Commercial real estate

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The Pikes Peak region’s commercial real estate market has thrived for years thanks to new and expanding national corporate players, local developers and small business start-ups.

But as industry brokers, investors and analysts prepare for 2010, most acknowledge that commercial real estate investment has become increasingly challenging — and paydays less frequent — since mid 2007.

With money for development in short supply — the result of increased regulatory pressure on lenders and a drop in international money flowing into the country — brokers have had to scramble, proactively negotiating lease renewals for tenants and landlords or holding their breath that loans get approved.

Their corporate clients in some cases have been forced to cut staff and abandon commercial office space in order to survive — and small business owners have followed suit, opting to delay expansion until the economic dust settles.

So far the future remains unclear, and until the clouds lift, investors will be cautious.

In an October Loopnet.com survey conducted of 1,200 commercial brokers,  31 percent said the economy would take at least two years for the number of commercial real estate transactions to return to the levels of second quarter 2007.

Another one-third said market values will slip by 11 to 20 percent before beginning to rebound. Multifamily property is expected to present the best long-term investment opportunity during the current cycle, the respondents said. A whopping 56 percent of those polled had no plans to invest in commercial real estate during the next 12 months.

Analysts at IHS Global Insight, a commercial market research firm, believe for a sustained office market recovery, employers must start adding jobs. The firm has predicted that the total number of U.S. jobs will not return to pre-recession levels until 2013, which “implies that the office vacancy rate will not return to equilibrium until perhaps 2014,” it said in a fourth quarter statement.

The slower pace of deterioration in the vacancy and absorption rates during third quarter was “a hopeful sign,” especially because as some economists believe, “panicked employers ‘over-fired’ after the credit markets froze in September 2008.”

So far El Paso County remains in an enviable position. Its unemployment rates hover just above 7 percent, a third lower than the 10.2 percent national rate as the year begins. Fort Carson continues to generate billions in new construction and Schriever and Peterson Air Force bases are expanding. As a result, defense contracting and military-related firms continue to set up shop, leasing office and industrial space. While retail spending was down during 2009, some growing, underserved neighborhoods near Monument, Falcon or Fountain also drew new retailers and restaurants.

In a December market overview for 2010, Sierra Commercial Real Estate’s brokers took an in-depth look at four key commercial market segments. In addition, national and regional analysts at Jones Lang Lasalle and the National Association of Realtors’ Certified Commercial Investment Member group weighed in on what lies ahead.

Here’s a brief snapshot of what they had to say about the office, industrial, retail and land markets — and the aftermath of the country’s two-year “Great Recession.”

Office space

The 2009 Colorado Springs office market currently included about 28 million square feet, up slightly from 2008’s total, and the city’s overall vacancy rate stood at 17 percent — up from 14 percent for the previous year.

One of last year’s biggest shifts in the market occurred as a result of 321,000 square feet of new Class A shell space added to more than 1 million square feet of existing vacant space along North I-25 — the city’s largest employment submarket, said Sierra Commercial Real Estate senior managing director Kent Mau. In the company’s 2010 market overview, Mau, along with colleagues Brian Wagner and Randy Miller reported that multi-story buildings abandoned by corporate tenants such as California Casualty are now 8 percent vacant.

“It will take as much as 5,000 new jobs to help the north end achieve stabilized occupancy,” the brokers said in their recap, adding that only additional employment will bring increased occupancies to “oversupplied single story and newly developed shell product” along north I-25.

Those likely to benefit most, should those jobs appear: Corporate Office Properties Trust with its Hybrid I and II single-story and its Epic One multi-story Class A building, the Promontory business center owned by Prime West/Orix, Healthcare Realty Trust’s two-building Pavilion complex, and the 24-acre Powers Office Park marketed by Grubb & Ellis Quantum Commercial Group.

National commercial real estate firms like Jones Lang Lasalle have predicted that a market recovery won’t begin until second or third quarter 2010, after unemployment and vacancies have peaked. Regional JLL vice president Amber Strang, however, said Denver and Colorado Springs have seen steady national tenant lease renewals and even one or two new corporate expansion leases.

“We just finalized a 70,000-square-foot lease in the Intel building for a new back office operation that will bring several hundred new jobs to Colorado Springs. The company already has a presence in Colorado Springs. They’ll make an announcement with EDC [Greater Colorado Springs Economic Development Corp.] after the first of the year,” she said.

Sierra’s brokers also expect once the economy begins to rebound during late 2010 or early 2011, that new commercial development will be key to any office market resurgence.

“Currently there are nearly 49,000 acres of vacant land within the city limits … out of a total of 126,000 acres. Twenty-six percent of this land, or nearly 13,000 acres, is zoned for commercial use, while 42 percent is zoned for residential and 11 percent for agriculture,” they said, adding that the importance of high quality developable land in the coming years will provide upside opportunity for investors and brokers alike.

Industrial

Even a mid-continent city like Colorado Springs saw more than 10,000 technology jobs move overseas since the tech bust of 2001 and 2002. As a result of this and the current soft employment, during 2010 Sierra Commercial industrial brokers David Bacon and Aaron Horn said the 30 million square foot local industrial market will continue to see flat market conditions.

During 2010 lease rates are expected to drop slightly from 2009’s yea-rend average of $6.30 per square foot, triple net. Absorption of available space should stay about the same, but the inventory of available space will be higher than during 2009. And new construction will be all-but-nonexistent with developers unable to secure funding.

“More than 650,000 square feet of industrial space has been vacated during 2009, driving up vacancy rates to 12.08 percent, compared to 10.47 percent at the end of 2008,” said Sierra Commercial market analyst Ben Lowe.

There have been some exciting deals completed during the past year that could lead to brighter days ahead. Industrial Realty Group bought the 1.4 million-square-foot Intel campus at 1575 Garden of the Gods Road, Verizon Wireless added 108,450 square feet with the purchase of the former Vitesse Semiconductor facility at 4323 Arrowswest Drive, and Tech for Less signed an 80,000-square-foot lease at the former Hotsy manufacturing facility.

Overall, however, Bacon and Horn said market potential exists. “While the national recession grabs all the headlines, local conditions are showing signs of a slight recovery that will undoubtedly help the industrial market,” Bacon said, adding that as the residential building market recovers during the next few years, construction suppliers and other industrial users will begin leasing at least 3 million square feet of available space once again.

Because Colorado Springs’ rent rates remained higher than in other cities that compete for many of the same new companies throughout 2009, the brokers also believe that the local community will be more price competitive in the future as a result of 2010’s lower lease rates and sales prices.

Retail

With a new Costco and Lowe’s at University Village Colorado and a number of still-underserved neighborhoods in Fountain, Falcon or Flying Horse still waiting for new services and restaurants, the Pikes Peak region retail outlook for 2010 is not too bad.

That view from Sierra Commercial Real Estate brokers Mark Useman and Lori Ondrick was somewhat surprising in view of less optimistic national trends.

Of course, the future may not be entirely rosy. The Colorado Springs retail market during 2009 suggested that it was the worst performing year of the decade, Useman said. But the second half of the year — from July through December 2009 showed signs that a recovery was in the works. Year-to-date absorption hit its yearly low during second quarter with negative absorption of 240,000 square feet. That was followed by modest gains, however, as Costco opened and nearby redeveloped inline space filled on North Nevada Avenue.

Vacancy rates, which reached a high of 11.4 percent during the summer dropped to about 11 percent at year’s end. No spikes in new vacancies are anticipated, Useman said, due mostly to almost no new retail construction in the area and to recognition among large and small retailers of market conditions.

The brokers’ outlook for 2010 includes good news during first quarter. So far 450,000 of a total 650,000 square feet at University Village Colorado have been pre-leased by developer Kratt Commercial Real Estate — signaling that even during difficult economic times, “there is still a ‘reward’ aspect to the risk/reward model.”

In addition, as retailers cut costs due to decreased revenues, landlords of newer shopping centers will face continued pressure to offer rental rate concessions to prevent losing tenants to older centers offering lower lease rates.

And new retail construction should be stronger during 2010 than last year. “Multiple big box stores are currently under construction — projects like Citadel Crossings and Interquest Marketplace — and should be delivered during the coming year,” the brokers said.

Norwood Development vice president Fred Vietch, now in the midst of negotiating new leases for Interquest Marketplace, expects at least two new restaurants to open at the company’s 140-acre mixed use center during 2010. Preparation for new commercial tenants has included elaborate landscaping and design of the 3.5 acre site’s storm water detention pond, complete with a labyrinth, a gathering plaza and trail system.

“It’s an investment,” he said of the project’s $450,000 price tag. “In this economy, you have to be the place retailers or restaurants looking for a new location want to be. It’s very competitive out there.

Land discounts

Mark Twain once admonished, “Buy land. They’re not making it any more.” In 2010, however, an investor will be hard pressed to find financing for a land purchase.

In fact, international land brokerage, Orvis-Cushman/Wakefield president John Watson was forced to close the company’s downtown Colorado Springs headquarters office last year because the celebrity- and wealthy-investor-driven market for unspoiled ranch or mountain land had dried up.

Some developers like Lorson Ranch’s Leroy Landhuis, Norwood’s Jenkins family or Classic Cos.’ Jeff Smith and company had the foresight — and the financial resources — to buy land and pay for infrastructure improvements a few years ago, before land prices escalated to 2007 top dollar prices. Others like Morley Cos. owner Jim Morley, acquired big parcels along Powers Boulevard at the height of the market and ended up turning at least some vacant land back to lenders.

During 2010, the only investors likely to buy land are cash-rich opportunists looking for an alternative to low-interest accounts or volatile Wall Street investments.

Dale Wheeler, a Sierra Commercial Real Estate broker who once helped facilitate the sale of the Banning Lewis Ranch to its current owner, sees the ability to hold for the long-term as key to making money on vacant land during 2010 and beyond.

There are some positive signs — especially as new retail development continues on projects that have an established recent history of activity such as University Village, Monument Market Place and the Power Boulevard corridor, he said.

“While 2010 may bring a better overall economic picture, it must be acknowledged that there is probably enough existing development opportunity in the various inventories to make it difficult next year to have a significant effect on land sales. The continued growth of Fort Carson, however, will be a positive impact.”

Wheeler based his assessment on statistics — and on the market’s 70-percent drop in new home construction since 2006, once a major contributor to land sales.

A land analysis by the company showed that of all sales during 2007, 2008 and most of 2009, the total dollar value of land sales declined by about 46 percent from 2007 to 2008, and another 80 percent from 2008 to the estimate for 2009.

His conclusion: Some of the decline was the result of price reductions, but most was attributed to the volume of land sold. More than 7,000 acres sold during 2007, while an estimated 1,500 acres sold by year end 2009.

“What you’ll see is more distress shoppers looking for deep discounts, but prices haven’t softened enough for them. And then there are large developers making incremental lot sales to builders. We’ve got 43,000 acres of undeveloped land and half of that is on Banning Lewis Ranch. With so much vacant land, right now most investors are waiting.

Becky Hurley covers real estate for the Colorado Springs Business Journal.