CREJ - Retail Properties Quarterly - February 2015
It has been said that the economy of Colorado Springs historically trails Denver by 12 to 18 months. When a downturn hits the economy, Colorado Springs may not feel the full impact for up to a year after the Denver market, and when the economy begins to recover, Colorado Springs does not see that recovery for 12 to 18 months. I have never heard a definitive explanation for this lag – maybe it is because Colorado Springs’ economy is heavily influenced by the military (30-plus percent) and government spending does not follow the national or state economies, or maybe the companies that provide the primary jobs have different influences than those in Denver. In this recovering economy, if Denver is Colorado Springs’ older brother and they are in economic “school” together, Colorado Springs was held back a grade in 2014. Recovery of the Colorado Springs market is well behind the 12- to 18-month lag we have grown to expect. Simply driving through each city provides proof of the longer-than-normal lag. In Denver there is new commercial construction in every quadrant. New homes are being built in creative new developments, and young people are attracted to Denver for careers with established companies as well as start-ups and high-tech. In Colorado Springs commercial construction is almost nonexistent, new home construction is stagnant at recession rates and well-qualified workers are moving to vibrant markets to the north. These factors all have an impact on the retail market in Colorado Springs. Retail vacancy and absorption. Turner Commercial Research reports that overall retail vacancy rates reached a historic low in Colorado Springs in 2006 at 6.4 percent. Rates rose each year after that, to a high vacancy rate of 12.2 percent at the end of 2012. (2014 ended with a 10.2 percent retail vacancy rate.) Absorption (the change in the amount of occupied space from one period to another) was negative in 2011 and 2012, meaning the amount of leasing activity could not surpass the increases in vacant space.
Positive absorption numbers returned in 2013 and 2014, chiseling away at the vacancy rates. However, the vast difference in commercial construction activity between Colorado Springs and Denver is similar to that of each city’s largest retail corridors, suggesting that Colorado Springs may have greater vacancy issues than the overall numbers indicate. Colorado Springs has two main retail corridors – Academy Boulevard and Powers Boulevard. Academy Boulevard’s retail properties were built during the 1970s and 1980s, while the retail on Powers Boulevard was built in the mid- 1990s through today. To get the true vacancy numbers of what is apparent when driving through the two main retail corridors, I looked at the vacancy rates reported in Turner’s year-end edition on individual shopping centers on Academy Boulevard and Powers Boulevard. The charts show my nonscientific findings. (The numbers do not include regional malls.) From a visual inspection of each of these retail corridors, the vacancy rates on Academy Boulevard are in excess of the overall stated retail vacancy rate of 10.2 percent. However, it is more surprising to see high vacancy rates throughout the Central Academy area as well as for unanchored centers in the North Academy area. The other revelation according to these numbers is that the South Academy retail area, long considered the stepsister to all north locations, has much better occupancy than the Central Academy area in anchored shopping centers and has equal or better occupancy in unanchored centers than any other section of Academy Boulevard or Powers Boulevard. In general, the newer anchored retail centers throughout Colorado Springs, built with a much lower percentage of small retailer space, are very well occupied with strong national retailers. The older anchored centers, built with equal portions of anchor space and smaller tenant spaces, are struggling to find local or national tenants to fill their vacancies. Unanchored centers throughout the city are experiencing high vacancy rates as well. Retail building sales. According to Turner, 57 retail properties were sold in Colorado Springs in 2014, the fewest number of transactions since 2010. Of the 57 sales, 29 were sold to investors (not owner/users). The average price per square foot of all sales was $92.72. On a national basis, there is great demand for quality retail properties from investors. This has driven capitalization rates down to unheard of levels for quality properties (a low capitalization rate produces a higher sales price). While these ultra low cap rates are now the norm in the Denver market, Colorado Springs is still abundant in higher cap rate opportunities, getting investors more for their money. There are bright spots in the Colorado Springs retail market: University Village on North Nevada Avenue continues to bring in strong national retailers. Some of the retailers are new to the market, like Trader Joe’s and Bass Pro shops, which opened in 2014 at Northgate Road on Interstate 25. The development is expected to announce many new retailers soon. Walmart Express is in the process of opening five new stores in the market, helping to absorb several big-box vacancies. The First and Main development on Powers Boulevard continues to attract the highest-quality retailers to the market. The overall story in the retail commercial real estate market in Colorado Springs is one of opportunity. The day is coming for Colorado Springs to catch up to the frantic economic pace of its big brother to the north. There are opportunities to purchase existing healthy retail centers and reposition them in the market. On the other hand, there are opportunities to purchase existing struggling retail properties, raze them and create entirely new mixed-use developments. Either way, there are several opportunities for investors to purchase retail properties at great prices relative to other markets. It’s time to seize the opportunity.