Market Reports
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Office 2nd Quarter 2017
Industrial 2nd Quarter 2017
Investment 2nd Quarter 2017
Retail 2nd Quarter 2017
Land 2nd Quarter 2017
2017 Colorado Springs Forecast
Residential 2nd Quarter 2017

Market Reports

OFFICE

The Colorado Springs Office market saw its third consecutive quarter of positive absorption continuing a positive trend that should continue through the second half of 2017.  Overall vacancy continued its steady decline.  Average asking rents remained stagnant. 
 
Absorption
Net absorption was positive 136,384 square feet in the second quarter 2017. It was positive 114,466 square feet in the first quarter 2017, and positive 114,039 square feet in the fourth quarter 2016.
 
Vacancy
The office vacancy rate in the Colorado Springs market area decreased to 11.0% at the end of the second quarter 2017. The vacancy rate was 11.5% at the end of the first quarter 2017, 11.9% at the end of the fourth quarter 2016, and 12.2% at the end of the third quarter 2016.
 
Rental Rates
The average quoted asking rental rate for available office space, all classes, was $15.44 per square foot per year (Full Service) at the end of the second quarter 2017 in the Colorado Springs market area. This represented a 2.7% decrease in quoted rental rates from the end of the first quarter 2017, when rents were reported at $15.87 per square foot. The average quoted rate within the Class-A sector was $20.68 at the end of the second quarter 2017, while Class-B rates stood at $14.72, and Class-C rates at $11.71.
 
Forecast
The positive momentum in the office market will continue through the remainder of 2017 bolstered by job growth.



INDUSTRIAL

The Colorado Springs Industrial market hasremained positive over the Second quarter of 2017 and we have seen further someimprovements over the healthy first quarter of 2017.

 

The continual fluctuation of the overallIndustrial vacancy rates which we have seen over the past couple years hascontinued through the second quarter 2017 and was recorded at 9.2%. This is a0.2% decrease from the first quarter 2017 and a large decrease from 9.7%, whichwas recorded at the end of the fourth quarter 2016.   The Flex sector vacancy rate had a nominalincrease to 17.9% compared to the Warehouse sector which continues to record amuch lower vacancy rate of 7.2% at the end of the first quarter 2017.  

 

The overall net absorption for the ColoradoSprings Industrial market recorded positive 72,056 square feet for the secondquarter of 2017.   The Warehouse sectorremains strong with a net absorption of positive 78,240 square feet, whereasthe Flex sector recorded a net absorption of negative 6,184 square feet at theend of the second quarter of 2017.

 

The average quoted asking rental rates for theoverall Industrial market saw a large increase from $6.90 per square foot (NNN)at the end of the first quarter 2017 to $7.48 per square foot (NNN) at the endof the second quarter 2017.  This is thesecond large increase and represents a total increase of approximately 16% fromthe fourth quarter 2016.   Thesubstantial increase is due to the Flex sectors quoted rental rate at the endof the second quarter 2017 which was recorded at $9.27 per square foot (NNN),this compares to the Warehouse sectors quoted rental rate of $6.77 per squarefoot (NNN).

 

The rental rates and low vacancies are now on apath to justify new construction which we are now seeing this being reflectedin the amount of Industrial space being completed and spaces underconstruction.  A majority of the constructionis focused on smaller industrial facilities which we saw three buildingcompleted during the second quarter 2017 that total 27,400 square feet ofindustrial space.   There is, however, atotal of 163,440 square feet under construction with one of the facilitiesbeing a 131,440 square foot facility.


The overall industrialmarket continues its trend of slight increases, but the demand for smallerspaces continues to drive the market and pose challenges for tenants and buyerswith the lack of good options.   Asrental rates continue to increase and vacancies decrease, along with theinevitable increase in new construction, we expect this trend to keep on itssteady path through the remainder of 2017 and into 2018.
 
 
INVESTMENT

The multifamily investment market remains veryactive with local, regional and national groups competing for qualityassets.  The recent sale of BonterraLakeside, a 156-unit apartment complex in the SW area, for $28.6 million showsthe multifamily investment market continues to be very competitive.  Coughlin & Co acquired the assetincreasing Coughlin’s  holdings inColorado Springs to over 720 units.  Itwas reported there were more than twelve groups competing for the asset withfifty percent of the potential buyers new to the Colorado Springs market.  Bonterra was acquired by Griffis-Blessing in2012 for $16.5 million. 

The trend to “repurpose” existing buildingscontinues with the recent sale of Tiffany Square.  The 184,219 square foot office propertylocated at I-25 and Corporate Drive was acquired by Amerco who representsU-Haul.  Plans are to convert vacantspace for UHaul’s use.

It appears there will be another strong year offinancing opportunities based on strong economic growth and solid marketfundamentals.  This will continue to fuelthe appetites of investors seeking to place money and acquire well positionedproperties.  Increased investor demandand low interest rates are expected to continue through the balance of 2017.  Although there is some caution creeping intothe capital markets, this is not yet a factor in markets such as Denver withcap rate compression and competition among investors for quality assets stillvery strong.  This bodes well forColorado Springs as investors perceive the local market as a great alternativeto Denver.

Sales of older, well located properties remainsstrong with the potential for owners to provide strategic upgrades to attracttenants and increase rents.  Severalproperties in the North Academy corridor have been sold at attractive prices tostrong investment groups.  Theseindividuals and investment groups have completed significant upgrades toproperties once languishing in the current market.   This trend will continue as newer Class Aand B assets  trade at high prices andrelatively low cap rates.

Forecast

·       Owner/usersales will remain strong with attractive financing still available forqualified borrowers.

·       Investorconfidence will remain high during the last half of 2017 barring any unforeseennational crisis. 

·       Moreolder buildings will be purchased and converted to alternative uses.

·       Interestrates will continue to gradually escalate. This will equate to higher borrowing costs that will affect commercialreal estate prices and capitalization rates. There will be no significant impact on the market until 2018.

·       Caprates will hold steady or decline through 2017 in markets that are attractingmultiple investors competing for well located assets.



RETAIL

Any index over 100 indicates there are localjobs to match new home owners and the Colorado Springs index was 251, versusthe city next closest in value, Charleston, South Carolina at 225.  High in-migration and low unemployment ratescontinue to fuel the housing sector, which should fuel the retail sector.  However, retail fundamentals continued theirslow drop first seen in Q1 of 2017. Overall market vacancy slid from 6.1% to 6.3% by the end of Q2.  Vacancy was 5.6% at the end of 2016, so theslide in six months is a point and a half. Net absorption was positive at 40,624 SF at the end of Q2.  162,591 SF remain under construction at theend of Q2.  Average asking rental ratesdeclined from $12.68 at the end of Q1 to $12.63 at the end of June.  In the first quarter rents were up over theyear end 2016 rate of $12.47.  The totalretail square footage in the market is 40,753,622 Square Feet.

New retail lease activity in Q2 mirrored theslow start in Q1.  The largest Leasessigned were the 7,000 SF Pins & Needles at Southpointe Plaza, the  5,500 SF Verizon Lease at 4302 Austin BluffsParkway, and the 4,986 SF Lease by Muse Comics at 1330 N. Academy Boulevard.Since the end of 2016, average asking rental rates have decreased Downtown, inthe North and Northeast Quadrants, the Northwest Quadrant and the SouthwestQuadrant.


Retail InvestmentSales are down for the year compared to 2016, and cap rates have risen from anaverage of 7.7% in 2016 to an average 8.51% for at least Q1 2017.  Lower lease rates may be impacting this aswell as the perception that Colorado Springs remains a bargain market and isattractive to investors for that reason.


LAND

  2nd Quarter Highlights 

♦ Singlefamily building permits in at the end of the 2nd quarter are nearly identicalto the number of permits pulled from January to June in 2016.  The number of permits expected to be pulledin 2017 in El Paso County is expected to match the number of permits pulled in2016.


♦ Demand for new homes is high but no increasesin building permits are expected for the year because the labor shortage islimiting the number of lots that can be developed and the number of homes thatcan be built in the market today thus resulting in new home and resale homesprices continuing to rise because demand is outpacing supply.   


♦ Apartment rental vacancies have dropped to lessthan 4% in 2017 and rates are expected to increase by 10% or more in 2017 over2016.


♦ Construction of multi-family attachedresidential properties (townhomes and duplexes) for sale has continued to growbecause of the need for more affordable housing ($300,000 and less) in themarket.  

The Colorado Springs/El Paso County land marketis still considered to be one of the best values in the State of Colorado as ithas been for the past 36 months.  Thearea continues to attract new home building companies, buyers, investors anddevelopers into the market because the larger US markets have become saturatedand over-priced.  Speculative purchasesof land have finally made a comeback for the first time since 2012, with manynew out-of-area and out-of-state buyers exploring the market.

Residential land, finished and platted lots,have dominated the land market since 2012. The residential lot and land market continues to remain tight and isexpected to remain that way for the next couple of years.   The demand for new homes has risen becauseof the severe under supply of existing homes for sale throughout the market.

High-density, single-family homes and theresurgence of attached multi-family for-sale homes have been the most rapidlygrowing segments in the local and national markets because of the pressure fromconsumers for dwellings that can be purchased for in the $220,000 to under$320,000 range.  Land contracts and landpurchases to accommodate this type of product increased substantially in thefirst half of 2017 and is expected to continue to grow for the foreseeablefuture.  Nearly all large local builderswill be introducing smaller, more affordable homes in 2017.  Growth in this for-sale product category willmost likely only be limited by continued concern about construction defectsordinance reform which has improved, but has not been solved and is stillconsidered a risk by many builders.

Colorado Springs continues to benefit fromDenver being one of the best markets in the United States.  The need for apartment land continues to bestrong in specific market areas of Colorado Springs with new properties goingunder contract for new apartment projects with out-of-state developers atmarket rate prices of $6.00/sf or more. This trend is expected to continue because of the less than 4% vacancyrate in the County and the area rental rates being over 30% less in ColoradoSprings as compared to the Denver area markets.

Industrial land has begun to make a comeback in2017 with land being purchased by developers and users for construction of newbuildings to satisfy market expansion requirements in the area for this category.The industrial land market is expected to get stronger, especially on the northend of the County which can service both the Colorado Springs and Denvermarkets. The office land market has lagged since 2006 and is not expected toshow much improvement anytime soon because of the excessive vacancy rates inthis market segment. 


The 2nd half of 2017looks to continue its upward trend at a steady pace for the next couple ofyears.  The labor shortage and extendedtime for approvals and construction will limit growth and keep the market frombeing over-supplied however, demand will drive-up land prices.  As compared to the 2008 to 2012 marketperiod, these are good market problems to have.


RESIDENTIAL

2nd Quarter Highlights

♦  Though we saw higher summer temperatures, the mortgage rates remainedlow and affordable for most buyers.  Thiskept a strong pace into 2017’s second quarter for home sales with over 4,850homes selling in El Paso County.  Thishas surpassed 2016’s second quarter by 3%, which at its time set a 10-yearrecord with just over 4,700 home sales.

♦  The summer high season saw an increase in inventory absorption.  Last year a home stayed on the market for anaverage of 30 days during the second quarter. This year that time has been cutby 22% with homes selling after 24 days on average.

♦  Along with increased sales volume and an increased pace, the median homeprice has increased by nearly 8% from 2016 to 2017.  Only a year ago at this time it was $248,000and has climbed to $268,500.  With a pacelike this the Pikes Peak region continues to be a poster child of the strongrecovery we are seeing in the housing market.

Statistical Summary

The residential market in El Paso County hascontinued its upward momentum.  Accordingto a report issued by Metrostudy in June, the recovery nationwide of homevalues from the Great Recession is complete. In April 2017, Zillow reported that the national median home value was$198,000, up 7.3% year-over-year, beating the value at the height of the marketin 2007 by $2,000.  Home sales alsoreflect the new paradigm. In the first quarter of 2017, Metrostudy dataindicated that the median price of existing homes sold was $199,500, an 8.4%increase over the same period the previous year.  The new home median price also was higher,rising 3.2% to $308,100 for the same period.

With the market heating up, the concern hasbeen raised for new home affordability. In markets larger than Colorado Springs, the premium for new homes overresale is a challenge, but in some markets the list price of existing homes onthe market is far outstripping the median home value in the market, which canlead to a more attractive scenario for home buyers to pay a small premium toget into a new home.  In several nationalmarkets a mortgage on a new home would require more than 50% of householdincome.  This is considerably larger thanthe recommended allotment for a home purchase.

In the Metrostudy report, consideration wasgiven on the current state of new and existing home sales prices and thecurrent spread between median income and the percent required to buy a home.

It will take 50% of a median income earner’sbudget to buy a median-priced new home in Los Angeles, while there wasvirtually no new home premium in Austin and Boston markets in the firstquarter.   Miami has the largest premiumwhere a new home requires 41% of income. By comparison, Colorado Springs requires 25% of a median income earner’sbudget to buy a median-priced new home.


On the upside, thecontinued availability of low mortgage rates is supporting home ownershipdesire as homes are still more affordable in many markets than they werehistorically.  And, purchasing a home isstill an attractive option over renting in most markets, as rent consumes 29.2%of renters’ incomes, nationally.