‘More of the same’ in commercial real estate

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Some vacancies from 2012 remain unfilled heading into the new year.

The excitement and hope commercial real estate brokers put on display at the start of 2012 was mostly gone by the time they started trying to predict what will happen in 2013.

“I think we all just wanted it to be behind us,” said Greg Phaneuf, a principal at Cushman & Wakefield Colorado Springs Commercial. “We still want it to be behind us.”

The difference is a disheartening realization that while the worst is likely over, the recovery is just getting started and it will depend on one thing — jobs.

With unemployment still high, many retail, office and industrial spaces will continue to have high vacancies and lease rates will stay low, according to brokers from Sierra Commercial Real Estate, Cushman & Wakefield, Hoff & Leigh Commercial Real Estate and Quantum Commercial Group.

There was a lot of commercial real estate activity at the end of 2011 and the beginning of 2012 that led brokers to declare a turn in the market. But the activity petered out and the year ended more or less where 2011 did.

The year brought “more of the same,” brokers said.

That’s why they say they aren’t ready to celebrate the good signs they’re seeing now. There have been several sales at the end of 2012 and there are rumors that there will be some big ones at the start of 2013.

There’s also genuine interest from institutional investors who are looking to make buys in the Colorado Springs market, brokers say.

“The question is, can it be sustained,” said Brian Wagner, a broker at Sierra Commercial Real Estate.

Good signs in retail

“There are a lot of good things out there,” said Mark Useman, a broker at Sierra who primarily focuses on retail spaces.

While unemployment is higher than 9 percent, the city’s population continues to grow and there have been more new housing starts this year than any year since 2007.

“That’s all positive,” Useman said.

Retail sales are also strong. But vacancy actually climbed slightly from 10.58 percent in 2011 to 11 percent this year. The trouble is that all of the vacancy is focused in the older shopping centers, while newer ones are mostly full. Centers built after 1994 are 3.42 percent vacant, Useman said.

The 38 older anchored shopping centers in town have a 19.67 percent vacancy.

Rents range from an average of $23.26 per square foot at new centers to $10.88 in older centers. If the economy comes back, some of those centers could rebound. But it’s more likely they will eventually have to be repurposed, Useman said.

There have been 36 commercial construction permits issued so far this year. That’s compared to 12 in 2011 and a high of 97 in 2003. Some of the building permits this year include the 115,000-square-foot Bass Pro Shop near Northgate Boulevard and I-25, Steinmart at University Village Colorado and nine Kum & Go gas stations, Useman said.

Along with new construction, Useman said he expects to be able to announce the sale of an investor portfolio of three major shopping centers before the end of the year.

Office market good for brokers

“It’s been a tough decade for commercial real estate,” said Kent Mau, a broker with Sierra.

Owners have been sitting on their properties for years, not making what they’d hoped when they bought and unable to sell without losing.

But that’s starting to change, said David Delich, Sierra president.

“Sellers have been unwilling to sell into the bottom of the market when everyone is looking for a deal,” Delich said. “Buyers are under pressure to use that money they’ve been sitting on for years.”

As the market begins to shift and property values rebound, hungry investors will swoop in to take advantage of well-priced and well-positioned properties.

RD Trinidad, president of Hoff & Leigh, said investors are finding that properties in hotter markets like Denver are selling too high. If they’re looking for value investments in a less competitive market, they’re likely to start looking to secondary and tertiary markets like Colorado Springs.

That’s good news for brokers.

There are rumors that a major investor with a large portfolio of office properties is going to put its entire portfolio on the market in 2013.

“That will change the direction of our market,” said Peter Scoville, a principal at Cushman & Wakefield.

A big chunk of real estate like that changing hands is a big deal.

“I think there will be a lot of movement next year,” Scoville said. “But I don’t think the overall health of the market is very strong.”

Movement is good for brokers who make their money on deals, Phaneuf said. But it’s not necessarily going to be a pretty picture for building owners.

As properties sell for less and distressed sales come back online, Scoville said, it will put downward pressure on lease rates.

“If we’re competing for tenants and I own at $50 a foot and you own at $100 a foot, you can’t go as low as I can,” Scoville said.

None of that is particularly good for the overall health of the market.

Randy Miller, a broker at Sierra, said a lot of building owners have been hustling to close on their properties before the end of the year to avoid possibly higher capital gains taxes on property sales in 2013.

There are concerns in the defense sector, where Miller said there has been some movement as different companies have won government contracts and old ones have lost. But there hasn’t been any growth.

Trinidad said he expects the commercial market to remain relatively flat in 2013, unless we go over the fiscal cliff.

“If sequestration hits Colorado Springs harder than expected, there’s no telling what will happen,” Trinidad said.

Industrial lacks location

The industrial market has been flat through the last year, said David Bacon and Aaron Horn, brokers at Sierra.

Vacancy hasn’t shifted much at all, though Bal Seal Engineering, Inc. and Wal-Mart are building new facilities.

Additions like those are good news, indicating that companies from outside Colorado Springs have been looking at moving to the city.

“The last couple years there have been a few companies that came and kicked the tires and we were one of 22 cities they were looking at,” Bacon said.

But it’s starting to feel like companies looking at moving to Colorado Springs have a narrower search lately, which is promising, he said.

The only trouble is that there aren’t a lot of desirable places for industrial companies to go, Bacon said.

“We don’t have an overabundance of inventory,” Bacon said.

“That’s good in that when the market does turn, we should be able to fill it up.”

When he worked with Bal Seal, they started out searching for an existing facility. When they didn’t find anything, the company, which is based in California, wasn’t interested in property out east near the airport, where the city is driving industrial development.

“They said no way they would go out there,” Bacon said. “They wanted to be up north.”

Image is important to businesses moving to the area from out of state and they want the area to be nice and to have desirable residential real estate nearby for their executives.

They also want to be able to draw from Denver’s talent pool, Horn said.

“There just aren’t any big tracts of land up there,” Bacon said.

And that will be a challenge for attracting high-tech firms, which tend to be the out-of-state companies most interested in the city.

Even though brokers are reluctant to declare the recovery under way the way they did at the start of 2012, there are a lot of positive signs the market is improving. It might be happening slowly, but at least it’s not getting worse anymore.

“It’s going the right direction now,” Trinidad said.

 

13,000 jobs needed to fill existing vacant office space.

10,000 jobs needed to fill existing vacant industrial space.