Colorado Real Estate Journal - August 19, 2015
Demand for commercial real estate in Northern Colorado has pushed vacancy rates below 5 percent for every product type and, in some cases, to their lowest levels in years. DTZ’s second-quarter Market Snapshot report says the vacancy rate for office space dropped to 4.9 percent in the first quarter, its lowest level since 2001. Retail vacancy, also 4.9 percent, has been below 5 percent for the last three quarters, setting historical lows for Northern Colorado. Industrial vacancy is 4.77 percent, and multifamily vacancy is next to nonexistent, 1.6 percent. Cutbacks in the energy sector don’t appear to be hurting the market, DTZ said. If there is an issue, it is meeting demand from employers for quality commercial real estate space, according to Jason Ells, vice president in DTZ’s Fort Collins office. “The Northern Colorado commercial real estate market remains very vibrant. Demand for high-quality space continues to remain strong, and our region continues to be a nationally recognized leader in innovation and a desirable place for families and business to locate. The challenge we face as we finish 2015 and look toward 2016 is a lack of existing options for primary employers and the growing cost of constructing new facilities,” he said. “Businesses ultimately have a certain level of occupancy cost they can afford, and the fear is that we are pushing that envelope with new facilities. This cost vs. availability dilemma will continue into the foreseeable future, making creative repurposing, public-private partnerships and other unique methods of delivering product to the market as important as ever.” Ells said there are a variety of sites around the region where new office product is planned, designed or permit-ready, but increased construction costs have stifled construction. “The economic rent required by developers based on these increased costs is 25 to 30 percent higher than achievable market rent, and until that gap narrows, office development will likely be constricted to primarily owner-user projects,” he said. DTZ’s second-quarter report shows the average office rent, $18.37 gross, was up 25 cents per sf in the first quarter but was 15 cents per sf lower than in the second quarter of 2014. Ells says that is a function of high-quality space having been absorbed. “With now a lower inventory in the market and less of that inventory consisting of Class A space, the overall asking rents have fallen slightly. This is not a poor reflection on the market at all, but rather a sign of strength as demand remains strong for well-located, high-quality space, and tenants are willing to pay a premium for it.” The same is true for retail product, he said. Rates average $13.08 per sf triple net, 19 cents more than in the first quarter but slightly below the historical average of $13.18 per sf. There will be some overlap of retailers with the opening of the Foothills Mall redevelopment in Fort Collins starting later this year, but Ells said in general “the mall will not take another slice out of the pie but rather make the pie bigger.” One of the things the city hopes the redevelopment will reverse is leakage of sales-tax dollars out of the city. “Ultimately we see the reopening of the Foothills Mall as a rising tide that will bolster sales for the market as a whole as its customers spill over to options that are downtown, along Harmony Road or located along the midtown corridor,” said Ells. Another major Northern Colorado retail project will be a 250,000-sf Scheels “retail adventure” store slated to break ground at Interstate 25 and U.S. Highway 34 in Johnstown early next year. The mall and Scheels will add as many as 1.2 million sf of retail to the Northern Colorado market. More than 2,000 apartment units are under construction in Northern Colorado, and asking rent is at an all-time high of $1,074 per unit, according to DTZ’s Market Snapshot. A more detailed DTZ Snapshot report on the multifamily market reports rents at $1,173 per unit in Fort Collins and Loveland and $882 in Greeley, whose vacancy rate was 1.1 percent at the end of the second quarter. Fort Collins’ vacancy rate was 1.8 percent, and Loveland stood at 2.7 percent vacancy. In addition to units under construction, more than 2,900 apartment units are proposed or planned. DTZ projects rental rates will continue to stabilize with increased development and low salary growth, vacancies will continue to climb slightly despite “surprising” absorption and sales of apartment communities will increase. Northern Colorado’s unemployment rate dropped to 3.9 percent in the second quarter, slightly lower than the state average (4.4 percent) and well below the national average (5.3 percent).