CREJ - Office Properties Quarterly - January 2015
Colorado 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 Colorado Springs’ MSA – composed of Teller and El Paso counties – has a population of 685,773. The office market measures 28 million square feet, and the largest submarket is the north Interstate 25 submarket, representing 12 million sf. The north I-25 Class A sector comprises 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 remaining 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 frustrated 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 recovering 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 largest employer in the market, posted 1.8 percent growth, the first increase since 2012. This positive trend, along with Colorado Springs’ population 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 customer service support functions. Additionally, there is a stable base of local companies that will help drive the economy through moderate growth. The investment market is reemerging and, as the economy continues 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 project was working through long bankruptcy 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 Denver. 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 speculator interest. Colorado Springs’ single-family housing market is leading resurgence in building activity for the area. The combined dollar value for commercial 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 percent over sales for September 2013, the highest for any September since 2005. Home values are appreciating as well, with the median price of single-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, Colorado Springs can expect absorption and lease activity to increase. The gains in lease absorption will be significantly 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 significantly stronger during 2015. Both population and employment will help drive the rent increases. If you are an investor, there are and will be opportunities to increase portfolio returns. We will see strong volume in the office investment market.