Urbanization: National trends could impact local market

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Two emerging national trends in commercial real estate could have ripple effects in Colorado Springs: increased urbanization and institutional investors looking to smaller markets.

The Urban Land Institute released its annual Emerging Trends Report at a recent conference in Denver attended by more than 6,000 commercial real estate developers, brokers, architects and investors.

Local developers say they see the national trend toward creating denser, more urban and walkable communities slowly making its way here. They hope it will contribute to a downtown renaissance.

But brokers aren’t holding out hope for increased investment from big-money institutions like real estate investment trusts and major pension funds, saying Colorado Springs might be too small to attract such attention even as institutional investors look to secondary and tertiary markets.

Developers are increasingly building more urban communities, ULI’s report says, even in suburban areas. Infill development with an emphasis on walkability and convenience over space is influencing development nationwide, even in small cities. There’s also a trend toward “urbanizing the suburbs.”

That’s held true for most new commercial development locally. There are apartments next to University Village and a tunnel connecting the shopping center to the University of Colorado at Colorado Springs and the dorms there for a suburban version of multi-use development.

First & Main Town Center, Nor’wood Development Group’s project on Powers Boulevard, is incorporating urban principles as it builds apartments and a hotel adjacent to restaurants, shops and a movie theater.

“There are some key design principles around creating a place where people choose to gather while they’re doing commerce that we’ve been cognizant of,” Nor’wood president Chris Jenkins said.

They are applying those principles to developments, but Jenkins feels the real opportunity for urbanization isn’t in suburban areas.

“We have a huge opportunity to urbanize our most urban environment,” he said.

Downtown already has shops and restaurants, civic centers and community gathering grounds, he said. It’s built on a grid and there’s density there, even if it’s not residential density.

“The anchors that are already there would be impossible to recreate in a suburban environment,” Jenkins said.

There has historically been a lack of residential development downtown. Nor’wood announced four apartment projects around the city last year, none downtown. Downtown apartments are more expensive to build. They have to be built vertically, which means builders can’t use affordable wood-framing techniques they apply to suburban properties. And parking structures are much more expensive than open lots.

However, downtown apartments might not be far off. Last month Jenkins said he hoped to announce a downtown apartment project within a year.

Steve Engel, president of Griffis/Blessing, which owns and manages hundreds of apartments and office buildings, sees the trend toward urbanization taking root.

“We think we’ve seen this trend coming to our city for a few years,” Engel said. “It’s something we really thought would develop here quicker than it has.”

Griffis/Blessing bought downtown property and had plans to develop it before the recession. But he said the time might be coming for residential or multi-use projects.

“We think it’s sooner now than later,” he said. “It’s about time. We really have recognized this trend toward secondary cities urbanizing for eight, nine, 10 years. It’s about time.”

Institutional money

Jenkins said the trend toward institutional investors looking to secondary and tertiary markets seems accurate to him. Nor’wood recently partnered with Western National, a REIT based in southern California, to build its four suburban apartment complexes totaling more than 1,000 units.

“We have not historically partnered with institutional investors,” Jenkins said.

But Western National had apartment expertise, which Nor’wood lacked. They met, had common ground and decided to work together, Jenkins said.

Other than that instance, local brokers aren’t seeing a lot of big-money interest. Though the ULI report emphasized that major investors are running out of opportunity in high-priced coastal cities and looking to smaller markets, Colorado Springs might be too small, locals say.

“It’s getting too expensive on the coast, so you’re seeing a lot of activity driven inland to markets like Denver,” said Jason Baumgartner, director of research for Hoff & Leigh Commercial Real Estate.

ULI ranked Denver the nation’s 14th best overall market, eighth-best for investment.

One might think investors looking at Denver would also check out Colorado Springs, that’s not how it usually works.

“Colorado Springs is close to Denver,” said John Greenman, a Denver broker who once worked with institutional investors. “But people who look in Denver are focused in Denver and if they don’t find what they’re looking for, they don’t naturally say, ‘Well, gee, I guess I’ll look in Colorado Springs.’”

Big money like that gravitates to secure products. Even if returns aren’t as high, it’s important to be able to sell a property.

“In New York, you know you’ll always have a buyer,” Greenman said.

He now works with foreign investors who aren’t interested in Denver properties. They stick to the coasts.

There are a lot of differences between the product in Denver and what investors can buy in Colorado Springs, said Hoff & Leigh president R.D. Trinidad.

While the average price of commercial office buildings has climbed slightly, the median price is down about $4 per square foot. That means inventory is growing, but the quality is declining, Baumgartner said. And institutional investors almost exclusively look at Class A spaces, he added.

Aside from a lack of quality inventory, Trinidad said Colorado Springs’ fundamentals are weak. Investors are starting to poke around in other cities where Hoff & Leigh works or does research, like Omaha, Des Moines and Boise.

But those markets have low unemployment. They’re also the biggest cities in their areas, which makes them regional cultural centers and reasonable headquarters for national companies, Baumgartner said.

Institutional money has made its way here in the past, Engel said.

“It’s not something you notice,” he said. “But it imports capital. We might see two or three or four properties under development instead of one.”

The last time there was an influx of institutional money in Colorado Springs was 1999, he said, just before the dot-com bust. He’s sure it will come again, but adds, “I just think it’s farther away.”

Before investors start slipping down I-25, the Mile High City will have to hit a balance between supply and demand.

“I think it will be a while,” Engel said, “before Denver reaches that supply-and-demand balance.”