Market Reports
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Office 1st Quarter 2017
Industrial 1st Quarter 2017
Investment 1st Quarter 2017
Retail 1st Quarter 2017
Land 4th Quarter 2016
2017 Colorado Springs Forecast
Residential 1st Quarter 2017

Market Reports


OFFICE

The Colorado Springs Office market began the year with strong positive absorption continuing the momentum of the previous quarter with vacancy rates continuing to decline.

Absorption
Net absorption for the overall Colorado Springs office market was positive 84,684 square feet in the first quarter 2017. That compares to positive 112,315 square feet in the fourth quarter 2016, negative (70,560) square feet in the third quarter 2016, and negative (18,559) square feet in the second quarter 2016. Though we had two quarters of negative absorption in 2016, we believe the numbers over the last year show a positive trend that we expect to continue through 2017.

Vacancy
The office vacancy rate in the Colorado Springs market area decreased to 11.6% at the end of the first quarter 2017. The vacancy rate was 11.9% at the end of the fourth quarter 2016, 12.2% at the end of the third quarter 2016, and 12.0% at the end of the second quarter 2016.  Vacancy has maintained a consistent downward trend for the last several years.
Rental Rates
The average quoted asking rental rate for available office space, all classes, was $15.87 per square foot per year at the end of the first quarter 2017 in the Colorado Springs market area. This represented a 4.6% decrease in quoted rental rates from the end of the fourth quarter 2016, when rents were reported at $16.64 per square foot.  Despite the activity in the office market, average rental rates have remained relatively flat over the past several years.

Forecast
The strength in job creation will continue to benefit the office market through the remainder of 2017.
 
INDUSTRIAL

The Colorado Springs Industrial market began 2017 in a very similar manner to the start of 2016, but we saw slight improvements throughout the overall Industrial market and increased demand, particularly with small Warehouse space.  However, because the Flex sector continues to lag the Warehouse sector, the overall Industrial market statistics do not represent how well it is doing, particularly with the high demand small Industrial spaces.
The overall Industrial vacancy rate landed at 9.4% at the end of the first quarter 2017, which is down from 9.7% at the end of the fourth quarter of 2016. Interestingly, the 9.4% vacancy rate was the same rate we saw at the end of the first quarter of 2016.  The Flex sector remains high at a vacancy rate of 17.8% compared to the Warehouse sector, which recorded a much lower vacancy rate of 7.5% at the end of the first quarter 2017.  These vacancy rates, however, do not reflect the strength of the market for Industrial spaces 10,000 square feet and less, where we are seeing the vacancy rate dipping slightly below 4%.

The overall net absorption for the Colorado Springs Industrial market for the first quarter of 2017 was positive 57,120 square feet which is due to a positive 81,693 absorption within the Warehouse sector.  The Flex sector saw a negative 24,573 square feet at the end of the first quarter of 2017, compared to positive 17,726 square feet at the end of the fourth quarter 2016.

The average quoted asking rental rates for the overall Industrial market continued to increase to $6.90 per square foot (NNN) at the end of the first quarter 2017, marking a substantial increase from the fourth quarter 2016, which recorded $6.44 per square foot (NNN). 

The rental rates remain slightly below what is required to justify new construction, but due to the large demand for small Industrial spaces, we are beginning to see some investors, owners and developers start the process and build smaller Industrial facilities.  There were no new completions or delivers for new space at the end of the first quarter 2017, but there is approximately 37,400 Square feet under construction.  There was approximately 36,000 square feet completed at the end of the fourth quarter 2016, and we expect the new construction to continue to increase over the next few quarters.

The industrial market remains steady and strong with demand for smaller spaces driving the market, which we expect this demand to trickle down for larger spaces to further tighten up all sectors of the market.
 
 
INVESTMENT

Sales volume for commercial real estate in Colorado Springs slowed in the 1st quarter of 2017 as compared with the 4th quarter of 2016.  Owner/user sales accounted for 27% of all sales volume in the 1st quarter with 73% of all properties sold to investment groups.  Sales of commercial real estate are expected to increase at a more modest pace in 2017 after the high volume of sales recorded in 2016.  Record setting sales of multi-family assets continue as vacancy rates are still below 5% and rental rates are escalating.  The opportunity to drive rent growth in existing multi-family properties with property upgrades has also attracted buyers to invest in older apartment properties. 

The sale of 2860 S Circle Drive for $18.00 psf to a Denver investor is a clear indication of confidence in the Colorado Springs market.  The property, located at I-25 and Circle Drive and built in 1972, was approximately 35% leased at the time of sale.  These value-add investors typically acquire properties with long-term hold investment strategies..  They focus on the opportunity to add value based on location, renovation costs and market dynamics and take advantage of markets with improving market fundamentals such as Colorado Springs.  There has also been a trend to repurpose existing properties that have experienced high vacancies, especially in submarkets such as the SE office market. Two large office properties in the southeast market have been targeted for alternative uses.  360 Command View, 87,577 SF, and 1795 Jet Wing Drive, 70,466 SF, were both built in the early 2000’s for defense contractors.  As defense contractors have consolidated and vacancy rates have escalated in the southeast office market, owner/users have seized the opportunity to buy Class A and B buildings at competitive prices. 360 Command View will be sold to a charter school.  1795 Jet Wing Drive has been sold to Aspen Pointe, a company that provides behavioral health, education services and career placement.  This trend will continue for properties with high vacancy rates.

Owner/users looking for properties to acquire while interest rates are relatively low are seeing escalating asking prices.  Prices for properties in the in core and perimeter of the Central Business District typically average well over $100.00 psf.  The Downtown Partnership recently released its second annual state of downtown Colorado Springs report in which over $600 million in public and private investments are in process or completed in the downtown area.  Construction of several multi-family projects in the downtown area signals improving market conditions with lower vacancies and escalating rents in both retail and office.

Forecast

Investors seeking strong Class A and B assets as well as buyers looking for value-add opportunities will continue to target Colorado Springs for acquisitions.

Commercial Real Estate sales are predicted to increase at a more modest pace in 2017 primarily due to the possibility of higher lending rates. 

The southeast office market experienced the highest vacancy rates during the recession.  There will be more absorption in 2017 if the new administration commits to expand the military.  Investors are becoming more willing to acquire properties with high vacancies in this submarket.

Interest rates will continue to gradually escalate.  This will equate to higher borrowing costs that will affect commercial real estate prices and capitalization rates.

Older properties will high vacancy rates will be repurposed as the cost of new construction escalates.


RETAIL

Demand for housing, portending future shoppers, predicated an increase in sales of building materials with subsequent sales tax increases of 40.7% month over month on building products.  Overall though, the Colorado Springs Retail Market saw a slight decline in conditions in Q1 of 2017, with the vacancy rate going from 5.6% at the end of Q4 2016 to to 6.1% by the end of Q1 2017.  Net absorption was negative at 100,982 SF primarily due to 5 buildings with 100,302 square feet being delivered to market.  388,766 square feet was still under construction at the end of Q1.  Of the square footage under construction, 138,000 SF are in the  East Quadrant and 250,766 are in the North and NorthEast Quadrants of the city.  Vacant sublease space increased by 27,122 SF.

So far in 2017, retail lease activity has been slow.  The largest leases signed in Q1 were Muse Comics at 4,986 SF, Bob’s Mattress at 4,200 SF and Artisan Vaper at 3,817 SF. Average asking rental rates were up to $12.68 annually per square foot, over $12.47 at the end of Q4 2016  and $11.75 at the end of Q3, 2016.  Some of the increase is due to higher asking rental rates on new construction.  Nevertheless, it is a 7.33% increase over a year ago.

The largest investment sales to date in 2017 have been C.B. Potts at $4,550,000 in January, and Murphy Express at $4,700,000 in March.  Increase in interest rates by the Federal Reserve may have played into the lack of investment sales, as well as unknown forthcoming changes in the federal tax code that might make it prudent to wait. Although the future of brick and mortar retail is still a work in progress and is likely to be for a long time, once the tax situation is clarified, Colorado Springs will continue to be an attractive underpriced investment market.



LAND

4th Quarter Highlights 

♦  Single family building permits totaled 3,237 in 2016 which was an increase of 18.2% over 2015.  This was the first time since 2006 that permits exceeded 3,000 permits.

♦  Announcements of new projects and commencement of construction of residential housing, for sale and rental product, in the downtown area was a bright spot in the economy in 2016 with many new projects coming out of the ground in the 4th quarter. 
 
♦  Apartment rental vacancies continued at less than 4% and over 1,424 new apartment unit permits were pulled in 2016, the most since 2002.  Monthly rents rose more than 9% over last year’s rates, and it is expected that rents could rise by another 10% in the next 12 months.

♦  Area home builders selling homes north of Woodmen Road continue to see substantial increases in potential home buyer traffic from the Castle Rock and South Denver areas that are looking for more affordable housing.  Colorado Springs home builders are advertising in Castle Rock and Denver, with very positive results.

♦  Denver area and national investors have begun focusing on the Colorado Springs/El Paso County markets as viable long-term investments, both in land and income property investments.  The area is considered one of the best values with potentially the most upside in Colorado.  

Residential land, primary finished lots, continued to dominate the land sales in the 4th quarter of 2016 mainly because many of the finished lots that were promised in the 2nd and 3rd quarters were finally completed and delivered.  Not since the mid 2000’s have more finished lots been delivered than were delivered in 2016.  Nearly all of the major home developers participated in delivering these finished lots.  It is expected 2017 will see these same home developers surpassing the 2016 numbers.  However, many believe that there were fewer lots delivered in 2016 than projected, because the circumstances necessary to affect finished lot deliveries were less than ideal.  Longer entitlement processing by the County and the City, limited labor supply, and limited qualified contractor availability constrained the finished lot supply in the majority of the market areas.  It is expected that developers and home builders are positioned to exceed 3,500 permits in 2017 in spite of the fact that costs in nearly every category of lot development have seen more than a 10% increase in the last six months of the year.  The increased costs are expected to persist in 2017.
 
Multi-family for sale product, paired homes, and townhome construction continued to improve in 2016 with nearly a 25% increase in permits during the year.  This category is expected to substantially grow in 2017 because of the availability of land for this product type, and the need for more affordable housing in the area.  The City’s construction defect reform has contributed to the growth in these categories.  However, condominium development is completely non-existent, and expected to stay that way until there is a change in State law which currently makes this type of construction economically impractical.
 
During the 4th quarter, out-of-town and out-of-state investors, home builders and developer’s interest in the market continued to increase from the beginning of 2016. This is a result of Colorado Springs’ less expensive real estate in all market categories and the proximity to the Denver and Northern Colorado markets.  Colorado Springs continues to benefit from Denver being one of the best markets in the United States.  The Denver area markets have shown little slow down and new jobs continue to be created.  The Denver and Northern Colorado markets have become saturated, making it difficult to obtain reasonable investment returns in these areas.  This is a significant benefit to Colorado Springs since the Colorado Springs market prices in every land category is typically 20% - 30% less than anywhere in the greater Denver market area.
 
The 4th quarter of 2016 was the end of a great year; the best land market in the last decade.  The area market returned to pre-recession (2008) pricing in nearly every land category.  The land market in 2017 is positioned to be the best land market since the early 2000’s.  Area job growth is expected to be the best in the state in 2017.  The ramification of this stellar growth will result in a greater influx of new residents, more transactions and an improved market.


RESIDENTIAL

1st Quarter Highlights

♦  The new year opened with higher, yet still affordable mortgage rates. 2017’s opening quarter reflected the confidence buyers continue to have in our market with over 3,200 homes selling in El Paso County. This has surpassed 2016’s opening quarter by 5%, which at its time set a 10-year record with just over 3,000 home sales.

♦  Home sales are already setting a new pace for a new year. A recent report from Realtor.com noted that by the end of the 1st Quarter Colorado Springs ranked No. 7 in the country’s top 20 hottest medium- to large-sized markets. This level of attention has the numbers to back it up. Last year a home stayed on the market for an average of 57 days during the 1st Quarter. This year that time has been cut by 25% with homes selling after 43 days on average.

♦  Along with increased sales volume and an increased pace, the median home price has increased by nearly 9% from 2016 to 2017. Only a year ago at this time it was $230,000 and has climbed to $252,000. With a pace like this the Pikes Peak region continues to be a poster child of the strong recovery we are seeing in the housing market.

Statistical Summary

These statistics are clear indicators of the increasing demand for properties in El Paso County.  These statistics are also indicators of the increasing demand for lenders who can fund these transactions.  For example, of all the real estate transactions handled by Quantum Residential Group in 2017’s 1st Quarter, each deal was funded by a different lending entity.  Some of these mortgage brokerages are new companies coming into existence at a time when some borrowers are less concerned with the history of the company and more concerned with finding the right loan for their circumstances.  Other companies have a proven history in the industry and are now expanding into additional markets.  Whatever the motivation for these lending institutions, the buyers are still making their decision based on the product available.  A loan officer’s ability to provide good service and consistent communication is not enough to win over a client.  This professional standard is the minimum buy-in to even play at the table.  The Mortgage Network, for example, has been serving Colorado for over 30 years, but is now expanding into Colorado Springs with a loan product asking only 1% down from the borrower while kicking in the remaining 2% themselves, effectively giving the buyer an instant equity boost to their property.  We know of one credit union, on the other hand, that draws strong loyalty from their members because they know their loans will not be sold and serviced by an unfamiliar entity.  Even with such loyalty, this credit union works to keep their loan product competitive rather than resting on their laurels.

With such a large pool of lenders from which to choose, and expanding every week, Realtors are tasked more than ever to have a working knowledge of the latest products being offered and to make those available to their buyers.