CREJ - Office Properties Quarterly - October 2015
Boasting more than 28 million square feet of office space, Colorado Springs is an active market with notable opportunity for groups that are positioned to take advantage of its higher quality of office space and rising volume of national credit tenants Colorado Springs has seen moderately steady growth this year, with year-to-date net absorption of 222,352 sf, a vacancy rate of 11.44 percent and an average asking rental rate of $17.23 per sf, full-service gross. Certain projects in the market have seen outlier levels of absorption while pushing rates higher, such as North Creek at 5725-5775 Mark Dabling Blvd. in the northwest submarket, which secured more than 100,000 sf of leases in 2015 at above-average rental rates. We have witnessed a continuation of the 2014 recovery and a steady uptick in leasing rates. Asking rates for Class A product outside of the central business district are approximately $20 to $21.87 per sf, full-service gross, while non-CBD Class B asking rates are averaging $12 to $17 per sf, full-service gross. CBD tenants should expect to pay an average of $25 per sf, full-service gross, for Class A space, and $19.90 per sf, full-service gross, for Class B space. There continues to be a discrepancy between the south and north submarkets, with the north side of town experiencing higher rental rates and, generally, more tenant activity. Declining unemployment rates are contributing to the health of the office market in Colorado Springs, which continues to rely heavily on government spending and defense spending, in particular. The U.S. Bureau of Labor Statistics estimates the unemployment rate to be 5.1 percent, down from its high in 2008 of 9.9 percent. Boasting lower lease rates and a lower cost of living than nearby primary markets, Colorado Springs is poised for growth as sizable national occupiers continue to evaluate the market as a potential location for secondary operations. Tenants in the market continue to command favorable lease terms as Colorado Springs’ double-digit vacancy rate creates a natural competition among building owners. Steady growth is a positive attribute because of its predictability and sustainability, but it limits the possibility of speculative development, which Colorado Springs has not seen on a large scale since before the recession. Developers that can retain a tenant predevelopment are poised for success in this environment, but completing a project of serious magnitude is easier said than done. Tenants are able to execute a venerable flight-to-quality in the current environment, in which it is feasible to relocate from a Class B to a Class A campus with hyperattentive property management and proactive ownership. Rent is sometimes perceived by tenants as a necessary expense or sunk cost. But when these projects are owned and managed properly, they generate the ability to leverage tenants’ rent dollars. This can create leverage to elevate employee experiences, which, in turn, allows companies to attract and retain the best talent. In the right office environments, employers’ cost-per-employee benchmarks can be thought of as an investment as opposed to an expense. Culture is increasingly important to employers, so much so that it has created a truly defined difference in an office building’s ability to attract and retain tenants. Forward-thinking building owners understand this concept of tenant investment and continue to capitalize on their buildings’ tenancy with culture improvements, such as common area upgrades, above-market tenant improvement packages, wellness initiatives and ongoing tenant appreciation events. At the core of this strategy’s success is having the right owner for the task and the right property management firm to execute on these goals and initiatives. Navigating the Colorado Springs market requires a thorough understanding of its fundamentals and its opportunities to create arbitrage situations with the correct tools at hand. Value continues to be realized by both owners and tenants that can creatively execute their strategy to leverage their real estate. We remain optimistic and bullish on the future of Colorado Springs and predict that 2015 will come to completion with lower vacancy rates and slightly higher rental rates.