Market Reports
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Office 1st Quarter 2018
Industrial 1st Quarter 2018
Investment 1st Quarter 2018
Retail 1st Quarter 2018
Land 3rd Quarter 2017
2018 Colorado Springs Forecast
Residential 1st Quarter 2018

Market Reports

OFFICE

Absorption
Net absorption for the overall Colorado Springs office market was negative (19,465) square feet in the first quarter 2018. A single tenant vacating 104,000 square feet at 655 Space Center Drive had a large impact on the absorption for the quarter. The net absorption for 2017 was also slightly negative but, again, there was a single building that had a very large impact on that number. 2424 Garden of the Gods Road contained long-vacant space that was under long-term lease agreements those leases expired in 2017 causing roughly 285,000 SF of negative absorption. When that negative absorption is removed from the net absorption total, 2017 looks a lot more positive than is indicated by the attached charts.

Vacancy
The office vacancy rate in the Colorado Springs market area remained at 10.9% at the end of the first quarter 2018. The vacancy rate was 10.9% at the end of the fourth quarter 2017, 10.7% at the end of the third quarter 2017, and 10.7% at the end of the second quarter 2017. We’ve seen a slight up-tick in vacancy over the past few quarters. Again, there were a few isolated factors that contributed to this but we expect the downward trend in vacancy to continue.

Rental Rates
The average quoted asking rental rate for available office space, all classes, was $15.47 per square foot per year at the end of the first quarter 2018 in the Colorado Springs market area. This represented a 0.3% increase in quoted rental rates from the end of the fourth quarter 2017, when rents were reported at $15.43 per square foot (rates shown are “Full Service”). Deliveries and Construction Similar to fourth quarter 2017, there was no new space was completed in the Colorado Springs market area in the first quarter 2018. The only project under construction at the end of first quarter 2018 was SEC Interquest Pkwy, a 109,800-square-foot building with 1% of its space preleased.

Overview
There seems to be quite a bit of internal growth coming from the market. What we haven’t
seen yet are any major employment announcements. We expect that these  announcements are coming and the office market will finally show some meaningful gains.
Increased activity in the DOD market. Interest in acquisitions of older well-located office buildings if priced competitively.

Steady flow of showings, and slight absorption, decreasing vacancies in the office sector expected.


INDUSTRIAL

The Colorado Springs Industrial market vacancy rate dipped back to normalcy in the first quarter 2018 and overall rental rates continue to slowly increase. The signs that new construction is needed throughout Colorado Springs is ever increasing as demand and lack of quality spaces continue to be limited.

The overall Industrial vacancy rate dropped from 10.7% at the end of the fourth quarter 2017 to 9.4% at the end of the first quarter 2018. This is a substantial drop over one quarter, but the 9.4% represents an average rate we have seen over the past few years and the high 10.7% rate is corelated to an increase of new product being delivered at the end of the fourth quarter 2017. The Flex sector vacancy rate has begun to drop and recorded a vacancy rate of 14.8% at the end of the fourth quarter 2018, which compares to the first quarter 2017 which was 17.8%. The Warehouse sector remains steady at a vacancy rate of 8.1% at the end of the first quarter 2018.

The overall net absorption for the Colorado Springs Industrial market recorded positive 164,469 square feet at the end of the first quarter 2018, with the Warehouse sector totaling a positive absorption of 242,602 square feet and the Flex sector recording negative 78,133 square feet.

Rental rates for the Industrial market continue to increase, which the overall Industrial market was recorded at $8.09 per square foot (NNN) at the end of the first quarter 2018. The Flex sector quoted rental rate was $9.84 per square foot (NNN) and the Warehouse sector recorded a quoted rental rate of $7.40 per square foot (NNN) at the end of the first quarter 2018, both increases over the fourth quarter 2017.

New construction continues to be a trend and highlight for the Industrial market with three buildings totaling 160,040 square feet of space were completed during the first quarter 2018 and there is a total of 182,300 square feet under construction. The largest completion was the project located at 2570 Zeppelin Rd which consists of 131,040 square feet and is 100% occupied. We are continuing to see smaller projects 25,000 square feet and less begin to break ground, both build-to-suit and speculative projects, which we have been anticipating over the past few quarters.

Industrial building sales transactions, over 15,000 square feet total, were down in 2017 due to a lack of options, recording 18 total transactions, compared to 2016 which reported a total of 25 transactions, but the average price per square foot had a nominal difference recording $66.12 per square foot in 2017 compared to $66.66 recorded in 2016.

With the vacancy rates continuing to decrease and further increases in rental rates, the trend for new construction is evident. This trend is expected to continue as owners and tenants require additional space with a lack of options both for sale and for lease.
 
 
INVESTMENT

Investors are searching for assets in markets that have “bottomed out” after the Great Recession. Improving market conditions and strong leasing fundamentals continue to attract investors to Colorado Springs. The North Academy submarket is a prime example of investor interest in acquiring older properties that can be improved and repositioned to capture new tenants and increase value. The recent sale of the Colorado First Building, 3204 N Academy Boulevard is a prime example. The property sold for $28.02 psf in 2013.
It sold for $88.96 psf in January 2018.

Class A properties remain a highly sought after asset class. A majority of the interest comes from institutional and out-of-town investors. Sales prices continue to escalate to 70% to 80% of replacement costs as market fundamentals improve.

Class B properties are becoming more attractive as vacancies are declining and rents are starting to rise. The North Academy submarket is one of several submarkets that experienced a significant downturn as retailers moved to Powers Boulevard, Interquest and Northgate to support the rapidly expanding housing market. Office buildings and retail centers experienced large amounts of vacancies as the migration to new markets caused occupancy to fall dramatically. We will see more retail and office properties sell to investors seeking to acquire value add assets in submarkets that are emerging from the recession.

Sales of multi-family properties continue to set records in Colorado Springs. The sale of The Willows at Printers Park for $41,000,000 is a strong indication of investor interest in the local market. The 220-unit apartment complex sold for $186,363/unit at a 4.76% cap rate. Apartment sales remain strong largely as a result of the strong economy and job growth, shift to renting by many baby boomers and continued interest by millennials in renting as opposed to purchasing homes. The burden of student loans and the challenge of adequate funds for a down payment also present challenges to millennials considering home ownership.

Single tenant investments and stabilized assets with long-term leases remain attractive to a large percentage of investors. Cap rate compression continues for properties with leases of 10 years or more with credit tenants.

Most economists are forecasting continued favorable economic conditions throughout 2018. Strong job growth and economic conditions combined with an abundance of capital available for real estate acquisitions will ensure interest in investment real estate will continue for the foreseeable future.

Forecast

• The strong economic picture may push interest rates higher and faster than originally expected in 2018.
• Escalating prices may affect sellers’ decision to sell commercial real estate. Many owners want to take advantage of selling at higher prices; however, some owners are reluctant to sell with the lack of available properties for reinvestment.
• Investors will continue to search for assets in smaller markets with strong population and job growth in search of better pricing and higher yields.
• There will be further cap rate compression for institutional quality assets such as large multifamily investments.

RETAIL

A sound indicator of local economic health is seen in sales taxes. February’s sales taxes in Colorado Springs increased 6.2% year over year while increases in December and January followed four months of decline. Any increase over 2% is considered favorable according to the University of Colorado at Colorado Springs Economic Forum. In February, the largest month over month increases of all categories were seen in Grocery Stores (16.32% increase) and Clothing Stores (16.12%.) Both are good signs for the health of local retail real estate.

Contrary to these indicators, vacancy in the retail sector increased slightly in Q1 of 2018 from the prior year. 5.1% at the end of Q4 2017, vacancy went up to 5.5% in 2018. In 2017, vacancy decreased quarterly. Net absorption was also negative, with an additional 145,681 square feet going on the market. Absorption was positive in the last two quarters of 2017; coming in at 401,024 in Q3 and 294,313 in Q4. At the same time, the amount of vacant sublease space has continued to increase over the last four quarters. Currently, 77,352 square feet of vacant sublease space are on the market.

While vacancy increased, quoted asking rental rates are on the rise. Average market rental rates were $13.73 at the end of the first quarter of 2018, up from $12.69 PSF at the end of 2017. The increase was 8.2% for the current quarter and an 8.52% increase from a year ago.

27,930 SF of new construction were completed in Q1 of 2018, comparing to 418,842 SF in the last four quarters. 160,106 SF remained under construction at the end of Q1 2018.

Retail leasing was constant in Q1, but the largest lease was 8,400 SF reflecting the season. The year is expected to bring more good retail news.


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

1st Quarter Highlights

♦  2018’s opening quarter reflected the steady demand from buyers in our market with 3,248 homes selling in El Paso County. This barely outperformed 2017’s opening quarter of 3,246 home sales. This does not reflect reduced demand, as much as it highlights the lack of supply. It is cyclical to see a lower inventory of resale homes in the winter market and see a general slowing of new construction completion during these colder months. Had more homes been in the market at the appropriate prices, we would have likely seen many more sales.

♦  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 looking to get into the right homes is captured in the latest pace of sales. Last year a home stayed on the market for an average of 43 days during the 1st Quarter. This year that time has been cut by 28% with homes selling after 31 days on average.

♦  Along with increased sales volume and 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 $252,000 and has rocketed to $282,000. With a pace like this the Pikes Peak region reflects a classic example of what happens to home values when the supply is low and the demand is high.

Statistical Summary

The report by U.S. News & World Report cited the low unemployment rate in Colorado Springs as one of the contributing factors for this high ranking. In a recent public speech,
Colorado Springs Mayor John Suthers spoke to this. “After a decade of very little job growth we have averaged about 8,000 new jobs per year for the past 2 years. And we are now beginning to experience significant wage growth. Our unemployment rate that was about 10% in 2010, dropped to the lowest in recorded history, reaching 2.5% this past year.  Colorado Springs now has approximately 13,160 job openings and 10,519 people looking for work. The median salary for posted jobs is $69,600. That’s about $4,500 higher than the median salary for Colorado… Effective workforce development will remain a very high priority for our community.” This employment vacuum will continue to draw people into our region which translates to more buyers coming into the market looking for a home.

These statistics and the aforementioned report are clear indicators of the increasing demand for properties in El Paso County. Already buyers in the median price point find themselves competing against multiple offers for an average-quality home. The inevitable result has been bidding wars that have sometimes resulted in a purchase price exceeding the initial asking price by as much as 10%. This experience can be discouraging for a first-time homebuyer, who usually can’t qualify for a larger loan nor make up the difference with cash. If a buyer can’t compete on purchase price, another appeal to a seller is to offer an earlier closing date. One of Quantum Residential Group’s lenders now offers a product in which they can fund a loan in only 10 days, instead of the market standard of 30 days. The buyer goes through the same underwriting process, but it is done before identifying a property. Upon receiving conditional approval they can then begin shopping for the right home. Once they have the contract on the home the appraisal is ordered, received, and they close 10 days after the contract was signed. This product has already proven to be a game changer for those eager to buy a home in one of the best places to live, Colorado Springs.