Colorado Real Estate Journal - February 18, 2015
Several large national investment groups have made multiple purchases in Colorado Springs during the market downturn, a further indication of investor confidence in the market, according to a recent quarterly market report by Quantum Commercial Group Inc. The firm noted that investors continue to target opportunities in secondary and tertiary markets to escape bidding wars in the primary markets and take advantage of better yields in the smaller markets. The majority of commercial sales transactions in Colorado Springs came from well-capitalized national and regional investment groups. In particular, Denver’s record-breaking multifamily sales had a trickle-down effect on the Colorado Springs apartment market as institutional buyers, real estate investment trusts and funds of wealthy individuals continue to pay record-breaking prices for well-located quality assets, according to the fourth-quarter report. Additionally, sales in other market sectors – office, retail and industrial – continue to attract both value-add buyers and buyers seeking stabilized, well-located assets. Quantum Commercial forecasts that the Colorado Springs commercial real estate market will continue to be primarily opportunity driven. It predicts that the market will see older properties with higher vacancy rates trade at discounted prices until vacancy rates stabilize and lease rates fully rebound; and with interest rates remaining low throughout the year, the availability of low-cost capital will continue to fuel transaction volume. The firm also released its fourth-quarter 2014 and forecast reports on the retail, office, industrial and land market in Colorado Springs. Highlights from each sector include: Retail. The retail market showed improvement in some key indices in the fourth quarter. While the net absorption of 97,431 square feet was well below the 215,535 sf seen in the third quarter of 2014, the average asking rental rate increased 3 percent to $10.95 per sf. At the same time, vacancy marketwide dropped 5 percent, decreasing to 5.7 percent. “These are significant indicators of a rising market, especially during the time of year when, traditionally, not many retail transactions occur,” according to the report. During the fourth quarter, two retail buildings were constructed with 94,980 sf of new construction completed in 2014. The report noted that investment sales of retail properties were lower last year compared with 2013, likely due to the fact that distressed properties have almost entirely been sold and stabilized properties are now selling, a trend that will continue this year. Quantum expects retail market indices to continue in the first quarter, leasing activity will continue to pick up as the job market continues to strengthen and the availability of funds and low interest rates will continue to fuel local investment sales. Office. 2014 was a bump in the road for the Colorado Springs office market. Quantum noted that since its peak in 2009, office vacancy has declined every year after until 2014. The office vacancy rate in Colorado Springs increased to 12 percent at the end of the fourth quarter compared with 11.8 percent in the fourth quarter of 2013. The uptick, the report noted, was mostly due to negative absorption in the greater central business district submarket, where vacancy jumped from 8.7 percent at the end of 2013 to 10.3 percent at the end of 2014. Suburban submarkets saw a slight decrease. Net absorption was negative 43,220 sf in the fourth quarter while the average quoted asking rental rate for available space was up slightly for the year for Class A product and down slightly for Class B space. No new space was completed during the fourth quarter and there were no properties under construction at the end of the quarter, aiding the progress toward equilibrium as existing office space is absorbed, the report added. Steady, moderate growth is expected for 2015. The office market will continue to see a flight to quality. Quantum expects continued slow growth in lease rates and absorption as the market advances toward equilibrium in the next few years. The addition of new jobs will be needed to fuel absorption and occupancy rates in 2015 and allow a slow and steady advancement in the right direction. Industrial. The Colorado Springs industrial market ended fourth-quarter 2014 with a vacancy rate of 8.1 percent. The vacancy rate was down over the previous quarter from 8.7 percent, with net absorption totaling positive 199,101 sf in the fourth quarter. Vacant sublease space decreased in the quarter, ending at 106,276 sf. Rental rates ended the fourth quarter at $6.19 per sf, which was an increase over the previous quarter of $6.07 per sf. There were no properties under construction at the end of the quarter, but Quantum anticipates new construction in the future due to a lack of options and low vacancy rates. The industrial vacancy rate in the Colorado Springs market area decreased to 8.1 percent at the end of fourth-quarter 2014. The vacancy rate was 8.7 percent at the end of third-quarter 2014, 8.6 percent at the end of second-quarter 2014, and 8.7 percent at the end of the firstquarter 2014. Total year-to-date industrial building sales activity in 2014 was up compared with the previous year. In the first nine months of 2014, the market saw 12 industrial sales transactions with a total volume of $25.17 million. The price per sf has averaged $33.32 in 2014. In the first nine months of 2013, the market posted 11 transactions with a total volume of $20.52 million. The price per sf averaged $41.32. Land. The land market ended 2014 steady with an upbeat outlook for 2015, according to the report. There were two major land transactions at the end of the year: Local development group, Norwood, purchased the 18,000-acre Banning Lewis Ranch and a Denver investment group purchased the 800-plus-acre Sanctuary in Black Forest. Sales of entitled undeveloped land for singlefamily lot development picked up momentum in the fourth quarter as homebuilders began securing land positions for late 2015 and 2016. Sales of larger commercial parcels (10 acres or more) were more prevalent in the last half of 2014 as land for larger retail centers and mixeduse developments were being planned for 2015 and beyond. Quantum noted bank financing for land acquisitions became more available as the year continued on, however, development financing through traditional banking sources was still nearly nonexistent. Private lenders have begun offering development financing as activity continues to increase and land prices have finally started pushing upward. There are approximately 2,000 residential lots currently under development in El Paso County and over five times that number of lots in the entitlement process for future development. Land developers and investors interest in longer-term land positions continued to increase during 2014 indicating confidence in the stability and future growth of the Colorado Springs/El Paso County market. The apartment land market continues to be a bright spot during the past two years but has seen a slowdown during the past six months because of the number of new projects that are under construction throughout the entire market. Many investors and developers of apartments have concerns about overbuilding the market and are waiting for the current projects to be absorbed before moving forward on future projects, the report noted. In the nonresidential land market, the activity has been the expansion and/or development of new retail shopping centers in the market. Many of these retail centers stalled in the planning stages or got off to a very slow start because of the market downswing in 2008. With the continued improvement and more confidence in a steady economy, many retailers have been expanding and opening new locations in Colorado Springs. Quantum anticipates industrial and office land will continue to lag historic levels and is expected to do so for the foreseeable future.