Market Reports
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Office 1st Quarter 2019
Industrial 1st Quarter 2019
Investment 1st Quarter 2019
Retail 1st Quarter 2019
Land 1st Quarter 2019
2019 Colorado Springs Forecast
Residential 3rd Quarter 2018

Market Reports

OFFICE

Absorption
Net absorption for the overall Colorado Springs office market was positive 18,240 square feet in the first quarter 2019.  That compares to positive 35,200 square feet in the fourth quarter 2018, positive 196,047 square feet in the third quarter 2018, and positive 64,181 square feet in the second quarter 2018.  The low net absorption reflects a fairly quiet office market for the first 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 remained at 9.5% at the end of the first quarter 2019.  The vacancy rate was 9.5% at the end of the fourth quarter 2018, 9.6% at the end of the third quarter 2018, and 10.3% at the end of the second 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 down slightly for the quarter to $16.24 per square foot per year (full service) at the end of the first quarter.  This is down from $16.64 at the end of the fourth quarter 2018, but still up from the $15.64 reported at the end of the third 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 have been no deliveries of new office product in the Colorado Springs market since fourth quarter 2017.  There were 141,331 square feet of office space under construction at the end of the first quarter 2019.

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 continues to tighten up as we move into 2019 and all indicators are showing that it is a very strong sector in the market.  The current conditions, however, are making it much harder for groups to find new locations to purchase or lease whether they are looking to expand, downsize or even move into the market.

The overall Industrial vacancy rate, recorded a rate of 6.8% at the end of the first quarter 2019, which is historically very low and clearly shows that the demand for Industrial space is high throughout the market.  This rate is a drop from 7.4% at the end of the fourth quarter 2018 and is the lowest recorded overall vacancy rate over the past 11 years.  The Flex sector vacancy rate is lagging at the end of the first quarter 2019 at 13.6% compared to the Warehouse sector which stands at 5.1%.

At the end of the first quarter 2019 the overall net absorption for the Industrial market was recorded at positive 322,991 square feet.  The Warehouse and Flex sectors were nearly equal in net absorption through the first quarter 2019, which the Warehouse sector totaled positive 162,105 square feet and the Flex sector recorded positive 160,886 square feet.

The average asking rental rates for the Industrial market has yet again increased through the first quarter 2019 recording $9.30 per square foot (NNN), which compared to $8.56 per square foot (NNN) at the end of the fourth quarter 2018.  This increase is due to the spike in the average asking rental rate for the Flex sector, which recorded an average quoted rate of $11.34 per square foot (NNN).  This represents a substantial increase of $1.80 per square foot from the fourth quarter 2018.  The Warehouse sector is continuing a steady trend of increases and recorded $8.33 per square foot (NNN) at the end of the first quarter 2019.

Colorado Springs saw a total of 112,000 square feet of industrial product completed at the end of the first quarter 2019, along with 165,870 square feet reportedly under construction.

There was a total of 32 sales transactions recorded in the first quarter 2019, with a total sales volume of $28,360,000 at an average price per square foot of $87.15.  The largest transaction that occurred was a large portfolio sale in which two of the properties purchased were Industrial product in the Colorado Springs Market.  The two properties totaled 146,304 square feet and sold for a total of $12,443,211.

Although the overall vacancy rates are low and all other indicators show a strong industrial market, there is still a need for larger users/tenants throughout the market.  The total vacancy of contiguous space above 20,000 square feet totaled 1.9 million square feet (53% vacancy rate) at the end of the fourth quarter 2018.  This vacancy accounts for approximately 70% of the total vacancy throughout the Colorado Springs Industrial market.  Conversely, there continues to be a lack of smaller Industrial product causing a high demand for new construction.

 
INVESTMENT

Industrial and multifamily are the preferred assets for many investors due to strong improvement in rents and rising values in each of these asset classes.  Industrial sales are likely to remain a target for acquisition in 2019 as e-commerce sales have boosted the demand for more warehouse and distribution facilities.  Newer properties with long-term credit leases command the highest prices.  Etkin Johnson recently sold their portfolio of 19 industrial properties in Colorado for $247.5 million setting a record for the largest industrial portfolio sold in terms of both total square feet and price.  5001-5025 Centennial Boulevard, an 82,800 sf building, was part of the portfolio sale.  The portfolio was acquired by Berkley Partners from California.

Challenges for affordable housing, especially with millennials, continues to drive demand for apartments.  The Overlook at Interquest, a 265-unit apartment community, recently set a new record of $251,894 per unit.  The complex, built in 2018, was 80% occupied at time of sale and was acquired by a California investor.  Investors are challenged to find reasonable returns on properties in some of the major markets such as Denver.  This has created an influx of regional and national investors to the Colorado Springs market where they perceive there is an opportunity for higher returns as compared with some of the major markets.

Economists predict a good balance between the prospect of gradually rising interest rates combined with a moderate slowing of the economy in 2019.  Although many investors are adopting a more cautious approach to underwriting, the availability of capital for acquisitions and moderate increases in interest rates will keep deal flow strong.

The office market fundamentals are improving, however, most of the focus in acquisitions has been to acquire older, well located properties and stabilize tenancy with new improvements.  Woodmen Corporate Center was acquired in 2017 by a local developer for approximately $44.61 psf.  The building was recently sold for $126.87 psf and was reported to be 81% occupied at the time of sale.  Rental rates for office space still do not justify new speculative construction.  The majority of activity has been to acquire existing properties and reposition them with major renovations to attract tenants.

Store closings will continue as e-commerce impacts the retail market; however, there is a trend to adapt vacant or underutilized properties for new uses.  The area surrounding the Citadel Mall has been designated as an Opportunity Zone to stimulate investments.  We will likely see properties such as Babies-R-Us and Toys-R-Us repurposed for new uses.

Forecast
• The availability of capital for acquisitions and moderate increases in interest rates will keep deal flow strong in the first half of 2019.
• Industrial will remain one of the preferred asset classes with continuing improvement in rents and rising values.
• Demand will remain high for multifamily assets.  Rents continue to grow and occupancies are holding steady.
• The current economic growth cycle is one of the longest on record.  Investors are cautious about a potential downturn in late 2019 or 2020.


RETAIL

Although Colorado Springs is feeling the same contraction in existing retailers as the rest of the country, new retailers are being incentivized to locate here to service the expanding millennial population.  A great example is Scheels All Sports.  In February, the City Council approved a $16.2 million tax incentive for Scheels to locate on the north side.  The 220,000 square foot store will bring $84 million in construction dollars and eventually employ 400 people in its massive apparel, sporting goods, fitness equipment, camping and hiking gear store.  Its entertainment side, including an indoor Ferris wheel, will help solidify the City as a regional entertainment and shopping destination.

Although a 3.9% unemployment rate as of February makes hiring a challenge at times, continued high population growth, 1.9% Y-O-Y July 2017/2018, drives job creation, allowing for retail growth.  5% job growth year-over year, the highest since the 1990’s, allowed the retail market to approach capacity with vacancy down to 4.4% at the end of Q1.  Rental rates continued their upward trend, rising to an overall market average rate of $14.19 NNN.  There were 34,710 SF of completions brought to market and 168,454 SF of absorption.  110,088 SF of retail space remained under construction at the end of Q1.

Strong demographic trends continue to support retail in Colorado Springs, and retail sales as well.  The overall market CAP rate remained at 7.6%, illuminating the age and type of retail sold in the last year, the largest property being Chapel Hills Mall, at $59/SF with a vacancy rate at the time of 71.6%.

The forecast for the next quarter remains strong and optimistic.  Brick and mortar retail should remain strong through 2019 and 2020, as long as there isn’t speculative construction.


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.


RESIDENTIAL

3rd Quarter Highlights:
• 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 continues to fuel our market.  Last year a home stayed on the market for an average of 22 days during the 3rd Quarter.  This year that time has been bumped only slightly with homes selling after 23 days on average.

• Along with 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 $268,000 and has rocketed to $298,000.  The lack of inventory has made sellers more brazen in what they will ask for their homes.  Subsequently, buyers have been pressed to increase their budgets if they want to secure a residence.  While the market steadily heated up during the spring and summer months, we are now seeing these higher prices have a slowing effect on that momentum.

• 2018’s 3rd Quarter reflected the cyclical cooling of our market with 4,493 homes selling in El Paso County.  This is quite a bit less than 2017’s 3rd Quarter of 4,978 home sales.  While seasoned Realtors are accustomed to seeing activity reduced in the fall, this is a sharper drop than in previous years.  With a steadily increasing median home price, there are fewer homes coming into the market at a price that first-time homebuyers can afford.  This cooling is happening in the larger markets of Colorado Springs and has not yet hit the higher price points.  Home sales from $500K-$749K have actually increased from 298 homes in 2017 to 340 in 2018.  Sales from $750K to $1M have increased from 41 homes in 2017 to 61 in 2018, and sales from $1M to $1.5M have nearly doubled from 15 homes in 2017 to 24 homes in 2018.

Statistical Summary
After the summer ends and school begins it is not unusual to see real estate sales decline.  The large push from buyers to close on a home and be settled before school starts is met with a contrasting lull as the dust and leaves settle.  Nonetheless, buyers are still eager to relocate to Colorado Springs and they need homes.  As experienced Realtors we advise sellers relative to the supply and demand manifest in the slower autumn months.  The reduction in inventory is perceived by many sellers as the opportune time to see how much a buyer is willing to pay for one of the few homes on the market.  Accordingly, it should come as no surprise that while sales declined, the prices aggressively increased.  At the 2018 Annual UCCS Economic Forum, Dr. Tatiana Bailey further detailed the variables of this correlation.  “The increase in housing sales and prices reflects lower mortgage rates, an increase in population, higher employment levels, and a decline in available housing for sale.  National experts are citing average price increases for all of 2018 in the 5.0 percent range across the nation.”

Home values are understandably a strong indicator of the health of the economy in the Pikes Peak Region and should rightly be celebrated.  Monitoring the affordability to live here will also sustain the momentum our market has experienced.  While the increasing home prices are welcomed, we must encourage vigilance across the dynamics that make Colorado Springs a desirable and affordable place to live.  Dr. Bailey addressed this in the forum.  “The housing opportunity index for 2018 Q2 showed that Colorado Springs is still quite affordable compared to the other MSAs with 60.7 percent of the homes sold affordable to families with our local median income.  Similarly in the U.S. at that time, 57.1 percent of the homes sold were affordable for families earning the national median income.  Despite recent increases in home prices, our region is still relatively affordable.  Having said that, the double-digit increases we have seen in local home prices is good reason to monitor the trend of growing unaffordability locally and indeed nationally.  First time buyers across the U.S., who are typically younger, have low ownership rates (36.5% in 2018Q2) and this is important to address in the long term.”

The cooling that is occurring in our real estate market is an ideal time to compose ourselves.  We can make deliberate plans in our community which will foster growth and advancement.  We can vote in a manner that will keep Colorado Springs an affordable place to live and to operate businesses, while also supporting improvements to the qualities and attributes that make the Pikes Peak region attractive to new-comers.  As we acknowledge the cyclical slowdown, we can plan for the next upturn.