This week the Colorado Springs Business Journal visited with a multi-discipline group of brokers from Palmer-McAllister, a local firm handling more than 300 office/commercial, retail, industrial, land sales and investment transactions annually. The following are a few of their observations and their forecasts for 2002.
Kent Mau (Senior Managing Director), an office broker for Palmer McAllister, has learned to ride economic roller-coasters – and has built a twenty-year career in his industry, including fifteen years in Colorado Springs. He represents a team of five brokers who focus on the lease and sale of office buildings for Palmer McAllister. In 2001, Mau was the broker on almost 60 transactions, including the sale of two $10,000,000 office buildings and the acquisition of an $8,000,000 property in Pasadena, California.
Mau believes that Colorado Springs is poised for recovery and sees the North I-25 Submarket (the largest office segment in Colorado Springs) as near the bottom and expects it to rebound in the later half of 2002. He sees continued interest by tenants in the north end and expects to see a number of transactions register statistically by the end of the year. With vacancy rates in excess of 20%, including sublease space, on the north end alone, tenants have more choices at lower values. “This represents a three to five year supply of office space,” says Mau, who also points out that this space can absorb more quickly with some cooperation from a healthier national economy and expansion from tenants in Colorado Springs. “We have historically experienced significant interest in Colorado Springs from companies outside of our market and when supply is up and pricing down, a big move to Colorado Springs can accelerate our recovery.”
He also sees significant activity in the Department of Defense (DOD) contractors, due to new contract awards, some of which is a result of the September 11th attack. “The Central Business District (CBD) is an area which appears to have more downward movement,” Mau says. The reasons are supply and general lack of activity. The CBD also tends to grow in response to the growth of the suburban markets as tenants in the CBD are generally service providers to others located here. Overall he expects to see a strengthening in all segments of the office market by the end of 2002.
Both Mau and company president, Gary Hollenbeck are “realistically optimistic” regarding the outlook for the Colorado Springs market. The Colorado Springs office market averages absorption of between 400,000 to 600,000 square feet annually and in excess of 1,000,000 square feet of lease activity. This should be consistent with levels to be achieved in 2002, both predict.
Palmer-McAllister’s retail brokers, Mark Useman, Steve Hunsinger and Greg Kaufman, work with shopping center owners and developers to generate transactions. The three retail brokers support owners with services ranging from site selection, financial underwriting, project design, leasing, project management and the sale of shopping centers.
Mark Useman and Steve Hunsinger, veteran retail brokers, believe retail activity will continue at a conservative pace in the Colorado Springs area in 2002. Last year’s retail highlights included the construction or opening of at least four centers, according to Useman. They include: Mesa Ridge Shopping Center with grocery anchor, Safeway; Norwood’s First and Main center and theater complex; the expansion of the Safeway Market Place East with the new Kohl’s Department Store; and the new regional Union Towne Centre slated for Union Blvd. & Research Parkway. “Retail really was a bright spot on the real estate radar screen in 2001 and will continue to be active in 2002 with other major anchored centers to be announced,” says Useman. Steve Hunsinger agrees, citing the number of grocery-anchored centers that will go under contract in 2002. “The Front Range of Colorado runs counter-cyclical to the Coasts,” Hunsinger notes, “and I think retailers nationwide have been hit harder by the current economy than we have.” Hunsinger also says that interest continues in the Gold Hills Mesa area, though no specific deals have been reported. He also points to a brief rebound in Colorado sales tax receipts this fall, after September 11th – another sign that Colorado is bucking national trends.
The brokers see low vacancy rates continuing in well-located anchored centers. Non-grocery-anchored center spaces may stay vacant longer than in the past. In smaller centers or tertiary locations, lease rates may drop below the current levels. Useman does see announcements coming on several new shopping centers – primarily along the Powers corridor, including both a WalMart and a Target super-center. “We’ve also watched the development of a number of new grocery-anchored centers in ‘fringe’ areas where the need for services has grown – places like Falcon, Fountain, and Monument.” There were approximately 4,600 new homes built in 2001, and another 4,000 starts are expected in 2002, according to local economists. To retail brokers this is good news – especially because developers have not built a lot of “spec” shopping centers.
“We’ve seen some big box retailers close – and a few weak operators go out of business,” says Useman. He recently represented the owner of the former Jumbo Sports building on North Academy Boulevard in the sale of the building for $2.2 million and says that the building’s new owner, Rocky Mountain Calvary Church, represents a new breed of non-traditional big box space users who will help absorb those spaces.
The Palmer-McAllister team expects a good year in 2002, based on a 7 to 7.5 percent vacancy rate overall. Lifestyle Retail Centers that are being considered near Briargate Parkway and Powers Boulevard will inject a more sophisticated retail facet into the market. Greg Kaufman also points out that, thanks to stock market instability, REITs are once again eyeing attractive retail investments. The hard part, says Kaufman, is to find owners who want to sell in the current market.
“Eighty percent of our tenants are still small businesses,” Hunsinger adds, “and not all of them can afford the higher rents that are demanded in the current marketplace.
Sobering – that’s the best descriptor for the mood in the Industrial real estate market, according to Paul Engel, Dave Bacon and Kevin Heinicke of Palmer McAllister. The days of larger floorplate requirements has slowed, resulting in an abundance of vacant larger space. And September 11th has increased corporate expansion jitters. In spite of difficult marketing conditions, however, the three brokers see some bright spots on the industrial horizon.
Engel, Bacon and Heinicke all see a cautious market in which most decisions will be deferred until late 2002 or early 2003. That doesn’t mean that Industrial land or building sales and leasing will come to a halt. In fact, according to Bacon, a number of factors may move the sluggish Industrial sector along. Those include: excellent financing to seed new projects; the availability of attractive land parcels; and the increased number of small to medium size business owners who continue to pursue facilities of their own. “In the long-term,” says Bacon, “I think we will also see opportunities from the aerospace and defense industry.
Heinicke has seen a real slowdown, but along with Gary Hollenbeck, believes that 3rd and 4th quarter, traditionally the most active season for real estate transactions, will provide a true market barometer. Engel also points out that manufacturers have low inventories, increasing the need for new production as markets improve. On the flip side, however, he has seen more movement to take U.S.-ba
sed manufacturing operations off-shore – citing the decision by Quantum to move the bulk of its hardware production to Malaysia from Colorado Springs in 2001. Both moves will affect – the U.S. Industrial real estate market.
Trends for 2002 include new acceptance of eastern Colorado Springs for industrial development. Supported by Intel’s pending 700 acre purchase of land off Bradley Road, developers are committing to create a corridor that extends along Powers Blvd. near the Airport. To date, projects include the Classic Business Park at Fountain and Murray; the Airport Business Center; the Powers Airport Business Centre and Aerotech’s new buildings. “I think we’ll see few projects out of the ground in 2002, but thanks to new, small to medium (13,000 to 19,000 square feet) buildings such as the new units we’ve got listed at Powers Business Centre, we’re getting product that has been needed for years.” Bacon and Engel already see the new product lines – smaller attractive, well-landscaped office/warehouse buildings – creating great interest. Bacon also notes that developers are now willing to sell or lease new facilities – a good economic recovery strategy. “Future success in the industrial market will greatly depend on this flexibility.”
Land Sales:
With the largest land sale in the U.S. on the books for 2001(the sale of the 21,400 acre Banning Lewis Ranch), Palmer-McAllister brokers may have a hard time beating their own record. According to Dale Wheeler and Gary Hollenbeck, however, land transactions will continue to represent a large part of the company’s business. Even as desirable parcels become more difficult to find, both brokers see continued investor interest in Colorado’s Front Range.
During Wheeler’s six-year tenure with Palmer-McAllister, he has worked with international, national and local investors. Thanks to Intel’s announcement that it will purchase 700 acres in southeast Colorado Springs for a second facility, Wheeler believes a new corridor for development and land sales along Powers will build over the next few years. He projects that development will continue on the 21,000 acre Banning Lewis property in either case, but Intel’s decision will affect the speed at which the southern Powers corridor and adjacent parcels develop.
“Bottom line, the Pikes Peak region is a great place to live. There will always be investor interest in buying and selling land here – but good tracts of land are getting harder and harder to find,” he says. Several large parcels in northeast Colorado Springs, such as NorWood’s Wolf Ranch and Classic Companies’ Flying Horse Ranch, are already master-planned. Wheeler also recognizes the City of Fountain for its aggressive marketing efforts. “Fountain is participating with the City of Colorado Springs on a new water pipeline – opening the future of southeast Colorado Springs to new residential, commercial and industrial projects. Southeastern Colorado Springs’ property values will also benefit from the recently approved Jimmy Camp Creek Reservoir and adjacent regional park. My guess is that the Highway 24 – Highway 94 nexus will be the next big corridor for development.”
As he focuses on working with land owners, Wheeler foresees putting together at least another 3-4 deals by fall 2002, including a property currently owned by an educational institution and the assemblage of parcels by a group ready to sell. He also forecasts that large homebuilders such as U.S. Homes, Classic Homes and Richmond Homes will also continue to require additional land.