CREJ - Office Properties Quarterly - July 2015
As memories of the Great Recession can’t fade fast enough, the Fort Collins office market has strengthened and continues to improve. A current snapshot from Xceligent reports the city has a 4.4 percent vacancy rate, which is the lowest in Northern Colorado, and the rates continue to decline each quarter. The asking rates average $20.85 per square foot triple net, which is seeing a slow but steady increase. Sales of combined investment and owner-user properties to date in 2015 averaged $188 per sf, according to CoStar. While the market has both tenants and owner occupants, most new construction is for users, with speculative construction limited and focused in the prime locations. The investor-driven market is witnessing strong interest from investors who are in 1031 exchange situations or attracted by the improved market trends, cash needing returns or low interest rates. Cap rates on recent investment sales are in the 7 to 8 percent range for quality properties. And many of these deals are occurring off market and initiated by unsolicited offers. For those on the market, when appropriately priced, investment offerings are clearing the market quickly. Following are several good examples of Fort Collins investment sales that show the market’s diversity. The first is 363 W. Drake Road, which includes five office condominiums, totaling 6,113 sf. The investment sold for $650,000, or $106 per sf. The building was built in 1978, had recent exterior upgrades and was fully occupied, with an average of three years remaining on the leases. The cap rate was 7.25 percent. The fact that it was fully leased and had management in place attracted the 1031 buyer. The property was on the market for approximately four months. Another example is 400 E. Horsetooth Road, a four-tenant office building of 13,444 sf that sold for $2.5 million or $186 per sf. The building was fully leased with an average remaining term of four years, and the cap rate was 7.6 percent. Built in 1986, the building recently had significant upgrades to the exterior and interior. The 1031 buyer found the property’s condition, location and tenant mix as solid support for the price and return. This was a “pocketlisting” and not openly marketed. The 30,600-sf office property located at 3528 Precision Drive, built in 2014, sold for $8.45 million, or $276 per sf. The second floor was in shell condition without finish. The seller is leasing the first floor and the buyer intends to occupy the second. The property was available for lease but not actively marketed for sale at the time of offer. And finally, 2900, 3000, and 3030 S. College Ave., three midtown office buildings that total 75,522 sf, sold for $8.38 million, or $111 per sf. The buyer was completing a partial 1031 exchange and drawn to the portfolio by the location and probable upside. Vacancy was near 20 percent, generating an approximate cap rate of 8 percent. The buyer is upgrading the interior and exterior. The properties were not actively marketed at the time of offer. The improved market conditions are permitting landlords to modestly raise rents and limit concessions for new leases, yet options remain available for good-quality credit tenants. This is an excellent time to sell leased investments to maximize value, and buyers must be prepared to act quickly and present attractive offers. Many potential buyers have reduced their targeted returns (cap rates) in order to acquire quality properties. And lastly, tenant finish is challenging due to the long lead-time for permitting, lengthy construction periods plus historically high costs. Fort Collins is a very desirable location for businesses, investors and residents alike. Because of our diverse economy, a culture of innovation, a very high quality of life and relatively close proximity to Denver, the outlook for of our office market is quite positive.