Class A office buildings are difficult to define, but people will typically know one when they see it.
These properties — generally built within the last 15 years — represent the highest-quality buildings in their market and area, with top amenities, high-income-earning tenants and low vacancy rates, according to real estate crowdfunding platform Realty Mogul.
Class A buildings, which are well-located in the market, are typically professionally managed with few or no deferred maintenance issues for the tenant, according to Realty Mogul.
Thanks mostly to Colorado Springs’ rapidly expanding health care industry, Class A office space here seems poised for an uptick, said Mary Frances Cowan, senior broker at Quantum Real Estate.
“My perception is that we’re having pretty good absorption and we’re trending in the right direction,” Cowan said. “The rates are showing improvement. There is some new product coming online.
“I think the trend has been modest absorption over the last couple of years — not like a jet plane, but we’re pleased with the trending positive absorption and increasing lease rates,” she added.
In August 2016, 450,000 square feet of office space became available when Verizon ended its lease at 2424 Garden of the Gods Road — one of the largest unleased spaces in the state at the time, Steve Kohls, CBRE vice president in Colorado Springs, told the Business Journal in September 2017.
In August 2016, Verizon signed an agreement with Westside Investment Partners to sell the property but also remain in 80,000 square feet of the building to maintain its operations, the Business Journal reported. As of February, there are 14 office spaces available in that building for lease or rent, ranging from 15,000 to more than 90,000 square feet, according to officespace.com.
“The Verizon building has a huge amount of space still available but they’re really marketing to larger users, so that could start to be absorbed pretty quickly if they could land the right people,” Cowan said.
Additionally, she said, The Offices at Victory Ridge, located at Interstate 25 and Interquest Parkway, is set to come online this year. The 129,991-square-foot property will include one four-story office tower and two two-story buildings, and available office space will range from 1,330 square feet to more than 100,000 square feet of contiguous space, according to a September article from Bisnow Denver, an online hyper-local commercial real estate publication.
Victory Ridge will offer office space starting at $28 per square foot, according to the developer’s website.
“I think there’s good activity and with the strong economy, I think we’re going to continue to see good activity,” Cowan said.
New Class A buildings were scarce in the Pikes Peak region once the 2008 economic downturn hit, as few developers could justify paying higher leasing rates in the face of rising construction costs, said Holly Trinidad, co-owner of Hoff & Leigh, a Colorado Springs commercial brokerage firm.
“During the downturn, [Class A development] took a hit because there were not a lot of users who were willing to pay the rates that Class A space demanded,” Trinidad said. “It’s really hard to justify building a small owner-user building because the cost of construction is too much. It needs to be larger so that they could get economy of scale so that the cost per square foot isn’t so great.”
That trend persisted through 2015 and into 2016, Trinidad said, but is finally beginning to shift. The area’s office vacancy rate of 8.4 percent is expected to rise this year, but not because employers are leaving, according to news reports.
Instead, newly constructed projects will join the mix of existing space, increasing the supply and pushing up the local office vacancy rate, according to reports.
“I don’t think we’re seeing a lot of the vacancy rates going up,” Trinidad said. “I do think that lease rates are finally starting to catch up with the rest. … Now the lease rates are finally going up and we’re seeing them get done above $20 per square foot. Industrial office building rates have spiked up substantially in the last 24 months.”
Much of the new construction is taking place in the medical office market, and those users are willing to pay that rate, Trinidad said.
“A lot of these large medical groups have joined forces. UCHealth went around and bought up a bunch of family practice doctors and are moving them out of B and C places in the central part of the city to newer buildings on I-25 further north,” Trinidad said. “A lot of that has to do with changes in the medical industry and what these large entities are doing. That’s what’s driving a lot of the growth.”
While Class A rates are still gathering steam, the Class B market is soaring, Trinidad said. Many investors see Class B properties as “value-added” investment opportunities because the facilities can be upgraded to Class B+ or Class A through renovations and improvements to common areas, according to Realty Mogul.
“You used to hope you could get $8 net for leasing a Class B property,” Trinidad said. “Now we’re seeing $15 or $16 net, so there has been a substantial uptick in that market. Those buildings can be renovated and updated, and users like that — and it’s less than what they would pay if they were in Class A.”
WHAT ABOUT DOWNTOWN?
Much of the current Class A development is taking place in the northern part of the city, near the Interquest and Briargate areas, Cowan said.
“There’s more of a little built-in clientele [in those areas] to lease the space,” Cowan said. “My perception is, these developers are trying to get space pre-leased. To build 100 percent [speculative] spaces with competition out there is a little uncertain.”
That fact, coupled with lower lease rates, may be one reason why Downtown Colorado Springs has seen little development in the Class A office market, Trinidad said.
“If I was a developer and I wanted to build a Class A building downtown, the problem would be that the rates are not high enough to justify getting the return I need because construction would be too expensive,” she said. “Rates haven’t caught up with construction yet, and we don’t have an overabundance of businesses moving into Colorado Springs [that are] inflating those rates.
“A really easy way to think about it is, you can’t get a good enough return on the costs of construction based on where rates are right now,” she added. “You could build on spec, but that’s risky because the industrial market is crazy. There is not a lot of inventory and an abundance of users, so [developers] would probably fill space up quickly.
“New retail is going up because there’s a need and [developers] can justify the rate,” Trinidad said. “The office market just isn’t quite there yet.”
The true definition of a Class A building is subjective, Cowan and Trinidad agreed.
While the Wells Fargo Tower on South Cascade Avenue is definitely Class A, Cowan said, “you have the Conover Building at 24 S. Weber that has Class A finishes, but some people wouldn’t necessarily classify that as Class A.”
“If you look at the Downtown Colorado Springs market, there really, truly, aren’t any Class A buildings,” Trinidad said. “They’re B buildings, especially if you went to a large market like Denver. … For Colorado Springs, it’s a little bit different because we haven’t had any large new construction Class A office buildings come online, except for what we’ve seen up north.”
However, “with all the cool stuff that’s going downtown, that helps generate more activity and push up rates,” Trinidad said.
“Eventually, someone will build downtown,” she said.