Glut of office buildings plaguing northern market

Office vacancies remain high in the newly constructed buildings on the north end of Colorado Springs.

Both Hoff & Leigh Commercial Real Estate and Sierra Commercial Real Estate released their second quarter reports this week and while the statistics varied, both documented high vacancy rates in commercial office space in the northern part of the city, though the rates appear to be improving.

Both reports reveal that office vacancies in the northern part of Colorado Springs have improved from the first quarter.

Sierra reported the vacancy rate in commercial office space along the northern corridor of Interstate 25 at 19.65 percent, that’s down from 20.42 percent in the first quarter of this year and 22.86 percent last year.

Hoff & Leigh reported a 19.65 percent vacancy rate compared to 23.47 percent in first quarter for its northwest region.

Those figures are significantly higher than the citywide vacancy rate of 15.33 percent, according to Hoff & Leigh and 16.98 percent, according to Sierra.

Ben Lowe, director of market research for Sierra, said the discrepancies between the two reports come from how the two companies classify geographic regions differently and how they define building categories. One company may categorize a structure as industrial while the other labels it office space.

“But market trends and general analysis are pretty much in line,” Lowe said.

Peter Scoville, a principal with the real estate consulting firm Palmer McAllister, is also in the process of compiling statistics.

“I’m pretty sure, based on familiarity with the market, that vacancies are the lowest they’ve been in that area for at least eight consecutive quarters,” Scoville said.

While improving, vacancy rates are still nothing to smile about for developers stuck holding empty properties, Scoville estimated Class-A vacancies in the northern part of the city around 28 percent. Hoff & Leigh reported that they are 24.66 percent in its north region and 25.89 percent in the northwest region.

Sierra reported a whopping 29.64 percent vacancy rate for Class-A office space along the northern I-25 corridor. That’s down from 30.95 percent in the first quarter.

“The reason for those high vacancies, it’s not people moving out,” said Jason Baumgartner, director of market research for Hoff & Leigh. “We just overbuilt office space in 2007 and 2008.”

He said commercial building permits peaked in the third quarter of 2007 with 105 permits for new commercial construction. That’s compared to 20 in the first quarter of 2011.

“The driving force behind all of that available office space is brand new development,” Lowe said. “We just built and built because we thought things were going to stay good.”

Now developers have expensive high-end office space on the books, drawing down their reserves until new companies decide to move to town or existing businesses begin to grow again.

Nothing will happen to that space until job growth picks up, Lowe and Baumgartner said.

One of the biggest developers caught in the aftermath of the building boom and economic bust is Corporate Office Properties Trust, which built new facilities in 2008 and 2009, just as the economy soured.

“Things had been going so well,” Lowe said. “They had a great, great property at Interquest and just decided to pull the trigger, thinking it would leas right up.”

But that’s not quite how things worked out. COPT has two buildings at Interquest and I-25 that it completed in 2008 and 2009. They remain mostly vacant. The company also has a third new building in the southeast part of town, said Jason Krawiecki, the leasing representative for COPT.

Without those thee new buildings, the company’s space in Colorado Springs is 90 percent leased. With the three, its 76 percent occupied, Krawiecki said.

The buildings were intended as long-term holdings for path of growth, Krawiecki said.

“We knew it was going to take time to fill them up,” Krawiecki said.

The properties are leasing at $15.50 per square foot, Krawiecki said. That’s above the average for that area, where rents tend to be around $12.70, according to the Hoff & Leigh report. But Krawiecki said the pricing is incredibly competitive when tenants factor in the operating expenses, which currently run about $5 per square foot, roughly half of the average.

The new COPT facilities at Interquest are Leadership in Energy and Environmental Design certified, making them energy efficient and the overall per-square-foot cost competitive with existing office space.

“If it’s me, I’d rather be in a nicer building,” Krawiecki said.

COPT leases much of its space to government entities but is courting high-end commercial tenants for the Interquest spaces.

“I’d like to see a title company, residential brokerage, a financial group — those kinds of uses,” krawiecki said.

Each floor of the new buildings is about 30,000 square feet. Krawiecki said his company would ideally like to fill the space with tenants who want large chunks, but can separate out smaller pocket spaces for smaller tenants.

Baumgartner said one reason the vacancy rates in the north part of town are so much higher than they are in other areas (4.5 percent in the west, 12 percent in the southeast, 8 percent in the downtown periphery and 10 percent in the downtown core) is that most of the office buildings there have 30,000-square-foot spaces and aren’t as flexible about breaking it up into smaller office suites during a time when many companies are downsizing and looking for smaller spaces.

“Right now, we’re just overdeveloped,” Baumgartner said. “Our 10-year average is 10 percent vacancy. Right now, being up around 15 percent citywide, we just have a lot of work to do to catch up with that.”

Sierra Commercial Real Estate

Market Rentable area Vacant SF Vacancy rate Asking lease rate
North I-25 12,226,674 2,402,327 19.65% $12.46
Northeast 3,455,281 482,221 13.96% $10.31
I-25 Class A 4,818,317 1,428,072 29.64% $12.38
Citywide average 27,905,752 4,737,507 16.98% $11.35

Hoff & Leigh Commercial Real Estate

Market Rentable area Vacant SF Vacancy rate Asking lease rate
North 6,923,671 1,360,214 19.65% $13.83
Northwest 4,181,459 637,600 15.25 % $10.65
North Class A 4,148,253 1,023,094 24.66% $14.25
Northwest Class A 819,109 212,096 25.89% $12.02
North Class B 1,702,508 337,120 19.8% $12.09
Northwest class B 4.528,430 409,904 9.05% $10.34
North Class C n/a n/a n/a n/a
Northwest Class B 69,456 15,600 22.46% $9.50
Citywide average 28,516,045 15.33%