Market Reports
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Office 2nd Quarter 2019
Industrial 2nd Quarter 2019
Investment 2nd Quarter 2019
Retail 2nd Quarter 2019
Land 1st Quarter 2019
2019 Colorado Springs Forecast

Market Reports


OFFICE

Absorption
Net absorption for the overall Colorado Springs office market was positive 128,456 square feet in the second quarter 2019. That compares to positive 43,204 square feet in the first quarter 2019, positive 31,100 square feet in the fourth quarter 2018, and positive 201,987 square feet in the third quarter 2018. The uptick in net absorption reflects a an increasingly active office market in the second quarter of 2019. We expect to see modest but steady absorption for the next several quarters.

Vacancy
The office vacancy rate in the Colorado Springs market area dropped to 8.9% at the end of the second quarter 2019. The vacancy rate was 9.4% at the end of the first quarter 2019, 9.5% at the end of the fourth quarter 2018, and 9.6% at the end of the third 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 $16.44 per square foot per year (full service) at the end of the second quarter. This is up from $16.26 at the end of the first quarter 2019, but down from the $16.63 reported at the end of the fourth quarter 2018. 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 benefitted from increased rental rates.

Deliveries and Construction
There were 5,000 square feet of new office product delivered in the second quarter 2019, the first delivery of office since the fourth quarter of 2017. There were 144,171 square feet of office space under construction at the end of the second quarter 2019 (mostly comprised of the Victory Ridge development in the Northeast market).

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


INDUSTRIAL

The Colorado Springs Industrial market remains strong though the second quarter 2019, but the market may be experiencing a slight plateau. The plateau is largely due to the overall market strength, lack of quality Industrial product, and high demand for new industrial facilities. We are still seeing positive movement throughout most all of the market statics and unless more new construction doesn’t take place, the market will tighten further and begin to flatten out further.

The overall Industrial vacancy rate has now dipped down to 6.4% at the end of the second quarter 2019, which is a further drop from 6.7% at the end of the first quarter 2019. This is a very low vacancy rate and clearly shows the strength and demand for space in Colorado Springs. The Flex sector continues to lag greatly at 13.5% through the second quarter 2019 compared to the Warehouse sector, which was recorded at 4.8%. The flex product throughout the Colorado Springs market is proving to be functionally obsolete and most users and tenants require high ceilings, access for full size semi-trucks, and minimal office build-out. There are also a number of very large floor plates vacant in the flex sector, which is largely the reason for the vacancy rate to be so high for the flex sector.

At the end of the second quarter 2019, the overall net absorption for the Industrial market was recorded at negative 26,520 square feet, which is the first negative absorption since the fourth quarter 2017. The Warehouse sectors saw a negative 27,830 square feet of absorption, whereas the Flex sector saw positive 6,310 square feet of net absorption.

The average asking rental rates for the Industrial market, through the second quarter 2019, continues to gradually increase and was recorded at $9.52 per square foot (NNN). Flex sector recorded an average quoted rate of $11.73 per square foot (NNN) and the Warehouse sector recorded an average of $8.03 per square foot (NNN) at the end of the second quarter 2019. Both Industrial sectors have been increasing at a consistent rate over the past 11 years, but we may be expecting this to start tapering as we may be reaching a point where tenants are unable to support the high rent. The high rent, however, is nearing a point for investors and owners to justify the cost of new construction.

There was a total of 40 Industrial sales transactions reported in the second quarter 2019, with a total sales volume of $24,280,000 at an average price per square foot of $105.41. The sales were a healthy mix of both Investment and owner/user sales, but only one sale for a property over 20,000 square feet was reported, which was the 50,341 square foot facility located at 4870 Centennial Blvd for $6,000,000 as an investor at a 7.35 % CAP rate.

There were no Industrial projects completed in the second quarter 2019 and only 48,000 square feet reported to be under construction.

The overall strength of the Industrial market is making it difficult for tenants and business owners to find new locations to either expand or relocate, which some are forced into properties that are not ideal for the use or simply remain at their current location. This is leading to a lack of activity and movement creating a plateau effect, which we can expect to continue until more industrial product is delivered throughout Colorado Springs.


INVESTMENT

There is strong investor demand in all property types. Leasing fundamentals in the office market are sound as office vacancy falls below 10% for the first time in a decade. The absence of new construction and rising demand has forced industrial rents upward. Retail rents for new construction are upwards of $30.00 psf and multifamily vacancies are holding steady at 6%.

Developers have been wary of testing the market for new development in Colorado Springs. Office inventory cumulatively expanded by less than 0.5% between 2013 and 2018. With the absence of new product, absorption in the office market has been the strongest since 2013. Investors capitalized on this trend in the past few years by acquiring well located office buildings at competitive prices and then upgrading the buildings to attract new tenants. We are now seeing many of these properties being sold with substantial profits to the sellers.

Although there is some concern that we are in the longest ever sustained economic growth cycle, household formation remains strong and vacancy rates in multifamily remain at historic low levels. This is fueling the need for additional apartment units. Rent growth in Colorado Springs has been some of the strongest in the nation with average annual increases of almost 7%. Multi-family investors continue to target Colorado Springs for acquisitions resulting in record setting sales for both volume and price per unit. Cap rates have been in the sub 6% range for both well located, newer projects and older projects with upside potential.

Market cap rates for industrial sales remain at an average of approximately 7% subject to location, age of property, term of leases and credit of tenants. There has been little new industrial construction with the exception of the industrial development on Zeppelin Road and a few smaller warehouse projects primarily in the airport area. Several new developments are planned in the near future in the Monument area and SE market.  Market rents for new industrial properties are typically north of $10.00 NNN primarily due to land values and rising construction costs. Both users and investors continue to look for opportunities to acquire warehouse properties with a shortage of inventory driving prices upward.

Explosive retail development continues in the northeast area with new construction primarily in the Interquest and Northgate areas. Newer, well located properties with long-term credit tenants continue to trade at sub 6% cap rates.

Interest rates are expected to fall as much as 0.75% basis points through the end of 2019, further fueling investor interest in acquiring real estate while the cost of capital remains historically low. There continues to be some concern of a recession in the next 18 to 24 months. We will see investor interest in commercial real estate remain very high throughout 2019 and into 2020.

Forecast
• The availability of capital for acquisitions and the prospect of lower interest rates will keep deal flow strong for the remainder of 2019.
• Industrial and multifamily remain the preferred asset classes for many regional and national investment groups.
• Capitalization rates will continue to hold steady or decline for newer, well located assets with low vacancies and strong rental demand.
• The current economic growth cycle is one of the longest on record. Investors are cautious about a potential downturn in 2020.


RETAIL

Sales taxes collected over the same period in Colorado Springs were variable month over month on an annual basis. April was up 5.63% from the prior year, May was up 8.27%, and June was down -1.44%. The growth leaders in April were Business Services, up 13.79% year over year, and Auto Repair and Leases, up 10.99% for the same period. The biggest down turn was Medical Marijuana, down -8.69%. In May, the same categories still grew or declined the most year over year: Business Services up 31.21%, Auto Repair and Leases up 13.16%, and Medical Marijuana down -6.10%. In June, Business Services was up 26.61%, Auto Repair and Leases up 12.85% and Commercial Machines, the largest loser at -11.2%. Grocery stores were the biggest true retail gainer in all three months: 12.94% in April, 11.57% in May, and 10.64% in June. Population growth continues to fuel some portions of the local economy allowing demand drivers to continue to keep the market stable.

Overall market vacancy rates were fairly stable at the end of Q2, with vacancy rising to 4.5% from 4.4% at the end of Q1 2019. Rental rates, averaged for the entire city, rose slightly from $14.19 NNN to $14.22. These trend lines show a stable market overall. Absorption of 123,569 SF dropped from the 168,454 SF absorbed in Q1, while deliveries remained low at 88,551 SF. The current construction pipeline has a moderate amount of speculative space, which is mostly in smaller store format. Approximately 45% of the space under construction is not released versus about 30% nationally. 15 properties expecting to reach completion were still under construction at the close of Q2, containing approximately 171,633 square feet.


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.