Market Reports
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Office 3rd Quarter 2018
Industrial 3rd Quarter 2018
Investment 3rd Quarter 2018
Retail 3rd Quarter 2018
Land 2nd Quarter 2018
2019 Colorado Springs Forecast
Residential 3rd Quarter 2018

Market Reports

OFFICE

Absorption
Net absorption for the overall Colorado Springs office market was positive 210,779 square feet in the third quarter 2018. That compares to positive 63,681 square feet in the second quarter 2018, negative 27,380 square feet in the first quarter 2018, and negative 16,043 square feet in the fourth quarter 2017. The net absorption for the quarter is far above anything the office market has seen recently. One large contributor was the 75,272-square-foot lease signed by New Summit Charter Academy at Lexington Center in the Northeast market, which counted towards the 3rd quarter office numbers, but the balance of the absorption was spread out over many buildings.

Vacancy
The office vacancy rate in the Colorado Springs market area decreased to 9.9% at the end of the third quarter 2018. The vacancy rate was 10.6% at the end of the second quarter 2018, 10.9% at the end of the first quarter 2018, and 10.8% at the end of the fourth quarter 2017. As would be expected, the surge of absorption has pushed vacancy down in a market with limited development of new speculative office product.

Rental Rates
The average quoted asking rental rate for available office space, all classes, was $15.64 per square foot per year at the end of the third quarter 2018 in the Colorado Springs market area. This represented a 1.4% increase in quoted rental rates from the end of the second quarter 2018, when rents were reported at $15.43 per square foot. Though average rental rates across the market have not moved much, targeted areas have seen a marked increase over the past few years. Class “A” product in the Northeast and Northwest market are among those that have benefitted from increased rents.

Deliveries and Construction
There have been no completed deliveries in the Colorado Springs market since fourth quarter 2017. There were 202,045 square feet of office space under construction at the end of the third quarter 2018.

Overview
Our expectation continues to be positive absorption that is slow but steady over the next several quarters.


INDUSTRIAL

The Colorado Springs Industrial market has recorded its lowest vacancy rate over the past 10 years, showing that the Industrial market is in high demand and proving to be a very strong sector of the Colorado Springs market.

The overall Industrial vacancy rate landed at 7.4% at the end of the third quarter 2018 which is a large drop from 8.5% at the end of the second quarter 2018 and the lowest recorded overall vacancy rate since 2017. The Flex sector broke out of the higher vacancy rate trend and recorded 11.1% at the end of the fourth quarter 2018. This compares to the 14.2% at the end of the second quarter 2018. The Warehouse sector stands strong with the vacancy rate at 6.9% the end of the third quarter 2018.

The overall net absorption for the Colorado Springs Industrial market has recorded positive net absorption over the past 4 quarters and ended the third quarter 2018 with a substantial total absorption of 370,246 square feet. The Warehouse sector totaled 158,446 square feet and the Flex sector recorded positive 211,800 square feet.

Rental rates for the Industrial market continue to see incremental increases through the third quarter 2018 with the overall Industrial market recorded an average of $8.64 per square foot (NNN). The Flex recorded an average quoted rate of $10.16 per square foot (NNN), whereas the Warehouse sector recorded $7.49 per square foot (NNN) at the end of the third quarter 2018.

Colorado Springs did not see any completions of industrial product in the third quarter 2018, but there is 52,406 square feet reportedly under construction. The year-to-date completions total approximately 207,065 square feet.

Similarly to the second quarter 2018, the third quarter 2018 recorded a total of eight Industrial building sales transactions, over 15,000 square feet total. The average price per square foot rose to $105.10 compared to 69.68 in the second quarter 2018. The increase in average price per square foot was due to the sale of 2570 Zeppelin, which sold for $14,600,000 as an investment at a 5.9% CAP rate.

Although there is growth in the cyber security and defense contracting sector in Colorado
Springs, inclement weather may also be a factor into the current strength of the Colorado
Springs Industrial market. There have been several large storms over the past few years that have increased the demand in repair work for both properties and vehicles, which has led to an increase in contractors, suppliers and repair workers needing space. Many of these groups have been able to absorb some of the Flex space that would less desirable for industrial users, which has further tightened the overall vacancy rates.

The demand and need for new construction is ever growing, so the vacancy, rental and absorption rate trends we are seeing though the third quarter 2018 are expected to continue to be positive.
 
 
INVESTMENT

Demand for commercial real estate is strong, fueled by job growth, a strong economy
and the early benefits of the new tax law. The population of Colorado Springs grew by
11% in the past seven years. Forecasts are that Colorado Springs will have 1 million
residents by 2043. The current and future market dynamics continue to draw investors
to the Colorado Springs market looking for higher yields when compared with major
markets.

Multi-family investors are focused on smaller markets where the unemployment rate
is low and the economy is growing. Vacancy rates in Colorado Springs are still at record
lows and rents are continuing to escalate. Many investors are focused on well located,
older properties, a trend we are seeing in Colorado Springs. Union Heights, a 220-
unit apartment project built in 1984, was sold in the 3rd quarter to Priderock Capital
Partners, LLC from West Palm Beach, FL. Griffis /Blessing purchased the property in 2015
for $22,000,000 and completed extensive upgrades. The property was sold to Priderock
in August 2018 for $35,000,000.

Industrial assets are on the short list of property types for many investors. 2570 Zeppelin
Road, a new 131,040 sf warehouse located in the SE market, recently sold to an investor
from Nevada for $111.42 psf. The property was completed in early 2018 and was 100%
leased to two tenants at the time of sale. Reported cap rate was less than 6%. Colorado
Springs is seeing several new industrial projects planned or under construction to meet
the limited supply of available space for users. Newer industrial buildings typically have
higher ceilings, sprinklers, and good proximity to major thoroughfares.

The office market has shown improvement in absorption but rental rates still do not
justify new construction. Several older, well located office buildings have been acquired
with the focus on upgrading the asset or repositioning it with alternative uses. Several
of these properties have been upgraded, stabilized and resold to investors in the past 24
months particularly in the I-25 corridor and N Academy area.

Rising interest rates could compress yields; however, the deal flow and capital markets remain strong. The competition among investors for properties with attractive returns has kept cap rates low. Investors are still willing to pay top prices in exchange for credit
tenants and longer-term leases.
Forecast
• Colorado Springs is well positioned to attract investors with its strong economic base, growing economy and low unemployment.
• Investors will continue to search for assets in smaller markets in search of better pricing and higher yields.
• Demand remains very high in Colorado Springs for well located multi-family investments. There is little concern that supply will overwhelm demand in the foreseeable future. Job growth and population growth will continue to drive demand for apartments.

RETAIL

Forbes reported the job market here ranked 13th for mid size cities overall from
2006-2017. The good news continues on the retail front as well. Overall retail vacancy
improved from 5.4% at the beginning of Q2, 2018 to 4.9% by the end of Q3. This is an
improvement from 5.1% at the end of 2017. Vacancies have continued their declined
since 2013.

Overall retail market asking rental rates continued their climb. From $13.64 at the end
of Q2 2018, they have risen to $14.75 per square foot at the end of Q3. This is an 8.14%
increase from the prior quarter, indicating growth in the sector, as well as leasing of
newer product. The drivers appear to be immigration and job growth. The metro area’s
population has increased 1.8% from 2017. Job growth is growing faster, 4.1% year-over
year. Costar quotes 11,900 new jobs in that time period. Job growth topped 4% for the
first time since 2001.

Colorado Springs suffers from the same store closings as the rest of the country, but is
also experiencing store expansion due to strong demographic movements; job growth,
increased population, stable labor market and growing income. The future looks rosy for
Colorado Springs. Job and household growth continue to do better than the nation as a
whole.

All of this has also brought investors to the market. Investment sales, topping
$250,000,000 in 2017, are in line to come in around $200,000,000 in 2018. Average cap
rates are consistently in the low 7% range in 2018.

Only one building was finished in the third quarter, for a total of 6,840 SF of completion.
319,254 SF of retail remained under construction at the end of the Third Quarter of
2018.


LAND

2nd 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

3rd Quarter Highlights:
• 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 22 days during the 3rd Quarter. This year that time has been
bumped only slightly with homes selling after 23 days on average.

• Along with an increased pace, the median home price has increased by nearly 12%
from 2017 to 2018. Only a year ago at this time it was $268,000 and has rocketed to
$298,000. The lack of inventory has made sellers more brazen in what they will ask for
their homes. Subsequently, buyers have been pressed to increase their budgets if they
want to secure a residence. While the market steadily heated up during the spring and
summer months, we are now seeing these higher prices have a slowing effect on that
momentum.

• 2018’s 3rd Quarter reflected the cyclical cooling of our market with 4,493 homes selling
in El Paso County. This is quite a bit less than 2017’s 3rd Quarter of 4,978 home sales.
While seasoned Realtors are accustomed to seeing activity reduced in the fall, this is
a sharper drop than in previous years. With a steadily increasing median home price,
there are fewer homes coming into the market at a price that first-time homebuyers can
afford. This cooling is happening in the larger markets of Colorado Springs and has not
yet hit the higher price points. Home sales from $500K-$749K have actually increased
from 298 homes in 2017 to 340 in 2018. Sales from $750K to $1M have increased from
41 homes in 2017 to 61 in 2018, and sales from $1M to $1.5M have nearly doubled from
15 homes in 2017 to 24 homes in 2018.

Statistical Summary
After the summer ends and school begins it is not unusual to see real estate sales decline.
The large push from buyers to close on a home and be settled before school starts is met with a contrasting lull as the dust and leaves settle. Nonetheless, buyers are still eager to relocate to Colorado Springs and they need homes. As experienced Realtors we advise sellers relative to the supply and demand manifest in the slower autumn months. The reduction in inventory is perceived by many sellers as the opportune time to see how much a buyer is willing to pay for one of the few homes on the market. Accordingly, it should come as no surprise that while sales declined, the prices aggressively increased. At the 2018 Annual UCCS Economic Forum, Dr. Tatiana Bailey further detailed the variables of this correlation. “The increase in housing sales and prices reflects lower mortgage rates, an increase in population, higher employment levels, and a decline in available housing for sale. National experts are citing average price increases for all of 2018 in the 5.0 percent range across the nation.”

Home values are understandably a strong indicator of the health of the economy in the Pikes Peak Region and should rightly be celebrated.  Monitoring the affordability to live here will also sustain the momentum our market has experienced. While the increasing home prices are welcomed, we must encourage vigilance across the dynamics that make Colorado Springs a desirable and affordable place to live. Dr. Bailey addressed this in the forum. “The housing opportunity index for 2018 Q2 showed that Colorado Springs is still quite affordable compared to the other MSAs with 60.7 percent of the homes sold affordable to families with our local median income. Similarly in the U.S. at that time,
57.1 percent of the homes sold were affordable for families earning the national median income. Despite recent increases in home prices, our region is still relatively affordable. Having said that, the double-digit increases we have seen in local home prices is good reason to monitor the trend of growing unaffordability locally and indeed nationally. First time buyers across the U.S., who are typically younger, have low ownership rates (36.5% in 2018Q2) and this is important to address in the long term.”

The cooling that is occurring in our real estate market is an ideal time to compose ourselves. We can make deliberate plans in our community which will foster growth and advancement. We can vote in a manner that will keep Colorado Springs an affordable place to live and to operate businesses, while also supporting improvements to the qualities and attributes that make the Pikes Peak region attractive to new-comers. As we acknowledge the cyclical slowdown, we can plan for the next upturn.