Excess office, tight money top issues for brokers

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As the national economy’s challenges ripple into regional and local markets, Colorado Springs finds itself dealing with its sixth downturn in 40 years.

Some brokers, however, still believe the local commercial real estate market is in an enviable position.

Researchers at Grubb & Ellis, for example, published their national 2009 forecast during late 2008, just as analysts had finally labeled the economy in “deep recession.”

The company’s specific outlook for Colorado Springs office, industrial, investment and retail real estate reflected many of those national trends, but stopped short of lumping the city in with harder-hit communities in the Midwest or on the coasts.

Since the report’s publication, however, fallout from the Troubled Asset Recovery Program and economic stimulus initiatives has continued to affect the Pikes Peak region — putting downward pressure on retail and office leasing and making it more difficult for investors, used to highly leveraged profitable deals, to obtain cash.

A group of local Grubb & Ellis Quantum Commercial brokers took a closer look at the report this month, noting that the Pikes Peak region’s commercial market, like residential, still doesn’t have too far to fall — even during the worst of times.

Here’s a brief review of what the brokers had to say today about how the original G&E forecast is playing out — especially after what they viewed as a “terrible” third and fourth quarter of 2008.

Office and investment

With eyes wide open, the Grubb & Ellis analysts see Colorado Springs’ defense industry tenants as providing stability in the short term, but the long term could be less certain for office space users.

“Historically, the defense industry has played a vital role in the local economy, often acting as a cushion in a slow market. However, with a new administration, funding for defense could decrease and result in a softer office market,” the report said.

Speculative new construction is not likely through the remainder of the year, but rental rates are not expected to drop significantly because the market was not overbuilt.

Brokers closer to the local action, however, see a more complex picture — and office vacancies seem to vary greatly, depending on geography.

“It’s extremely challenging out there,” said office broker Andy Oyler, “and the sales you see right now are often forced sales. And you’re beginning to see more sublease space creep back into listings — especially along north I-25. And on the southeast part of town, (the government’s) new Force Protection requirements have rendered some former defense contractor space less desirable.”

Susan Beitle, a broker with Mark Dyer for the sparsely occupied Promontory medical office complex on Research Parkway, admits that leasing has slowed dramatically, especially for medical office space in the northeast quarter.

“Fortunately the owners — Prime West and its financial partner ORIX — are prepared to hold for now,” she said.

The Pavilions and the Powers Office Park, where leases have been slow to come, especially during the last six to nine months, are testimony to a temporarily saturated market.

“I think you’ll still see interest from the medical community — we’re working with several clients at Powers Office Park — but neither the money to buy nor 1031 exchange deals are there right now,” said Mary Frances Cowan of Grubb & Ellis.

Further north along Interquest Parkway, the promising move of Plasmon from Garden of the Gods Road to Corporate Office Properties Trust’s Hybrid II building didn’t work out as planned. The company has since vacated its 43,000 square feet of space.

The central business district, on the other hand, has been buttressed by development of a downtown U.S. Olympic Committee headquarters building, redevelopment of 19 N. Tejon and a nearby sports national governing body office building.

A pending move north by El Paso Energy also appears to be on hold, at least for now, which Oyler sees as key to continued downtown vitality.

“They have several hundred employees that patronize downtown restaurants and retail,” he said. “It would be tough if they left right now.”

And then there’s the scarcity of investor money available.

“For investors, you’re looking at 30 or 40 percent down in order to even qualify for a loan — and then the interest rate will be higher than two years ago when deals were done for 10 percent equity or less,” said broker Michael Palmer.

Hermann Spielkamp, who focuses on the Monument market, said that part of El Paso County is still expanding, due to pent up demand from existing residential communities.

“Even as the market has weakened, our landlords may be lowering rents slightly, but they’re not forced to liquidate,” he said.

Sublease space — office units that have been leased by financial services, homebuilding or other companies and then abandoned in a tough economy — grew to more than 400,000 square feet last year.

Though not as significant as it was during the tech bust of 2001-02, emptying offices on the Briargate Business Campus or near the airport, combined with new buildings begun during 2008 and coming on line, could mean an over-supply of space for at least two to three years.

The brokers agreed that the addition of 150,000 square feet of new office space at COPT’s new five-story Epic One building off Interquest Parkway is a sign of the times. So far only 40,000 square feet in the new Class A facility has been leased — to Lockheed-Martin.