Wealth of office space forcing low rents

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Last year’s departure of Quantum’s manufacturing operation, downsizing at MCI and Intel as well as a shake-out in the dot.com industry has left its legacy in sublease space. The glut of vacant, but leased office and industrial space exceeds 1.3 million square feet in second quarter 2002 – pushing overall vacancies to an eight-year high. Turner Commercial Research believes the sublease variable dilutes the market and may delay Colorado Springs’ economic recovery (which he says typically lags behind the national economy by eighteen months). He does point to expansion plans by some of the area’s larger employers such as Intel, Atmel and FedEx, but believes those will be delayed until the national economy turns around.

“So far the sublease space on the market is not priced attractively enough for a down market or for bottom feeders,” said Turner. “While subleased spaces are often leased in the short-term for less than direct-lease office or industrial rents, so far, second quarter’s $1.52 per square foot net drop isn’t enough to move empty floorplates.” He does note that some landlords are beginning to offer attractively discounted rates, but until corporate growth and unemployment rebound, those properties will remain unfilled.

Gary Hollenbeck, president of Palmer-McAllister, agrees that the office market has suffered most – especially after the record-breaking leasing and absorption rates seen throughout 2000. On the heels of more than 1.4 million square feet of office absorption, second quarter 2002′s net absorption loss of 336,100 square feet (including sublease space) looks especially gloomy.

“The problem for the office/commercial broker is that the smaller pool of businesses looking for space can negotiate a shorter term sublease at a discounted rate for two or three years,” says Hollenbeck. “Eventually, the tenant will have to negotiate a new lease at market rates, but in the short run, it’s tough.”

Firms like Palmer-McAllister also serve the industrial, retail and land sales customer, so the picture is not totally bleak. “We’ve completed some impressive property sales that help offset a down leasing market,” he said.

Retail leases continue to flourish as the Pikes Peak region plays catch-up – especially along the Powers Corridor and to the city’s fast-growing northeast neighborhoods. Turner’s second quarter 2002 report shows that owner-user property sales rates rose to an average of $67.31 per square foot – a 2.8 percent increase over 2001. So far this year, nine retail facilities have sold to speculative buyers, totaling 273,873 square feet at an average square foot price of $80.36 — a 22.8 percent increase over 2001.

Land deals through June 2002 include 104 transactions and 3,000 acres, accounting for more than $28 million in sales. This is compared with 369 transactions, 44,000 acres and $183.2 million in sales for all of 2001 (including the 21,400-acre Banning Lewis Ranch sale).