The year started out with several key announcements that bolstered prospects for the commercial real estate community, mostly during the first half of the year.
The owners of the Cliff House in Manitou Springs kicked off the year announcing a $20 million expansion, to include complete redevelopment of the Wheeler House which will become the Cliff House West once completed.
Enthusiasm for the United States Olympic Committee’s decision permeated the entire Colorado Springs business community. The USOC struck a $53 million deal with a partnership headed by LandCo Properties and CEO Ray Marshall, the city of Colorado Springs and other community stakeholders to lease 90,000 square feet in its new downtown headquarters building at 27 S. Tejon Street. As part of the agreement, LandCo also agreed to renovate the 30,000-square-foot former city gas operations building for use by national sports governing body offices near America the Beautiful Park.
Progress on University Village, an urban renewal redevelopment near the University of Colorado, Colorado Springs was bolstered by completion of the key North Nevada Avenue/Interstate 25 interchange. Developers Kevin Kratt and Tom Cone were also able to secure contracts with Costco, Lowe’s and Kohl’s to anchor the 650,000-square-foot center. Lowe’s also committed to open a new store at Citadel Crossing, a center long overdue for revitalization.
Even South Academy Boulevard was energized by construction of a new Nissan dealership and by refreshed landscaping, exterior improvements, new tenants and the opening of several faith-based organizations at the Mission Trace shopping center.
Medical office sales and leasing were bolstered in a major way, not only by last year’s completion of Memorial Hospital North, but by the 2008 opening of St. Francis Medical Center on the city’s north side. Designed to attract doctors whose practices wanted to be closer to St. Francis, the Northcare medical building opened almost fully leased said co-owner and leasing broker Mike Heritage of The London Real Estate Group. The Powers Office Park also announced it would move ahead on construction and leasing or sales of five new medical and general office buildings.
One of the year’s other newsmakers was the selection of The Vineyard Commerce Park as the site of the Colorado Department of Corrections’ new headquarters. The 9-acre location was selected over four other proposals from Colorado Springs, Canon City and Pueblo, based primarily on the Vineyard’s designation as a sustainable business park said the project’s leasing broker, Stan Kensinger of the Olive Real Estate Group. “That was one of the Governor’s Energy office’s highest priorities — and the final selection had to get their approval,” he said.
A number of other impressive number of lease and sales transaction were announced throughout the year. The CSBJ, with help from Sierra Commercial Real Estate research analyst Ben Lowe, compiled lists of the following major deals, by sector, which closed through November.
A growing Diamond Wire Technology LLC leased 113,000 square feet in a building purchased by Comcor, Inc. for $4 million on North Stone Avenue, and Springs Fabrication expanded its facility by 50,000 square feet. The company could employ as many as 400 workers within the next few years.
The 76,000-square-foot Hotsy building at 2150 Garden of the Gods Road also sold to an investor for $4.72 million, followed by the purchase of the 60,000-square-foot Newport Technoflex V building by 1275 Vapor Trail LLC for $3 million. Tech for Less made headlines by leasing 60,000 square feet of office/warehouse space in the former Hewlett-Packard facility at 5090 Centennial Blvd.
In a fourth quarter review of the industrial market, Sierra Commercial industrial broker David Bacon cited the city’s need for a designated “green industrial park” where zoning might accommodate new energy manufacturing processes. In the past few years, visionary cities like Albuquerque have successfully launched a green office and industrial park. He also pointed to the Vineyard Commerce Park, developed by a partnership including Vince Colarelli of Colarelli Construction — the city’s first approved sustainable business center. “I’m hopeful there will be more to come — especially if we want to attract energy-related business that has been going to northern and southern Colorado,” he said, referring to three new Vestas wind power plants.
The 60-acre Vineyard Commerce Park made separate headlines this year when the Colorado Department of Corrections selected the developer’s sustainable, LEED Gold design for its new state headquarters. CDOC will move to the site, just south of South Circle Drive and Interstate 25 on Janitell Road once its lease is up in January 2010.
Significant office transactions included both sales and leases. The three-building, 260,000-square-foot Briargate Research Center was sold for $37 million, and the new 125,000-square-foot Northop Grumman headquarters in the Airport Business Park sold for $23.3 million.
Two other major office deals were the purchase of the 123,000-square-foot California Casualty Center’s building in the Colorado Springs Tech Center for $15.5 million and the sale of the 77,000-square-foot Lexington Center for $5.36 million.
ITT Federal Services leased 104,000 square feet in the Patriot Park VI building during the summer and Plasmon move into 43,000 square feet in COPT’s Hybrid II building on Federal Drive.
Office sales and leasing broker, Kent Mau of Sierra Commercial Real Estate emphasized the region’s general stability — in spite of slower population growth, higher unemployment and a continued debt market crunch. With a total inventory of 27 million square feet, the hardest hit office markets include the North Interstate 25 corridor where there’s currently 800,000 square feet of vacant space available.
In contrast, the once-lethargic south east submarket near the airport appears to be regaining momentum though an oversupply of sublease space has pushed vacancies to more than 22 percent. The central business district remained healthy with a 10 percent overall vacancy rate — and the expectation of new tenants following the USOC’s move downtown.
Brian Wagner, also of Sierra sees the medical office submarket as accounting for as much as 3 million square feet of total space, largely because of the recent opening two new north side hospitals. Five empty buildings near both hospitals boost vacancy rates to about 33 percent in the north east sector he said, while the overall medical vacancy rate stands at about 17 percent. The central business district, however, was much stronger with only 8 to 9 percent vacancy rates.
Sierra Commercial owner Dave Delich sees the fact that large amounts of sublease space have been vacated by defense contractors as not a complete drag on the market. In fact, he said, during the past 24 months, the Economic Development Corp. has missed opportunities to snag relocating companies because it didn’t have enough land or buildings to accommodate large corporate customers.
Retail leasing remained stable, despite national trends to the contrary. The greatest new shopping center development and lease activity took place to the north and east.
Among the highlights, Costco opened its first 157,000-square-foot store at 5885 Barnes Road, and the Citadel Crossing shopping center sold for $7.5 million in anticipation of a late 2009 Lowe’s opening.
More notable additions to the local scene included a new 48,000-square-foot Hollywood theater that opened this fall near Interquest Parkway. Family entertainment will be the focus of a 46,000-square-foot new It’z at First & Main Town Center, and Family Furniture building owner, Craig Minette, sold his 36,000-square-foot building at South Academy Boulevard and East Pikes Peak Avenue to a South Carolina-based investor for $2.51 million.
To the north, the Monument Marketplace center added two major new tenants: Staples and Petsmart leased 21,000 square feet each.
In total, the city is home to 38 shopping centers including a total of 19 million square feet. Vacancy rates for the past 10 years have averaged from 7 percent to 9 percent said
Sierra Commercial’s senior managing director Mark Useman. He expects the year to end with a 9.2 percent average retail vacancy rate — down from 9.3 percent in 2007. While there was a slight uptick in occupancy, absorption of vacant space, was only up by 520,000 square feet for the year.
Stable occupancies and rents, few new units under construction and delayed absorption of multifamily units in southeast Colorado Springs because of troop deployments were the themes for the multifamily market during the entire year. In fourth quarter, however, job losses and seasonal attrition forced average vacancy rates up to 10.19 percent, the highest level since the fourth quarter of 2006 said Doug Carter of Sperry Van Ness.
Those properties exhibiting the greatest vulnerability were built prior to 1980 and during the 1990s. Landlords saw their “economic vacancy” or combined vacancy and cost of concession rate increase to 18.68 percent in fourth quarter, but that was still 0.2 percent lower than for the same period in 2007.
More renters were looking for affordable units this year than last. Vacancies in “tax credit” properties such as Rio Grande Village or Alta Mira Apartments, for example, were down to 8.02 percent — 2.17 percent below the average for conventional apartments. According to Apartment Insights yearend report, however, net rents remained, on an average, $7 higher than one year ago for an annual increase of 1.1 percent.
Apartment sales volume for the year decreased slightly from 21 sales transactions last year to 18 this year, and the average selling price declined on a per square foot basis from $77.05 to $69.28.
Ken Greene, vice president of Apartment Realty Advisors, said the multifamily investment market continued to reel from the subprime loan crisis and lenders such as Washington Mutual and Countrywide that are virtually out of the market. The few that remain have upped loan-to-value requirements, forcing prospective buyers to come up with a 30 percent to 40 percent down payment.
The subprime mortgage crisis reared its in March and April, causing many of the city’s publicly-owned homebuilders like Beazer, Lennar, Pulte, John Laing and D.R. Horton to close or consolidate local offices. Pulte, John Laing and Richmond, however, continued to pull permits but maintained leaner staffs. Move-up and custom builders such as Keller Homes, Vantage Homes and Classic homes were eventually affected as well, with total El Paso County building permits recorded expected to be fewer than 1,200 for the year, down from a 2006 high of more than 6,200.
The 2008 Parade of Homes showcased 29 models, down from 46 the prior year. Twelve Parade models were priced at $1 million or more, but public attendance was as strong as ever, said Renee Zentz, Housing and Building Association executive director. “People always love to see the interiors, the new features. That response was a bright spot.”
All home builders were hard-hit by the declining economy as mortgage rates hovered near 6 percent, and credit tightening forced by risky mortgage securities and defaults on Wall Street hit the home building business hard.
By third quarter 2008, even the Banning Lewis Ranch team announced a delayed opening for Phase 2 at Northtree, its inaugural community, citing poor economic conditions and homebuyer caution for the decision.
With no end to the economic downturn in sight and record foreclosures clogging for-sale inventories during fourth quarter innovative, builders hunkered down, hopeful their arsenal of creative marketing and financial incentives would eventually get them to the closing table by mid-2009.
Housing and Building Association Executive Director, Renee Zentz estimated that El Paso and Teller County construction related employed stood at 19,000 or better in 2003 or 2004, but is closer to 10,000 workers today as a result of the economic slowdown.
“Our membership still stands at 650 members — and it hasn’t changed that much over the last two years,” said Bobby Ingels, 2008 HBA president, “but the board has instituted some new programs to help our members in view of the economy — implementing a new dues payment program. So far a few members are taking us up on it. A lot of our members really don’t want to separate from the industry right now so we’re trying to work with them on renewals.”
Home sales were off by 25.2 percent through November though median home values fell just 9.9 percent to $187,000. The region’s foreclosure statistics were up 59 percent for November on a year-over-year basis, creating a tough market for sellers. Short sales became a household word as even veteran brokers used to the plentiful commissions and low-hanging listing fruit of the last two or three years were forced to negotiate discounted terms with lenders to get deals done.
The Cooper Tower’s developers — hoping to attract a national hotel flag such as Westin, Marriott or Embassy Suites — were unsuccessful in securing the financing necessary to make the deal work. Redesigned last summer from its originally-planned 24 stories to a more manageable 18 floors of hotel facilities, retail, parking and residential condominiums, the Cooper Tower’s budget gradually climbed to more than $100 million — requiring more “good faith” than lenders could provide in the United States or abroad according to Ray O’Sullivan, the project’s lead investor. Three properties along Nevada Avenue were purchased in anticipation of building a combination hotel-mixed use center, but O’Sullivan will likely lose them to foreclosure.
At the same time, NorWood Development’s President Chris Jenkins made it official: Pikes Peak Place, a sustainable office and apartment high-rise proposed for the north east corner of Pikes Peak Avenue and Nevada Avenue, would be put on the “back burner” for now, pending better economic times. With lenders requiring a minimum of 70 percent pre-leased office or apartment space with 30 to 40 percent down, the deal lost its luster, though Jenkins expects to re-evaluate as the economy and debt markets regain their legs. For now, the corner remains empty.
Developer Jannie Richardson kicked off construction of a new Cinemark multiplex and adjacent 1000-stall parking garage prior to getting final financing for the project. Construction started prior to Lehman Bros.’ demise, and created a difficult new lending environment for the project. G.E. Johnson stepped away from the job this fall as Richardson found lenders unwilling to honor prior financing commitments. The company’s CEO, Jim Johnson, said he fully expected that Richardson would come through with money she owed for construction work completed — “not this week, not in 3 months but maybe six months from now.” As owner of the entire 152 acres, free and clear — highly attractive to most lenders in the past — Richardson has found a new contractor and remains positive that the project will move ahead in 2009.
Classic Cos. spokesman Ron Butlin said during the summer that plans for upscale townhomes and a new Palmer Village office building with adjacent parking garage had been sidelined for now. Hotel developer John Q. Hammons reassured the city, however, that a 225-room Embassy Suites Hotel in the same location was still in the planning stages, pending environmental clean-up of coal tar residue by the city.
Citygate, a 12-acre parcel on the south east corner of E. Cimarron Street and Sierra Madre is another Urban Renewal Authority redevelopment project that will lie quietly for the foreseeable future said Griffis Blessing President Steve Engel. Ultimately the now-empty site will await the next market upswing.
While the CSBJ covered dozens of acquisitions and new projects, the majority of 2008 deals centered on medical office leasing, steady multifamily transactions or on the owner-user industrial and office markets, where demand remained strong. Only as lenders pulled in dramatically this fall did commercial real estate really begin to slowdown. Retail leasing and sales, as well as the office market took the earliest hits, but general softening in commercial real estate will be a major factor as the new year begins.