COPT sale raises questions for local commercial market

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While the investor with a contract to develop an $800 million airport business park has put its entire 1.1 million-square-foot portfolio of Colorado Springs office properties on the market, it’s retaining its interest in developing the airport project — for now.

Corporate Office Properties Trust, a Maryland-based real estate investment trust that specializes in office space for government agencies, defense contractors and technology services, put all 16 of its Colorado Springs buildings on the market last week. Together, they represent more than 10 percent of the city’s Class A office space.

COPT noted in its Securities and Exchange Commission quarterly filing in October that the properties were for sale, but just contracted with Michael Winn and Timothy Richey at Cushman & Wakefield in Denver and Peter Scoville at Cushman & Wakefield Colorado Springs Commercial to market the portfolio.

“We were aware that COPT was selling its Colorado Springs property,” said Mark Earle, director of aviation for the Colorado Springs Airport. “They informed us, but couldn’t provide us with a lot of detail because of SEC constraints.”

While the company’s holdings are on the market, Earle said COPT has not informed the airport what it plans to do about developing a 272-acre airport business park, for which the contract is still in force. COPT is exactly the financially healthy, third-party developer the airport wants to work with on the project.

The city put out a request for proposals for third-party developers and selected COPT in 2008.

“Immediately after that, the recession hit,” Earle said.

Other developments

While that likely weakened the company’s position in Colorado Springs, COPT wouldn’t have been able to start development at the airport anyway. The Department of Defense just completed a defense access road to its rapid-deployment facility. DoD was responsible for $8 million worth of roadways and sewer systems at the airport — its way of paying rent for the land its facility occupies. That was just completed in December.

“We have been looking forward to moving ahead with projects,” Earle said.

But demand is low. There is still a lot of commercial vacancy in the city, and it will be several years before Earle expects to see real development at the airport business park.

In the meantime, the airport has plans to build a convenience store and gas station on the airport grounds. It’s not a project COPT would be interested in developing, so the airport went through a process allowing COPT to waive its interest in the gas station.

“There is still activity going on in the park,” Earle said, “and we still have the ability to develop properties without them.”

As COPT markets its portfolio of properties, the airport project can’t be counted among its assets because it doesn’t own the land, Earle said.

But, if COPT finds a buyer for its portfolio and brings a developer to the airport, the airport administration will have to approve the new contractor. If COPT bows out of the project without presenting a suitable replacement, the airport will start the RFP process again.

History in the market

COPT came into the Colorado Springs market in 2005 when it purchased 64 acres of land near Powers Boulevard and East Platte Avenue for $10 million. After that, the company proceeded to buy roughly $230 million worth of property in Colorado Springs by 2008 estimates.

Among its holdings are two single-story office buildings on 132 acres near Interstate 25 and Interquest Parkway, known as Hybrid I and Hybrid II. The properties have remained largely vacant with continued listings for available space on public listing sites like LoopNet. Former COPT CEO Randall Griffin told the Colorado Springs Business Journal in 2008 that he envisioned building the site into a mixed-use business park akin to the Denver Tech Center.

The company had always focused on providing office space for government contractors like Lockheed Martin, Northrop Grumman, Integral Systems and Boeing, Inc. When COPT expanded into the Colorado Springs market, it was operating under a new business model that followed its key clients into other markets.

“The problem was that contractor demand did not materialize as COPT expected and the company’s growth in the market did not fit its strategy,” said John Bejjani, an investment analyst with Green Street who covers COPT.

In 2011, after CEO Griffin retired, the company announced a strategic reallocation plan. That has meant COPT is exiting markets like Colorado Springs where it’s invested in properties that don’t meet the company’s strategic vision.

“We think them getting out of Colorado Springs, despite taking an impairment, is a positive strategically,” Bejjani said.

Impact on Springs

“They’ve acquired a ton of stuff,” said El Paso County Assessor Mark Lowderman. “They kind of burst onto the scene and tied up a lot of property.”

Now the question is — how will COPT sell it? Will it come together as a package deal for investors or break into bite-size pieces for the market to nibble on for years to come? Will COPT hold out for market value or will it dump the properties at pennies on the dollar?

“The worst-case scenario is if they try to market it quickly at fire-sale prices to try to get it off the books, piece by piece,” Lowderman said.

Kent Mau, a veteran commercial office broker with Sierra Commercial Real Estate, says he suspects COPT would probably like to sell the portfolio as a package. But that won’t be easy in a market like Colorado Springs.

“My guess is they’re going to have to unbundle it,” he said. “I don’t think there’s anybody in the U.S. who would walk into Colorado Springs and buy the whole thing.”

He said most of the company’s holdings are strong assets — income-producing Class A offices and prime land. But COPT is also heavily invested around the airport, a submarket that has been struggling in recent years. Those assets won’t be as attractive to investors.

“There are different dynamics on the north end of town and near the airport,” said Michael Palmer, a broker with Quantum Commercial Real Estate. “And they’re going to bring different values.”

The company also made all of its acquisitions and most of its improvements during the height of the market between 2005 and 2008. That means COPT will have to command a high price for the portfolio and be willing to wait for it — or likely take a loss.

If the portfolio stays intact, it will have a limited impact on the rest of the Colorado Springs commercial market because an investment that size has a very small audience and is not likely to include the same people looking at a building here or there.

Having an asset that size on the market could attract institutional investors at a time when they’re looking for secondary and tertiary markets, Palmer said — putting Colorado Springs on investors’ radars.

“It will attract a different, more high-profile buyer than we usually see in Colorado Springs,” he said.

However, if COPT breaks up its portfolio — that’s a different story.

“It’s not good when you get a glut of that much square footage on the market at once,” Lowderman said. “It puts a strain on the existing market, which is fragile anyway.”