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Page 8 — Office Properties Quarterly — March 2017
L ast year concluded with posi-
tive absorption of 311,429
square feet to yield an
overall vacancy rate of 17.8
percent in Colorado Springs
for Class A and B office product. In
comparison, 2015 year-end numbers
reflected 245,365 sf of absorption and
an overall vacancy rate of 19 percent.
For the first time in four years, the
market realized a healthy reduction
in overall vacancy, which had hov-
ered in the 19 to 20 percent range for
the prior three years. The momen-
tum carrying over into 2017 suggests
we will see strong lease activity and
positive absorption for at least the
first half of the year, and lease rates
are reflecting the demand.
A missing component not accu-
rately reflected in the absorption
numbers is “lease activity.” For the
first time in many years, 2016 experi-
enced lease activity on space before
it was vacated. A few noteworthy
situations in which leases were con-
summated on space before the prior
tenant’s leases were up included
Booz Allen Hamilton’s lease at 565
Space Center Drive for 52,000 sf and
Western Digital leasing 35,000 sf in
Interquest. Total lease activity of new
transactions, not renewals, exceeded
absorption by approximately 135,000
sf. This is further evidence of the
overall health of the market, as well
as the diminishing supply of high-
quality available space.
A great deal of the available or
vacant space in today’s market is
weighted toward older generation
buildings and those properties with
big blocks of vacant space, which
means more limited quality options
for tenant’s seek-
ing space in the
market. Lease
rates continue to
increase and at a
more rapid pace,
with a 2016 year-
end average rate
of $13.63 per sf per
year (triple net) –
up from $13.35 per
sf in 2015.
For tenants
seeking space in
traditional multi-
story Class A office
buildings, they can
expect rates to be much higher, with
suburban product demanding as
high as $17 per sf per year (triple net)
and central business district product
exceeding $20 per sf per year (triple
net). Additionally and equally as
important are the costs of construct-
ing tenant improvements, which
have escalated significantly. No lon-
ger can a tenant expect a landlord to
“turnkey” work, and many tenants
will need to subsidize the costs to
improve their new space.
One segment of the market that
remains soft is buildings with large
blocks, greater than 50,000 sf, of
vacancy. These buildings skew the
overall statistics, driving up overall
vacancy rates and keeping average
lease rates low. These campus set-
tings do, however, appeal to high-
count employers and are important
in keeping Colorado Springs an
attractive site for new employers.
Overall, the city is in a positive
place with existing hospital cam-
puses expanding and new cam-
puses being added
– including the
recently completed
86,000-sf Colorado
General Hospital
and Children’s
Hospital 300,000-sf
campus in Briar-
gate.
Land sales have
been extremely
strong, and mul-
tifamily housing
developments
are popping up
throughout the
city. Sales of single-
family homes posted its best year
ever in 2016, up over 16 percent
from 2015, which was a record year.
Downtown Colorado Springs is see-
ing significant activity with apart-
ment development and is adding
over 350 units that will be delivered
later this year; this will fuel retail
growth and bolster an already
healthy office market, where vacan-
cy rates are at 11.12 percent.
The airport submarket, with its
proximity to Peterson Air Force
Base, traditionally has been a hub
of Department of Defense users,
and this market has seen a steady
decline in vacancy to 23.28 percent
after hovering in the low 30 per-
cent range for many years. The new
administration likely will have a
positive impact in this area, and we
expect lease activity to be strong in
the second half of 2017.
All indicators point to a steady
improvement in the local market
and this will fuel construction of
new Class A office product, which we
expect to see come on line in 2018,
approximately 10 years from our last
construction cycle.
• Vacancy. Vacancy rates continued
to decrease in the second half of
the year. Given the market size, one
or two 100,000-plus users entering
the market, which is anticipated in
the next 12 to 18 months, will drive
vacancy to single-digit numbers.
The majority of multitenant build-
ings have seen either no change or
a reduced vacancy rate and current
activity suggests the vacancy rate
will drop in 2017. The market will
continue to see decreasing vacancy,
but until we have new companies
relocating or starting up in Colorado
Springs, our vacancy will continue
to decrease at a more modest pace.
• Lease rates. With the overall
improving market, we have started
to see most properties begin to
push lease rates up and hold the
line in negotiations. Older, mid-
1980s generation buildings con-
tinue to pull the average down, but
a number of them are starting to
increase with the improving mar-
ket. We anticipate the overall aver-
age to increase through 2017, and
with the lack of newly constructed
product on the market the ceiling
for second-generation space is not
yet set.
• Absorption. Absorption has been
positive year to date, and we ended
2016 with a strong fourth quarter. As
was previously mentioned, the leas-
ing activity (not reflected in absorp-
tion numbers) was very strong in
the second half of the year and all
indicators are toward increased
absorption and leasing activity. s
ENSURING
LASTING
CLIENTS.
INSPIRING
PROJECTS
| 303.813.0035
Greg Phaneuf
Principal, Cushman
& Wakefield/
Colorado Springs
Commercial,
Colorado Springs
Peter Scoville
Principal, Cushman
& Wakefield/
Colorado Springs
Commercial,
Colorado Springs
Market Update