market in Colorado Springs.
The overall Industrial vacancy rate was recorded at 10.1% at the end of the third quarter
2017, which is a substantial increase compared to the 9.2% recorded at the end of the
second quarter of 2017. The Flex sector vacancy rate remains high at 19.4%, compared to
the Warehouse sector, which record a vacancy rate of 8.0% at the end of the first quarter
2017. The Warehouse sector did increase from 7.2% at the end of the second quarter
2017. This increase is largely due to the negative absorption and Tenants moving out of
large blacks of space in the third quarter 2017.

The overall net absorption for the Colorado Springs Industrial market recorded negative
172,623 square feet for the third quarter of 2017. The Warehouse sector recorded a
net absorption of negative 189,187 square feet, due to two large Tenants moving out of
space, FedEx and the Harris Corporation, which those two alone totaled 123,326 square
feet. The Flex sector recorded a net absorption of positive 16,564 square feet at the end
of the third quarter of 2017.

The average quoted asking rental rates for the overall Industrial market was recorded at
$7.46 per square foot (NNN) at the end of the third quarter 2017, a nominal decrease
form the second quarter 2017. The Flex sector quoted rental rate was $9.07 per square
foot (NNN) at the end of the third quarter 2017, a drop from $9.27 per square foot
(NNN) at the end of the second quarter 2017. The Warehouse sector recorded a quoted
rental rate of $6.79 per square foot (NNN) at the end of the third quarter 2017.

New construction throughout the Colorado Springs Industrial market continues to
increase as demand for new Industrial space grows. There were two buildings totaling
27,400 square feet of Industrial space completed during the third quarter 2017, which
gives a 2017 year to date total completions of approximately 80,800 square feet. The
most notable project underway is the 800,000 square foot T5 Data Center warehouse,
that is projected to be completed in the second quarter of 2018. There is an additional
25,000 square feet of Industrial space under construction at the end of the third quarter
2017.

Industrial sales are slightly up for the total year-to-date for 2017 compared to the
previous year, recording 80 total transactions with an average sale price per square for of
$74 through the third quarter 2017, whereas there was a total of 78 transactions with
an average sale price per square for of $69 through the third quarter 2016.
 
 
INVESTMENT

The recent sale of the Colorado Square Building to Seattle based Unico Properties LLC
is evidence of continued investor interest in Colorado Springs from strong regional and
national buyers. Colorado Square offered an opportunity to acquire a major downtown
office property anchored by a credit tenant. The property was approximately 80% leased
at time of sale. Unico owns 2.4 million square feet of space in Denver. Many investors
with assets in Denver see acquisition opportunities in Colorado Springs as a natural
transition with the opportunity for better prices and higher returns.

Sales of multi-family properties continue to be robust in Colorado Springs. Green Leaf
Rockrimmon, a, 260-unit complex, sold for $59,250,000 to an investment group from
California. Lamplight Square at The Park, a 280-unit complex sold to Griffis/Blessing, a
local multi-family developer and investor. Class B and C multi-family properties that are
candidates for renovation and upgrades are particularly attractive to buyers looking to
increase value by completing significant upgrades that result in increased rental income.
Cap rates for apartments continue to be in the sub 6% range for well located, stabilized
assets.

Investors are also looking for opportunities to acquire older, well located properties that
can be renovated and repurposed for alternative uses. The former Lincoln School, located
at 2727 N Cascade Avenue, was acquired by a local investment group approximately
three years ago and was successfully repurposed into a multi-tenant commercial
property. The property sold in September 2017 for $5,300,000 to a Denver-based
investor. The property was 100% leased at time of sale.

Woodmen Corporate Center recently sold to a local investor for $47.17 psf. The 101,755
square foot office building was built in 1983 and was 29% leased at time of sale.
Located at I-25 and Woodmen Road with excellent visibility to I-25, the property provides
an excellent opportunity to increase value by completing property upgrades and offering
aggressive leasing packages.

Most economists are forecasting favorable economic conditions throughout the remainder of 2017 and into 2018. This bodes well for commercial real estate, especially markets with strong population and job growth.

Forecast
• Real estate lending will continue to be strong into 2018. Some lenders are becoming more interested in secondary markets with strong market fundamentals and more attractive pricing.
• Cap rates will hold steady through 2017 subject to local market conditions and investor confidence. Cap rates for well located office buildings are generally in the 7.5% to 8.5% range subject to location and quality of asset, length of leases and credit of
tenants.
• Market uncertainties such as interest rate increases and global politics may affect investor confidence and sales volume.
• Investors will continue to search for assets in smaller markets with strong population and job growth in search of better pricing and higher yields.

RETAIL

For the second quarter in a row, vacancy remained at 6.3% market wide. Over the prior
four quarters, the vacancy rate steadily increased from 5.8% at the end of Q4 2016. No
doubt new spec construction has contributed to this increase. Net absorption was a
positive 169,329 square feet, versus 40,624 SF in Q2. Most positive absorption was due
to King Soopers moving into 123,000 SF on Constitution, Sprouts moving into 28,000 SF
on Barnes, and One Love Club occupying 17,438 SF in Manitou. Large tenants vacating
space in the quarter were Whole Foods, 27,743 SF, Rawkus, 10,628 SF and Zio’s Italian
Kitchen, 7,326 SF.

Quoted base rental rates market wide increased slightly from Q2 of 2017, from $12.63
PSF to $12.66 PSF. The current number is almost equal to Q1, when the market average
was $12.68. These very slight fluctuations are indicative of a market that is stable and
has good underlying fundamentals. Even though Colorado Springs, like the rest of the
country, has had many store closings, the variety of tenants here continues to expand.
The metro has a strong and diverse labor market with medium household incomes
higher than the national average. Additionally, with several universities and substantial
military bases, recreational tourism and a large defense contractor base, demand for
Class A retail remains strong. Retail is overbuilt nationwide, adding to the dilution of
income for retailers per square foot, and lowering average rental rates. These things,
coupled with higher construction costs, will continue to keep this market in balance.
Projects currently under construction include the Highlands at Briargate, 250,000 SF
with 94% leased, 1327 Interquest Parkway, 7,800 SQ and 44% pre-leased, and 1624 S.
Nevada, 8,800 SF, and 100% leased.

Investment demand, local and national, remains strong and the National Retail
Federation’s view of consumer optimism should lead to promising retail sales in Q4.


LAND

3rd Quarter Highlights 

♦ Apartment rental vacancies continue to remain at 4% even with new units being introduced into the market and over 500 new apartment unit permits pulled in 2017 thus far. Monthly rents are expected to increase by more than 10% from 2017 over 2016. Many existing Colorado Springs apartment developers and new out-of-stat apartment developers have begun focusing on the Colorado Springs.

♦ Single family building permits in 2017 are nearly the same as the number of permits pulled from January to September in 2016. El Paso County may reach 4,000 permits in 2017, which will be the first time since 2005. The labor shortage for skilled labor in the construction industry is the primary factor limiting the number of permits in the market. 

♦ Denver area investors and home buyers continue to migrate to and invest in the Colorado Springs market. Colorado Springs is still considered the best value on the front range because of the lower cost of living and higher returns in nearly all real estate market segments then the Castle Rock/Denver markets.

♦ Affordable housing ($300,000 and less) is still the primary driver in the residential home market. The demand for anytime type of product at this price point is steering builders to construct multi-family attached residential properties (townhomes and duplexes) in the market. This will be a growth area for land sales during the foreseeable future as single-family home prices are expected to increase and the single family lot supply has tightened.
 
In the opinion of many investors that have begun to look at the Colorado Springs
market, the Denver and northern Colorado markets have become saturated and
reasonable investment returns have become difficult to obtain. This should
benefit Colorado Springs because the Colorado Springs market prices in every
land category is typically 20% - 30% less than anywhere in Denver. Additionally,
local and state officials have directed substantial resources and focus on widening I-25 to three lanes as soon as possible to improve traffic flow between Denver and Colorado Springs. This should only enhance Colorado Springs’ desirability to Denver businesses and home buyers on the Front Range.

Residential land sales, finished and platted lots, have continued to dominate the land market in the first 3 quarters of 2017. The finished lot supply is continuing to lag behind the housing demand and this is expected to continue for the next couple of years because the entitlement approval process in both the City of Colorado and the County now takes at least 9 months and the labor force is stretched to capacity for development.

Land contracts and land purchases to accommodate high-density residential housing (6 or more units to the acre) has increased substantially in the first three quarters of 2017 and is expected to continue to grow for the foreseeable future. Smaller homes and housing options, thus more affordable housing, has been or will be introduced into the market by nearly all large home building companies in the immediate future. Land that can be
developed for apartments has seen a major resurgence in interest from many existing and new apartment development companies to the area during the past 90 days. New properties have been going under contract for at market rate prices of $5.00/sf to $6.00/sf.

Industrial land has begun to make a comeback in 2017 with land being purchased by developers and users for construction of new buildings to satisfy market expansion requirements in the area for this category. The industrial land market is expected to get stronger, especially on the north end of the County which can service both the Colorado Springs and Denver markets. 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 outlook for the next two to three years is very positive for the Springs-area land market and economy. The area has at least returned to prerecession (2008) levels in every major category at the measures the local economy. The land market in 2017 & 2018 should be one of the best since the top of the market in the mid-2000’s. Residential land and lot sales will continue to be the primary driver in the land markets for the next couple
of years while retail will continue to remain strong trying to keep up with new home sales. Industrial and office land, which has lagged since 2006, continues to show improvement but most likely will grow at a much slower pace. Many believe the growth in El Paso County and Colorado Springs is a sustainable because the markets never hyper-inflated and speculative transactions are still considered rare.


RESIDENTIAL

3rd Quarter Highlights

♦  Mortgage lenders are staying competitive with rates that are attractive to most buyers
and staying creative with product that breaks them out from the pack. This fed a strong
pace in 2017’s third quarter for home sales with over 4,900 homes selling in El Paso
County. This has surpassed 2016’s third quarter by 9%, which at its time set a 10-year
record with just over 4,500 home sales.

♦  Daylight is shrinking and so is the time it takes to sell your home. Last year a home
stayed on the market for an average of 29 days during the third quarter. This year that
time has been cut by 18% with homes selling after 24 days on average.

♦  Along with increased sales volume and an increased pace, the median home price has
increased by over 7% from 2016 to 2017. Only a year ago at this time it was $250,600
and has climbed to $268,300. With a pace like this the Pikes Peak region continues to
draw buyers from across the nation who recognize the strong recovery of our housing
market.

Statistical Summary

The demand for housing in El Paso County has moved many home owners to consider selling while the market is still in their favor. While the seller of an existing home may be able to have their house ready to sell in only a few weeks, new home builders can only build as fast as their tradesmen can be found. Not only are the builders navigating the increasing cost of materials, but they are now facing this shortage of labor. Both of these factors are contributing to the increased prices a buyer is facing when considering a newly constructed home. New construction accounted for only 9% of the 4,900 homes sold in El Paso County in the Third Quarter, over 400 homes. They sold at a Median Price of $343,700 after an average of 49 days on the market. Resales accounted for nearly 91% of the homes sold, nearly 4,500 homes. They sold at a Median Price of $260,500 after an average of only 8 days on the market. Buyers across several price ranges have seen that is often a better value to purchase a resale than it is to build new comparable product, though the competition can be steep as evident by how quickly they move off the market
and go under-contract. This is another variable for why some buyers are willing to pay more for new construction simply to secure a home.  Nonetheless, the demand for housing appears insatiable in the Colorado Springs market and resale and new construction combined are not satisfying it. The need to offer more affordable housing remains a concern as well.

In an effort to provide for affordable housing and mitigate the strain on builders to find more skilled labor, several initiatives are moving forward across Colorado. Wendy Brors is assistant director at the Colorado Workforce Development Council, CWDC, a department in the Colorado state government. She shared in the Fall 2017 Colorado Builder Forum that Colorado’s construction industry representatives worked last year to define career pathways for construction jobs and published these on the careersincolorado.org site. She goes on to say, “This information makes it easier for students, parents, career counselors, and teachers to learn about careers in construction and how to prepare for them.”

Locally, the Colorado Springs HBA has been collaborating with the Association of General Contractors and launched a Careers in Construction program to reintroduce vocational education at the high school level. Additional funding support has come from the El Paso County Commissioners, the City of Colorado Springs, and the Pikes Peak Regional Building Department. To get the program into local schools, a “Building Futures” fund was created. Pre-apprenticeship programs have been tailored to high school students and participating schools received a $10,000-$12,000 annual subsidy to help cover the cost of the instructors’ salaries. As of January 2017, the program has grown to 345 participating students. Pikes Peak Community College is continuing the effort with certificate programs and a new degree in building and construction technology. Construction trades training for people exiting the military is also in the works at Fort Carson. While we hope these
efforts will eventually bring a steady influx of skilled workers into our industry, and mitigate the rising construction costs, we do not expect the market to cool down in the foreseeable future.