Report: Commercial real estate markets start year strong

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The local commercial real estate market is going strong — even with the closure of two big-box retailers.

Colorado Springs’ retail, office and industrial markets performed well during the first half of 2018, according to CBRE’s H1 MarketView reports released Tuesday.

“The retail sector saw a significant amount of space delivered to market and healthy positive absorption that served to offset store closures by two big-box retailers in the first half of the year,” a CBRE press release said. “Colorado Springs’ office sector saw vacancy drop, reaching its lowest level in the post-recession period.”

New tenants occupying a 131,040-sq.-ft. building at 2570 Zeppelin Road, which was the largest industrial project of the cycle, helped decrease vacancy in the industrial sector.

Retail market highlights:

  • Direct vacancy declined from 6.6 percent in H1 2017 to 6.3 percent in H1 2018.
  • Healthy positive absorption helped to offset store closures by two large big-box retailers.
  • The average direct asking lease rate was $13.44 per sq. ft. NNN [Net, Net, Net — see below] at the end of Q2 2018 — an $0.11 decrease from Q4 2017, but a year-over-year increase of $1.19.
  • After a record amount of retail space delivered to the market in 2017, construction activity increased from year-end 2017 to have 255,256 sq. ft. in development at the end of Q2 2018.

Net, Net, Net fees are property taxes, property insurance and common area maintenance. Where a commercial space for lease is quoted as $13.44 NNN it means the tenant is responsible for paying these fees in addition to the $13.44 per sq. ft.

Whitney Johnson, an associate with CBRE in Colorado Springs, says the performance the local retail market can be attributed to two trends: new construction and restaurants.

“We are seeing exciting new retailers enter the market, attracted to the high-quality new construction projects primarily in the northeast,” she said in the release. “We are also seeing increased demand for food options, with restaurants playing an integral role in the new development projects.”

Beyond the northeast, the downtown core has seen renewed interest, which Johnson believes is “bolstered by the Olympic Museum and the newly announced Switchbacks stadium and Colorado College Tigers Hockey Stadium.”

“Overall, Colorado Springs’ retail market is performing well, with the entire sector benefiting from our city’s population growth and active housing market,” she said.

Office market highlights:

  • Vacancy continued to drop, reaching its lowest level in the post-recession period — dropping to 9.4 percent in Q2 2018.
  • Strong leasing activity drove positive net absorption of 193,053 sq. ft. in the first half of the year.
  • The average lease rate increased to $12.47 per sq. ft. NNN, up 2.9 percent year-over-year.

Jared May, a senior associate with CBRE in Colorado Springs, said the office market is “continuing to gain strength.”

“There have been very few deliveries of multi-tenant properties in the last several years, so as companies have expanded and moved to Colorado Springs, vacancy rates have declined,” he said in the release. “This has led landlords to raise their asking rates, and more often than not, they are able to achieve the higher rates.”

CBRE expects to see continued improvements during the second half of 2018.

“[We] are interested to see how the market will absorb the new 100,000 sq. ft. office building that is anticipated to deliver next year at Victory Ridge,” May said. “That will tell us a lot about the strength of the market.”

Industrial market highlights:

  • The direct vacancy rate continued to decline significantly, down 222 bps from 10.4 percent in H1 2017 to 8.2 percent in H1 2018.
  • Market absorption was driven by the newly delivered 131,040-sq.-ft. building at 2570 Zeppelin Road.
  • Lease rates continued to rise, generally due to the demand for large, quality industrial and flex space.
  • Two projects delivered, adding 143,040 sq. ft. of warehouse space to the market.

May said the industrial market had “good momentum” during the first half of the year.

“We are on track to have our best annual net absorption in a decade,” he said. “Quality space is at a premium. We expect the second half of the year to mirror the first half, as we continue to see increased demand from industrial warehouse and flex users. We expect vacancies to continue to decline and rates to increase steadily.”

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