CREJ - Office Properties Quarterly - June 2016
The Fort Collins-Loveland and Greeley metro markets continues to experience growth and promising economic indicators. Most recent statistics show that unemployment continues to remain strong, hovering around 5.4 percent. Since the beginning of the year, Fort Collins has added nearly 3,000 jobs, and Greeley has added 2,000. According to the most recent forecast from the state demography office, Northern Colorado likely will double its current levels by the year 2040. Larimer and Weld counties could see the population hit 1.05 million, an increase of roughly half a million people. The regional economy is comprised of a diversified mix of manufacturing and service-related industries. It also is becoming a popular destination for technology companies to call home because of the resources available from Colorado State University, which include several research facilities and a qualified candidate pool. The market remains incredibly tight across all product types with vacancy continuing to drop to new lows. Vacancy across the office market continues to tighten, down 150 basis points in first-quarter 2016 from the first quarter a year prior with a net absorption totaling positive 96,640 square feet. This compares to a negative 84,200 sf absorbed in first quarter 2015. Overall, this represents a strong first quarter of leasing activity considering 2015’s performance. The regional office vacancy rate ended the first quarter at 4.6 percent and has continued to drop. The vacancy rate is near an all-time low as reported by CoStar group, dating back to the first-quarter 2001. Even with the oil and gas downturn, leasing activity remains strong due to the emergence of technology and professional services. With oil and gas companies, both big and small, cutting jobs and slowing operations, office users are looking to mitigate losses by shedding excess space. With uncertainty still looming over the industry, companies will continue to weather the storm as best as possible. It is becoming more challenging to find quality office space opportunities from a leasehold interest and sale perspective. The cost of new construction is an impediment to the new development of Class A product, because the lease rates have not seen an increase to justify new construction costs. Class A vacancy remains low, but the biggest gains have been in Class B and C office products. The gross average asking rental rate for available office space of all classes was $19.50 per sf per year at the end of first-quarter 2016 in the Northern Colorado market. There are several tenants moving into large blocks of space. Madwire Web Design moved into 66,667 sf in a portion of the Fort Collins HewlettPackard campus. In the fourth quarter 2015, cable and Internet giant Comcast Corp. leased approximately 62,229 sf in the HP campus and intends to provide 600 new call center jobs to the trade area. The new center is an addition to existing customer service sites in the southern Denver metro area, where Comcast employs 400 people. Another tenant active in the market was Pinnacle Agricultural Holdings LLC, which leased approximately 24,010 sf at 4850 Hahns Peak Drive in Loveland. On the investment side of things, a portfolio sale of two properties located at 1250 H St. and 224 Dundee Ave. in Greeley sold for a total of $10.4 million. This comprised approximately 122,944 sf of Class B office and flex space. In March, a local investor in Imago Enterprise LLC purchased a three-story office building located at 1730 S. College Ave. in midtown Fort Collins for $2.4 million with the plan of exterior renovation that is currently in progress. With that being said, the office market is constricted with the lack of quality investment product. Cap rates have been compressed to low levels, and we believe that will remain a trend until interest rates adversely affect them. We’ve seen a slight uptick in interest rates; however, we are seeing great financing incentives from the banks and institutional lenders for longer-term, fixed interest rates and/or non- or partial recourse. Now is as good a time as any to lock down your financing.