CREJ - Office Properties

Page 8

— Office Properties Quarterly — January 2015

olorado Springs’ economic

performance is fundamental

to the state’s expansion and

consistently high national

rankings, including being

named as a top-three state for future

job growth. With one of the fastest-

growing metropolitan statistical areas

last year, the Colo-

rado Springs’ MSA –

composed of Teller

and El Paso coun-

ties – has a popula-

tion of 685,773. The

office market mea-

sures 28 million

square feet, and the

largest submarket is

the north Interstate

25 submarket, rep-

resenting 12 million

sf. The north I-25

Class A sector com-

prises 4.6 million

sf. This submarket, which reached

a high vacancy mark of 30 percent,

today reflects a 22.1 percent vacancy

rate. These numbers translate to the

pipeline for new transactions remain-

ing limited, with activity similar to

the past several years.

The Colorado Springs office market

slowed during the first three quarters

of 2014, after a busy end to 2013,

and activity in the Class A market

was very slow and uneven in 2014. In

the third quarter, the Class A market

posted positive, albeit flat, absorption

of 43,000 sf; Class A vacancy stands

at 21.6 percent compared with 18

percent at year-end 2013.

Leasing activity in the office market

has been erratically slow since 2008.

Vacancy created during the Great

Recession (2008-2010) has slowly

but consistently filled, bringing the

market to a point where landlords are

beginning to firm up and raise rates.

While the slow recovery has frus-

trated owners and investors, smaller

gains in the market continue to give

reason for optimism: population

growth, a diversifying employment

market, an improving investment

market, and significant increases in

the retail and residential markets.

Colorado Springs’ job growth in

2014 was well on the path to recov-

ering to pre-2008 numbers and

continued improvement is expected

this year. Annual average job growth

was positive in 2011-2013 and, after

moderate growth in 2014, October

unemployment was at 4.7 percent,

which is significantly lower than the

national rate of 5.8 percent. While

the financial activities, education

and health services, and mining,

logging and construction sectors

experienced growth of 6.2 percent, 3

percent and 2.2 percent in October,

respectively; the professional and

business services, information, and

leisure and hospitality sectors posted

negative growth of 6.3 percent, 4.3

percent and 1.8 percent, respectively.

The government sector, the larg-

est employer in the market, posted

1.8 percent growth, the first increase

since 2012. This positive trend,

along with Colorado Springs’ popula-

tion influx, bodes well for 2015 and

beyond.

Continued diversification of the

Colorado Springs economy is an

important positive indicator, and the

area continues to attract the attention

of many large companies involved

in high tech, aerospace and defense,

and information handling to custom-

er service support functions. Addi-

tionally, there is a stable base of local

companies that will help drive the

economy through moderate growth.

The investment market is re-

emerging and, as the economy con-

tinues to recover, the market feels

as active as it has been since the

downturn. The number of assets that

are lender owned or controlled is

decreasing, the largest of which is the

Colorado Crossing project. The proj-

ect was working through long bank-

ruptcy proceedings for the past four

years, and it looks like it will finally

be resolved early this year.

Historically, Denver leads coming

out of a soft market with Colorado

Springs trailing by 18 to 24 months.

The Denver market is currently very

active with strong recovery and

investment sales totals of $1.7 billion

through third-quarter 2014. This is

good news because Colorado Springs

currently, and traditionally, provides

better investment yields than Den-

ver. Additionally, the spread between

capitalization rates for Denver versus

Colorado Springs is up to 150 to 200

basis points. Savvy investors will

consider Colorado Springs a value

alternative, increasing national spec-

ulator interest.

Colorado Springs’ single-family

housing market is leading resurgence

in building activity for the area. The

combined dollar value for commer-

cial and residential permits totaled

nearly $2 billion in 2013, setting a

new record in El Paso County, and

was expected to continue at a similar

pace by year-end 2014. September

home sales increased nearly 24 per-

cent over sales for September 2013,

the highest for any September since

2005. Home values are appreciating

as well, with the median price of sin-

gle-family homes sold in September

2014 standing at $253,000, almost

$10,000 higher than one year ago.

The prognosis for Colorado Springs

in 2015 is one of optimism and

opportunity. In office leasing, Colo-

rado Springs can expect absorption

and lease activity to increase. The

gains in lease absorption will be sig-

nificantly positive and I predict we

will cross 100,000 sf of absorption

in 2015. Rental rates will climb in the

multistory building first, then the 100

percent single-story office. If you are

a landlord, your position will be sig-

nificantly stronger during 2015. Both

population and employment will help

drive the rent increases. If you are an

investor, there are and will be oppor-

tunities to increase portfolio returns.

We will see strong volume in the

office investment market.

Colorado Springs is positioned for 2015 growth

Leasing Market

Kent Mau

Executive

managing director,

Newmark Grubb

Knight Frank,

Colorado Springs

How Colorado Springs compares to other Class A office submarkets

Colorado Springs employment and job growth by industry

Savvy investors

will consider

Colorado Springs

a value alternative,

increasing

national

speculator

interest.