Market Reports
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Office 3rd Quarter 2019
Industrial 3rd Quarter 2019
Investment 3rd Quarter 2019
Retail 3rd Quarter 2019
Land 1st Quarter 2019
2020 Colorado Springs Forecast

Market Reports


OFFICE

Absorption
Net absorption for the overall Colorado Springs office market was negative 27,097 square feet in the third quarter,that compares to positive 136,756 square feet in the second quarter 2019, positive 47,205 square feet in the first quarter 2019, and positive 76,795 square feet in the fourth quarter 2018. Though down for quarter, net absorption YTD was positive 156,864 square feet. This reflects a relatively active office market overall. We expect to see modest but steady positive absorption for the next several quarters.

Vacancy
The office vacancy rate in the Colorado Springs market area was up slightly to 8.9% at the end of the third quarter 2019. The vacancy rate was 8.7% at the end of the second quarter 2019, 9.2% at the end of the first quarter 2019, and 9.3% at the end of the fourth quarter 2018. In a market with limited development of new speculative office product, the vacancy rate continues to mirror net absorption in the market

Rental Rates
The average quoted asking rental rate for available office space, all classes, was up slightly for the quarter to $16.87 per square foot per year (full service) at the end of the third quarter. This is up from $16.30 at the end of the second first quarter 2019 and $16.65 reported at the end of the first quarter 2019. Though average rental rates across the market have not moved much over the past few years, targeted areas of the market have seen a significant increase. Class “A” product in the Northeast and Northwest submarkets are among those that have benefited from increased rental rates.

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



INDUSTRIAL

The Colorado Springs Industrial market has seen steady positive movement for an extended period of time and continues to do so through the third quarter 2019, but we have begun to feel the need for new Industrial product throughout the market. Vacancy rates continue to be very low, rental rates are increasing, but there has been a lack of movement and activity in comparison to the previous years, which is largely related to the lack of new product being delivered and the abundance of obsolete and less desirable Industrial properties.

The overall Industrial vacancy rate has a slight drop from 6.4% at the end of the second quarter 2019 to 6.3% at the end of the 3rd quarter 2019. There have been more substantial drops over the past year ranging from .5% to over 1.5% decreases, so the decrease of only .1% in the third quarter is hinting at how tight the market currently is and the lack of options for tenants and owners. The Flex sector, however, remains high at a vacancy rate of 14.7%, which is in comparison to the warehouse sector that is now at 4.3% though the third quarter 2019.

The Colorado Springs Industrial market recorded positive 190,398 square feet of overall net absorption in the third quarter 2019. There was positive 211,760 square feet net absorption for the Warehouse sector, which there was negative 20,882 square feet of absorption in the Flex sector. Much like we see with the vacancy rates, the Warehouse sector continues to lead substantially over the Flex sector, further showing the need for new Warehouse product.

The average asking rental rates for the Industrial market recorded no change from the second quarter to the third quarter 2019 and has remained at $9.52 per square foot (NNN). The Flex sector recorded a slight drop to an average quoted rate of $11.68 per square foot (NNN) and the Warehouse sector slightly increased to an average of $8.23 per square foot (NNN) at the end of the third quarter 2019. These rates are still at a point that would typically justify the cost to begin new construction, but due to the current high costs of new construction, developers and owners have been hesitant to start new projects.

There were 18 Industrial sales transactions recorded in the third quarter 2019, with a total sales volume of $18,700,000 at an average price per square foot of $93.00. A majority of these sales were properties under 20,000 and were primarily investment sales. The largest sale, however, was an owner/user purchase of the 75,000 square foot manufacturing facility located at 5070 Centennial Blvd, which sold for $5.1 million ($68.00 per square foot).

There was one project delivered in the third quarter 2019 totaling 24,000 square feet that is 70% occupied. There is a total of 49,522 square feet of industrial that is reported to be under construction through the third quarter 2019.

Although there is some industrial product under construction, the need for new projects is evident with the low vacancy rates and the high demand for new quality industrial product throughout Colorado Springs. The Colorado Springs market continues to be an ideal location for new or growing companies and unless we see new product breaking ground, we can expect that the overall market will begin to further flatten out.  



INVESTMENT

Coming out of the Great Recession, Colorado’s Front Range has rebounded more than other areas of the country. Colorado Springs has out performed many other cities in terms of both population and job growth. Our quality of life has attracted millennials and others to relocate to the area resulting in Colorado Springs being labeled the #1 city in the US for relocation by millennials.
 
Construction costs are reported to be up 17% and the cost of land continues to rise. Rental rates for new construction often do not support development of new projects, especially in the office market. Due to the low industrial vacancy rates, we are starting to see some new industrial development. Rental rates are typically $10.00 to $12.00 NNN for new industrial properties. Medical office developments are on the rise to support the growing population and the new hospitals planned in the northeast area.

Rising land and construction costs are causing investors to seek existing properties with upside potential. The vacant Sears Building in Southgate, 145,675 sf, recently sold for $8.5 million ($58.35 psf) for redevelopment. The property, located in the Broadmoor Towne Center, was appealing for its strong location, visibility and access. The property will be subdivided and redeveloped into a multi-tenant property.

Rental growth continues to accelerate for apartments with increases just below 7% per year for the last two years. Vacancies for stabilized properties fell to a seven-quarter low of 5.23%. While the availability of apartment complexes for sale is declining, investors still consider Colorado Springs as a target market for acquisitions. Canyon Ranch Apartments, 328 units located on Parkmoor Village Drive, sold in the 3rd quarter for $56,985,000. Overall, sales are down for apartments in the 3rd quarter, however, this is related to lack of properties available for acquisition and not declining investor interest. Cap rates for multi-family still remain at sub 6% for well-located, newer stabilized projects as well as older projects with upside potential.

Current mortgage rates are below 4% for qualified investors with rates fixed for up to 10 years. The continued low cost of money is boosting investment activity as investors take advantage of the low cost of capital to build their portfolios.

Nationally, we are seeing sales of large portfolios as owners seek to profit from the appreciation in assets acquired during the recession. Some Investors are becoming more cautious about a potential downturn in 2020 as concerns continue over a slow down in the national economy, uncertainty over the path of interest rates and the upcoming election.

Forecast 
  • The availability of capital for acquisitions and the prospect of lower interest rates will keep deal flow strong for the remainder of 2019 and early 2020.
  • Many individual buyers and investment funds will seek to place funds before the end of 2019. Expect to see an uptick in investment activity in the 4th quarter.
  • Capitalization rates will continue to hold steady or decline in the 4th quarter of 2019. Cap rates are relative to location, type of asset and strength of tenants. Market cap rates reported by Costar averaged 7.16 % for all property types in the 3rd quarter.
  • There are signs the national economy is slowing that may result in additional interest rate cuts in 2020.

 
RETAIL

Colorado Springs finds itself in the third quarter of 2019 to be in a unique situation. Population and job growth continue. 5,734 new jobs were created between Q1 2018 and Q1 2019 (UCCS Economic Forum), with Construction employment growing 52.3%, Health and Social Assistance increasing by 31.1%, Accommodation and Food Service up 19.7% and Prof and Tech Services up 19.1%. Gross Metro Product contribution increased 7.2% for the retail trade. Population continues to grow, predictions putting growth from 712,714 in El Paso County in 2018 to 1,075,535 in 2050. No wonder U.S.News and World Report ranked Colorado Springs the third best place to live in the country. These are the underpinnings of the stable Retail Market.

Market vacancy rates increased slightly from 4.5%at the end of Q2 to 4.86%, primarily from national store closings and relocations to newer construction. Overall market triple net rental rates continued their slow climb, rising from $14.22 NNN to $14.27. Absorption increased from 123,569 SF at the  end of Q2, to 319,496 SF for Q3. Deliveries also increased from 88,551 SF for Q2 to 234,010SF for Q3. Most construction today is not speculative. Larger tenants entering the market for the first time primarily do so via new construction.

Sales tax receipts for the 3rd Quarter document the stability of the retail market as well. Receipts were up 3.37% for the month of July, and 7.24% for the month of August. Taxes were down .16% for the month of September. Restaurants had the largest monthly sales increases in all three months while retail and grocery stores had the largest percentage increases in August and September. Interestingly, automotive sales decreased in all three months.



LAND

1st Quarter Highlights 

♦ Catering to the continued growing need for more affordable for-sale housing ($350,000 and less) and for-rent housing ($1,000/per month or less) throughout the market will be the primary trend in 2019 and for the foreseeable future.

♦ Many home builders are focusing on purchasing land for affordable, for-sale and lease, high-density attached (townhomes and duplexes 6 to 12 units per acre) and detached residential (single family homes 6 to 10 units per acre) product.  Also, new construction for condominiums have returned to the market for the 1st time since 2006.

♦ Demand for new homes remains high and steady, however an increase in building permits from 2018 are not likely in 2019 because of the continued labor shortage for both lot development and home construction.  Additionally, the entitlement process has slowed down and requires typically more than 12 months to complete entitlements.  These factors continue to increase prices for new and resale homes.

♦ Single family building permits remain dropped approximately 27% in the first quarter of 2019 compared to the 1st quarter of 2018.  The primary reason was builders pulled extra permits at the end of 2018 to avoid new building standards and costs that will be required in 2019.  The number of permits is still expected to exceed 3,500 permits in 2019.

♦ Apartment rental vacancies dropped to 5.9% and lease rates continue to increase.  The average rent of $1,171.62/per month in the 1st quarter of 2019, which set a new record for Colorado Springs.
 
The announcements of the arrival of regional headquarters for In and Out Burger and a regional distribution center for Amazon has put Colorado Springs on the national map as one of the most desirable and best places to live in the United States.  Additionally, expansion and further investment by existing firms in the area further reinforce the excellent long-term prospects for the Colorado Springs market.

Residential land, platted and finished lot inventories remain very tight and are 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.  High density attached and detached single-family homes 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.

The need for apartment land continues to be strong and is expected to grow 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 $7.00/sf or more and vacancy rates in the 6% range.  New for-rent single-family and townhome projects have been announced with many new out-of-state developers.  The downtown rental market continues to be a growing segment with new projects under construction and recently announced commercial projects and restaurants in the area.

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 industrial land market may be the next “best real estate opportunity” in the Colorado Springs/El Paso County real estate market.

The Colorado Springs/El Paso County has seen increased interest and activity from new home building companies, consumers, investors and developers from other large US markets that have become saturated and over-priced.  Our local market has proven it is at a sustainable growth rate because the market has yet to hyper-inflate and is considered one of the best values in Colorado and the western United States, as it has been for the past 36 months.  The remainder of 2019 looks to continue its upward trend at a steady pace and is expected to do so for the next couple of years.