Q2 2012 Colorado Springs, Colorado Office Market Trends

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Q2 2012 Colorado Springs, Colorado Office Market Trends

“Rebound has yet to take root in Colorado Springs office market,” proclaims the headline of an August report in the Colorado Real Estate Journal. Hopes that the investor and tenant interest seen earlier in the year would make 2012 the “tipping point” in a quick recovery of the local market were disappointed when that perceived potential failed to materialize as the year progressed. Indeed, the oppressively high vacancy rate—20.4% as of mid-year as calculated by Reis—and its painfully slow, 30-basis-point descent since year-end—render moot the small positive net absorption under way in the 14.9-million-square-foot general purpose, multi-tenant office market. Thus alongside no newly added supply, total net absorption for the first half of the year was only 43,000 square feet (the total for second quarter alone was 42,000). July-August followed with 29,000 more and a 20-point decline in the vacancy rate.

While these small increases in overall occupancy were insufficient to ignite a new cycle of rent growth, rents, in any case, seem to be stabilizing. At $16.47 psf and $12.35 psf, asking and effective averages for the second quarter were down 0.4% and 0.2% since year-end. July-August, however, followed with respective gains of 0.1%; additional small increases are expected for the remainder of the year. As reported by Sierra CRE in its third quarter 2012 report on the local market, increasing rents may “be a sign that landlords believe the market has turned a corner and rent concessions can be eased.”

No competitive general purpose office projects have completed construction since 178,000 square feet delivered in 2009. No projects of this type were under way as of October 1 and none of the few planned projects had a specified groundbreaking date. Reis reports only one project currently under way—the 50,000-square-foot Medical Office Plaza project at E. Fillmore Street and N. Union Boulevard in central Colorado Springs. Construction will complete in October 2013. The largest competitive project in the planning pipeline is the proposed 800,000- square-foot office component of the Colorado Crossing mixed-use residential-commercial development at Highway 83 and Federal Drive in north Colorado Springs. The 150-acre project, once described by The Gazette as “one of Colorado Springs’ biggest real estate busts in recent memory,” was halted by bankruptcy three years ago. While its future remains uncertain, the eventual “resurrection” of the project may still be possible. The receiver “said he continues to try and position the property for future sale and development, which could eventually mean new owners and developers,” The Gazette reported in May.

The upcoming election and the “fiscal cliff” scenario, states Sierra CRE, “have many potential employers sitting on the sideline.” As noted in Special Real Estate Factors, however, several Class A deals may soon be done. Reis expects modest positive absorption over the remainder of the year; the vacancy rate should slip under 20.0% by year’s close. Small increases in mean rents are expected for the coming months. Recovery should accelerate in 2013.