Ho-hum numbers muffle commercial optimism

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Like broken records, commercial real estate brokers are repeating the same moderately upbeat refrain about the market conditions that they’ve been saying: “Well, it’s not getting worse.”

That’s the common reaction to the local third-quarter market reports.

“The attitude is that we’re through the worst of this and we’ve hit our statistical low,” said Peter Scoville, principal at Cushman Wakefield Colorado Springs Commercial Real Estate. “Of course, what I just said has basically been the same the last three years. I keep thinking that the end is in sight.”

But the third-quarter numbers are weak. Not bad, brokers are quick to say, just not good.

“It shows a flat environment,” said Jason Baumgartner, director of market research for Hoff & Leigh Commercial Real Estate. “And it has been that way for a while.”

Baumgartner’s reports show slight improvements in retail and office vacancies and rents, with some mildly negative activity in the industrial market.

Sierra Commercial Real Estate’s reports are littered with the word “slight.” There were slight gains in the office market, as 51,973 square feet were absorbed in the third quarter. But “year-to-date absorption remains lackluster at negative 38,173.” Asking rents have climbed 11 cents per square foot.

Retail rents have climbed a lot, but vacancy remains flat.

Office market — moving up

The local office market is flat. Hoff & Leigh’s reports show vacancies dropping from 14.44 percent to 14.31 percent. Sierra showed a bump in asking lease rates for the first time since 2008.

No one is talking about big gains or big losses.

“Overall, it’s a wash,” Scoville said. “There’s a big difference between asking rents and transaction rents.”

He said tenants have had their picks of new locations as landlords under pressure to rent have been offering steep discounts, free rent and extra bonuses to brokers for closing deals.

The best properties, however, have held their value, Scoville said. Tenants tempted with low rents have still opted for higher price tags on better spaces.

Baumgartner found vacancies shifting from class B to class C properties. As vacancy in class B dropped 1.5 percent during the third quarter, vacancy in class C climbed 2 percent, Baumgartner said.

“It’s a flight to quality,” he said.

Most of the moves have been by local companies into nicer and better-located properties, Baumgartner said.

A welcome drop in class A office vacancy, especially on the north end of town, can be largely attributed to bigger national companies, he said, though not much out-of-town business moving to the area. It has primarily been businesses moving from one space to another.

Ben Lowe, director of market research for Sierra, said a lot of defense contractors and national companies are checking Colorado Springs out. There are deals waiting in the wings, he said. But third quarters during election years are notoriously slow.

“This year seems exceptionally slow,” he said. “It’s not just the presidential election this year. It’s Congress and the fiscal cliff. It’s not just whether we’re going to have a Democrat or a Republican. It’s bigger issues.”

He said he expects the fourth quarter to be strong for the office market after the election.

“We’ll have some political certainty,” he said. “The wheels are spinning. We just need some traction. We need the tires to bite the road.”

Retail — out with the old

Colorado Springs retail market has taken one step back for every step forward, brokers say. Vacancy remains mostly unchanged, but asking rents are up a dramatic 26 cents per square foot to $12.47, according to Sierra’s report. But all the gain is in one sector.

“We continue to hemorrhage businesses from older centers to newer ones,” Lowe said. “I almost feel like I’m repeating myself every quarter with this.”

More than 48 percent of the city’s retail vacancy is in older centers, and most of those are close to the middle of the city.

“We’re only going to grow north and east,” Lowe said.

Centers like the Markets at Interquest are building up while developers work on new projects like Copper Ridge. New shopping centers draw development away from the city center to the fringes where the new population and more affluent shop, Lowe said.

“I don’t understand it because there is still a strong central population,” Lowe said.

But the news is positive for newer centers like University Village, regularly announcing new tenants.

Industrial — no growth

“It’s just stagnant,” Lowe said. “I wish I had more to say about the industrial market. Across the board, we saw a slight improvement in lease rates, which tells me landlords are more optimistic.”

But the 164,156 square feet of lost occupancy year-to-date negated half the gains of 2011, according to Sierra’s report.

Hoff & Leigh reports 3.61 million square feet of vacant industrial space in Colorado Springs, including 32,742 that became vacant in the third quarter. Baumgartner said Hoff & Leigh sometimes classifies spaces differently from other brokers. Many flexible spaces could be office or industrial, he said.

“There are a lot of previous retail spaces that are now being marketed as industrial,” he said.

That’s a big change. The going rate for retail, even in a tougher area, is usually upward of $10 a square foot. Some landlords might ask $4 per square foot for industrial use in the same space.

The end in sight

While the news is mixed, it’s not bad.

“If you look at trends, it’s not as bad as it has been,” Lowe said.

He, like most other brokers, is optimistic that means the pendulum has just slowed down enough to start swinging the other direction.

Scoville agrees. Despite nothing titillating, exciting or optimistic in the reports, he’s confident the market really is about to turn.

“We just need jobs,” Scoville said. “That has to be said. It’s completely remedial. But it’s true.”

Sierra Vacancy (percentage)
Central business district (downtown) 10.77
CBD fringe 10.81
North I-25 17.99
Northeast 14.38
Southeast 25.82
Southwest 14.31
Hoff & Leigh Vacancy (percentage)
Central 19.15
Downtown core 6.86
Downtown periphery 8.51
East 9.51
Monument 15.97
North 19.9
Northwest 12.23
Southeast 22.03
Southwest 6.73
West 2.61
Class A 16.01
Class B 13.2
Class C 14.48
Cushman Wakefield Class A vacancy (percentage)
North I-25 24.82
Airport 44.76
Central business 13.48
Total 25.98
Sierra Vacancy (percentage)
Central business district 17.41
CBD fringe 6.83
Northwest 10.8
East 19.36
Southeast 10.12
Southwest 2.33
West 0.39
North central 18.33
Hoff & Leigh Vacancy (percentage)
Central 13.1
Downtown core 13
Downtown periphery 9.5
East 5.5
Monument 4.2
North 4.3
Northwest 4.2
Southeast 21.7
West 3.6
Vacancy (percentage)
Sierra 10.34
Hoff & Leigh 10.96