Commercial real estate market steady during 3Q

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Commercial office-space vacancy rates are high in the north, and retail vacancy rates are high in the eastern-central part of town. But industrial space is slowly filling throughout the city, two commercial brokerage firms say.

Two firms, Sierra Commercial Real Estate and Hoff & Leigh Commercial Real Estate, each recently released their third-quarter reports. While the reports measure data slightly differently and divide the city into different submarkets, the results are in line with each other.

Figures held mostly steady from the second quarter to third quarters in all market segments.

“Office was relatively flat,” said Hoff & Leigh’s Jason Baumgartner. “There was some negative absorption, but not a lot.”

Office vacancies rose citywide, according to the Hoff & Leigh report, from 15.21 percent in the second quarter to 15.27 percent in the third quarter.

Sierra noted a slightly sharper spike in office vacancies from 16.89 percent in the second quarter to 17.28 percent in the third quarter.

The differences result from what each brokerage classifies as office space, Baumgartner said.

While those fluctuations are minor, office vacancies on the north end of town, especially in Class A properties remain exceedingly high.

Without making a distinction for the class of vacant property, Baumgartner said that Hoff & Leigh found a 20.94 percent vacancy rate in northern properties and noted that more than a third of all vacant office property in the region is on the north end of town.

Sierra reports a 26.85 percent vacancy rate in Class A office space along the northern I-25 corridor. While it’s extremely high, Sierra researcher Ben Lowe said it’s still an improvement over the second quarter when 29.64 percent of Class A office space in the north was empty.

“There’s at least movement,” Lowe said. “It’s still way too high but in this economy — baby steps. At least they’re baby steps forward.”

The high vacancy rates in office space come from a massive overbuilding between 2005 and 2009, Lowe and Baumgartner said. And there’s only one cure, one way to fill those empty offices.

Baumgartner said his work with other sister markets has revealed that Colorado Springs is not the only city in the country dealing with fallout from the overbuilding of office space during the height of the economy.

Lowe said that while vacancy rates are up, movement in the market has been strong. Businesses tend to be moving up and into nicer spaces for the same or lower rents, which has been good for brokerages and is a good sign that the market could be turning.

“The phones are ringing a little more,” Lowe said. “We seem to be busier, though that doesn’t mean we have more business. But phones are ringing again and it’s a good sign interest has returned.”

A lot of companies moving into nicer spaces are signing long seven-to-10-year leases.

“It will keep rents lower for a longer period,” Lowe said, “but not substantially.”

While office real estate has remained mostly flat, retail saw a slight drop in vacancy rates. Hoff & Leigh reported a total citywide vacancy rate of 11.19 percent and Sierra found 10.94 percent.

“There are some really good areas in Colorado Springs for retail,” Baumgartner said. “And then there are some really bad areas.”

Manitou Springs, for example has no vacancy at all, not a single documented empty storefront, Baumgartner said. Monument and the Southwest both have vacancy rates under 3 percent, according to the Hoff & Leigh report. But the central and southeast regions both have vacancy rates over 16 percent.

“The majority of that vacancy is those two shopping centers near Academy and Palmer Park,” Lowe said. “Those were hit pretty hard.”

Sierra divides its retail figures by the year the property was constructed. Vacancy rates throughout town in shopping centers built after 1995 are low with most under 5 percent.

But the east region, which includes the area around the Rustic Hills Shopping Center that sold to the lender at the El Paso County Public Trustee’s foreclosure auction for over $19 million last week, is 27.23 percent vacant.

That’s an improvement over second quarter rates, when 30.23 percent of the retail space was vacant. “Everything seems to be going east and north,” he said. “That area is smack between where the growth is happening and where the military is expanding and it may not get the benefit of either.”

Some businesses that have closed along the South Academy Boulevard have moved to Powers Boulevard.

“That’s just how it is,” Lowe said. “Following the rooftops. Give it 20 years and Powers will be the new South Academy.”

Aside from those gray patches in parts of the city, Baumgartner said retail looked good with some positive absorption.

Both companies reported positive absorption in the industrial real estate market.

Baumgartner said absorption has been positive in the industrial sector for two quarters in a row.

Lowe said that could be because companies are moving out of traditional office space into cheaper warehouses they can convert.

“But industrial is looking pretty darn good comparatively,” he said.