|
|
Market Reports Class A Office
Statistical indicators show a Colorado Springs Class A market continuing to right itself. Steady vacancy rates, flat absorption levels, and static lease rates are realities of our local recovery. Overall improvement in office market absorption depends on job creation.
The leasing landscape in the Class A market remains largely unchanged from the 1st and 2nd quarters of this year. Competitive lease rates, and tenant leasing incentives such as free rent and aggressive tenant improvement packages are persistent requirements to attract the limited number of existing tenants looking for new space. Medical users remain a force in the market and can provide landlords with much needed economic stability.
The third quarter vacancy rate remained virtually unchanged from last quarter at 19.9%. Absorption was negative for the quarter by about 4,000 square feet, falling from 38,126 square feet at the end or the 2nd quarter to 33,996 square feet by the end of the 3rd quarter. Lease rates for this quarter averaged $13.48 per square foot. Leasing for the 3rd quarter remains approximately the same as the two previous quarters. A lack of new tenants in the market will continue to impact property values and give investors and owner/users purchase opportunities in all sectors of the office market.
The values of existing office buildings are decreasing as a result of dropping rates and increased expenditures by landlords. Landlords will realize a reduction in cash flow as they attempt to meet the financial challenges of maintaining existing tenants and attracting new ones. Savvy investors are looking to seize opportunities to purchase high quality buildings with lowered values at bargain prices.
Metro Office
The Metro Office has not begun to recover and we anticipate very little positive activity going into 2012.
The Colorado Springs Metro Office Market remained relatively flat during the third quarter of 2011. With positive 50,383 square feet of absorption, the vacancy rate saw a slight decrease to 14.4%, down from 14.5% for the previous quarter. The increased amount of supply has continued to drive lease rates downward, and a number of tenants are taking advantage of discounted prices and favorable concessions from landlords.
Tenants have benefitted from significant rent discounts and free rent. Due to the high level of competition throughout the city, landlords are being forced to lower lease renewal rates to maintain tenancy. Many tenants have been able to renegotiate their current leases by obtaining competitive proposals from competing landlords, and have received significant rent reductions or concessions. Also, several tenants have located to a higher quality property, taking advantage of the narrowing gap between Class A rental rates and the remaining office product in the market. Average asking rates for Class “A” office space are currently $3.04 PSF/NNN higher than the average asking rates of the overall Metro Office Market. Landlords in all asset levels, will continue to be aggressive with lease incentives and discount rates. In general, landlords have not significantly discounted their asking rates but have been negotiated down significantly on effective rates.
Overall, the recovery for the Metro Office Market is highly dependent on the job growth in the region and military spending. With local and national unemployment levels still above 9%, El Paso County has suffered net employment losses every year since 2007, including nearly 3,000 jobs lost in 2011 alone. In order for the Metro Office Market to see an increase in net absorption, employers must grow.
Industrial
Third Quarter Industrial Market for Colorado Springs keeps showing signs of improvement.
The Colorado Springs Industrial market ended the third quarter 2011 with a vacancy rate of 10.2%. The vacancy rate was down over the previous quarter, with net absorption totaling positive 113,355 square feet in the third quarter. Vacant space decreased in the quarter, ending the quarter at 3,402,533 square feet. Rental rates ended the third quarter at $6.12, an increase over the previous quarter. A total of one building delivered to the market in the quarter totaling 24,035 square feet, with one 37,884sf property under construction at the end of the quarter.
The sale values of all industrial properties sold in 2010 showed an average of $42.49 per square foot, which is around 30% below the $60 per square foot average and still well below the replacement cost for such properties. As of the end of 3rd quarter 2011, twenty-four (24) industrial properties have sold for a total of 385,594 square feet for $19,568,500 or $50 per square foot. The mix comprises of thirteen (13) properties purchased by owner/users totaling 153,550 square feet for $6,455,000 or $42 per square foot. Investors account for eleven (11) properties totaling 232,044 square feet for $13,113,500 or $56 per square foot.
Lease rates are still low, from the historically averaged $6.50 NNN to $6.12 per square foot (source TCR).
Retail
The third quarter of 2011 ended with a 16,003 square foot increase in vacancy and a year to date decrease in absorption going into the negative by the same amount from the prior quarter for all retail centers, anchored and unanchored. Although there were several large sales and leases/lease renewals, the net retail scenario remained flat for the quarter.
Overall, from the end of June through the end of September, vacancy in all retail centers increased from 11.1% to 11.4%. Anchored Shopping Centers saw an increase in vacancy of .02% to 7.3%. This corresponds to the typical “summer doldrums” as families vacation nationwide, and traditionally, fewer transactions take place. Highlights of the 3rd Quarter were several larger investment sales, including Chapel Hills East, anchored by Best Buy and Whole Foods, which sold for $25,000,000.
As the cost of funds has decreased and lending requirements loosened some, we will continue to see an increase in the investment market. Sales taxes were up for the City of Colorado Springs for the quarter, with the largest gains seen over the three month period in Building Materials at a 1.5% increase over the term. This corresponds to the huge increase in single family building permits in September – 124 permits were issued which was a 53.1% increase year to year. Multifamily construction is also on the rise, with at least six complexes over 100 units announced and some already under construction. An increase in Sales Tax from Auto Dealers of .6% and an increase of 1.1% in Hotel and Motel sales taxes, which may be seasonal, were other bright spots. Retail sales in general were up nationwide in July and September, although the increase was met with an offset to savings rather than an increase in jobs/income.
Investment
Outside investors accounted for over fifty percent of improved property transactions in El Paso County in 2011, a clear indication of investor interest in Colorado Springs.
The commercial investment market still remains highly bifurcated with one class of investors seeking trophy properties and other investors bidding for REO and distressed properties. There is an extremely high level of competition for trophy properties fostered in part by the continued availability of low cost capital. Multiple offers for acquisition of REO and distressed properties is now the norm, a sign that most investors feel the commercial real estate market is in recovery mode.
Most of the lease transactions are the result of existing tenants moving to better quality space at competitive rates. This trend will continue into 2012 with only moderate improvement in lease rates and absorption. Expect the recovery to continue at an uneven pace as the economy struggles to stay out of another recession.
Institutional investors acquired two high profile properties in the 3rd quarter of 2011 – Chapel Hills East and 1555 Newport Road. This trend will continue as investors seek stabilized, well located properties that offer stable yields.
Cap rates are headed toward more historical norms for properties that are not institutional quality. Investors will continue to look at the secondary markets for quality properties priced well below the primary markets.
Land
El Paso County/Colorado Springs market land sales, in all real estate categories, continued to remain stagnant, at very low volume, through 2011. This trend will most likely continue through 2012 with a possibility of an uptick in 2012 and 2013 because of pressure the banks are receiving from regulators to clean-up their books of long held assets.
The majority of land sales activity has been investors or owner/users purchasing bank-owned land and lots at heavily discounted prices. The purchasers are either developing the properties for their own accounts or planning to hold the properties for a 3-5 year period until the market improves.
Currently, the majority of the local home building companies and residential developers are capital constrained and are not aggressively looking for deals. All of the national home builders, with the exception of Richmond Homes, have left the market. The national home building companies are not expected to return to the Colorado Springs market until at least 2013. Finished lot prices should remain level because of the limited supply and undeveloped land prices are expected to continue to decline for the next 12 to 18 months until at least 70% of the existing 2,500 finished production lots in El Paso County are purchased and development financing is available. The stabilization of the residential home prices will ultimately determine the value of residential land in the area.
Finished residential lots (approximately 6,000 s.f.) are being sold for $45,000/lot to $65,000/lot per lot in north market at Woodmen/Powers area and $25,000/lot to $35,000/lot in the market south of the airport. There have been very few undeveloped land purchases, commercial or residential, in El Paso County during the past 36 months.
Commercial property is being sold to investors and users at a slow pace. However, transactions are being completed with retail users paying today’s market prices (20%-25% less than 2005 prices) for “A” retail locations. There are a limited number of commercial and retail properties being purchased by investors at heavily discounted prices from banks.
In all land categories, there may be opportunities to purchase heavily discounted land in 2012 because of pressure the banks are receiving from regulators. However, the resale market for the land will be very limited until the national economy improves as a whole. This trend and the opportunities created from these circumstances is expected to continue through 2014.
|