CREJ - Office Properties Quarterly - March 2017
There is no uncertainty about the health of the Northern Colorado economy; it is on solid ground and 2017 promises to be another year of growth. The Northern Colorado market is comprised of Larimer and Weld counties with the prominent commercial real estate markets being Fort Collins, Loveland and Greeley, with Johnstown and Windsor rapidly becoming economic drivers. Although the national economy has been on a long, slow recovery since 2010 and is possibly near the end of its current business cycle, the current metrics on the Northern Colorado economy continue to give business owners confidence. The region continued to generate jobs at a healthy pace pushing the unemployment in Northern Colorado to a historic low of 2.3 percent. Over the next five years, it is anticipated that 28,000 new jobs will be created. Our population of approximately 620,000 residents is expected to grow to 700,000 residents by 2020, which will continue to drive all market sectors. Colorado ranked No. 4 nationally in home price appreciation and the Fort Collins-Loveland area increase of greater than 10 percent in 2016 was slightly better than the Colorado average home appreciation. With relatively little new construction of commercial space over the last 24 months, vacancy rates continue to trend lower. The Northern Colorado office market ended fourth-quarter 2016 with a vacancy rate of 5 percent after positive absorption of 225,759 square feet. The vacancy rate for retail space after four years of steady absorption is at a historic low of 4.2 percent with average quoted rates up 20 percent over this same period. Industrial space saw a 5.36 percent vacancy rate at the end of 2016 boosted by fourth-quarter absorption of 226,308 sf. • Office: It’s a landlord’s market. Demand for office space increased in Northern Colorado in 2016 with most leasing activity occurring primarily in the first six months. Notable lease transactions include Agrium (120,000 sf), which will take occupancy of its new headquarters building in June, Comcast (82,104 sf), Madwire (66,667 sf), Pinnacle Agriculture (24,500 sf) and Meyer Natural Foods (18,000 sf). With vacancy rates of 5 percent remaining level over the last 24 months, new demand will be met by build-to-suit and speculative construction. The average lease rates on recent Class A transactions have been in the range of $28 to $32 gross per rentable square foot, which makes speculative construction difficult. With only 600,000 sf of Class A and B office space available and average absorption in excess of 225,000 sf annually over the last three years, rental rates for quality space will be increasing and businesses needing larger blocks of space will be looking to build to suit or speculative construction to satisfy their requirements. There also are many developments that are changing the face of Northern Colorado. •Fort Collins. Colorado State University is well underway with the completion of a new on-campus football stadium designed as a multipurpose venue, which will have a capacity of 41,000. This $220 million project is scheduled for completion for the 2017 season. In Old Town Fort Collins, the Elizabeth hotel, a 164-room upscale hotel plans to open in the fall. •Loveland. The Foundry, a public-private partnership between the city of Loveland and Brinkman, is planning its groundbreaking in the spring after being on the drawing board for six long years. The anticipated project cost is $76 million and will include apartments, retail space, a theater, community plaza and multistory parking garage. Within the Centerra master-planned community at Interstate 25 and U.S. 34, the developer McWhinney plans to add two hotels, 420 apartments and an undetermined amount of new retail and restaurant space on both the west and east side of the interstate. McWhinney’s projects are in various stages of development with its hotels breaking ground in the summer. Another mixed-use project announced for Loveland, The Brands at The Ranch, is a $572 million project by developer Martin Lind that includes a high-end shopping center, two hotels, office space, apartments and an IMAX theater, which would be built on both sides of I-25 at Crossroads Boulevard. •Johnstown. Across the interstate from Loveland and within sight of the Centerra development, Scheels broke ground on its 260,000-sf, $55 million sporting goods store in Johnstown. The development, previously known as 2534, was rebranded as Johnstown Plaza. Steve Scheel promised his groundbreaking crowd that the Disneyland of sporting goods stores will be open in September. Approximately 200,000 sf of speculative retail space is under construction at Johnstone Plaza as well with more to follow as lease-up progresses. •Greeley. A new $31 million Doubletree by Hilton is under construction in downtown Greeley. A public-private partnership came together to transform a city block near Lincoln Park into this 147-room hotel, with 14,000 sf of conference space and 12,000 sf of ballroom space. On the west side of Greeley, UCHealth purchased ground for the UCHealth Greeley Hospital, which will be a four-story, 153,000-sf, 53-bed facility. Adjacent to the hospital will be the UCHealth Greeley Health Center. This $135 million project will begin construction in 2017 with the anticipated opening in late 2018. It is an exciting time in Northern Colorado with over $1 billion in new construction planned and much of it expected to be completed within the next 12 months. Time will tell whether all the announced new retail will come to fruition as the competition will be fierce in the I-25 and U.S. 34 corridor. It is doubtful that there is a current market for all of the announced retail. The winners will be those who wake up every day focused on their project, offer experiential retail with new concepts and restaurants, and can navigate possible headwinds, including: •J.C. Penny, Sears, Macy’s, Foot Locker and CVS, combined, announced over 500 store closings, and Kohl’s is planning to reduce the size of 300 stores, offering the excess space for lease. •Interest rates will increase; in January, the Consumer Price Index was up 0.6 percent, suggesting inflation may be ready to return to our vocabulary. •The labor force is only adding 2,000 to 3,000 workers per year, which could lead to a shortage of workers in the region. •Approximately 20 percent of the workforce is getting ready to retire and this population will dramatically change the housing market, looking for smaller homes and adding its larger home to the available inventory.