A lot of Colorado Springs businesses have been taking advantage of lower lease rates and moving into nicer office spaces.
Class A office space, which is the newest and nicest space in town, was a bright spot in most commercial brokers’ quarterly reports.
“This is the most positive quarter we’ve had, if you look at the overall market, since I’ve been doing this,” said Jason Baumgartner, a research analyst who started putting together market reports for Hoff & Leigh in 2011.
Class A office space was the biggest driver in leasing activity during the first quarter, according to most brokers. Sierra Commercial Real Estate reported that 53 percent of lease activity in the city was in Class A space, which only makes up about 29 percent of the market.
Hoff & Leigh reported 160,000 square feet of positive absorption in Class A space.
“There are a lot of tenants moving laterally,” said Mary Frances Cowan, an office broker with Quantum Commercial Real Estate. “They’re improving their space and maybe decreasing their expenses.”
Cowan said lease rates have dropped across the board, enabling businesses to move to better locations and nicer spaces for the same and sometimes less money.
But they’re not necessarily growing their businesses or adding square footage.
“It’s like if I moved my family to another 1,700-square-foot house,” Baumgartner said. “It’s not bigger, but it’s nicer and in a better neighborhood.”
That means overall vacancy figures haven’t changed a lot, and there isn’t great news about new employers boosting the economy.
But Ted Link, broker owner at Cascade Commercial Group, said the Class A leases are good news for the market and they mean things have turned around.
“The economy is doing well when Class A buildings lease up,” Link said. “And you know you’re in a recovery when you see less-desirable buildings lease.”
He said he has seen more activity in Class B and C buildings recently. Vacancy in Class B buildings fell, but it climbed in Class C space and Cowan said she has seen buildings with vacancies as high as 50 percent.
“Some of those are vacant because they aren’t very well-located,” said Andy Oyler, also an office broker with Quantum. “It’s really a flight to quality.”
Russell Stroud with Quantum added that some of the southeast office space is struggling because military contractors are fighting uncertainty in the face of sequestration.
But there have been some high-profile office building sales in the first quarter of this year, Link said. He sold the Presidio office building at 1155 Kelly Johnson Blvd. for $7.275 million and the Center City Plaza near the intersection of Pikes Peak and Colorado avenues for $5.05 million.
“I’m having my best year ever,” Link said. “I think a lot of brokers are having their best year.”
He said investors are buying because interest rates are low and occupancy is going up in a lot of Class A buildings.
There has been increased investor interest in the Colorado Springs market because Corporate Office Properties Trust put its entire 1.1-million-square-foot portfolio on the market, which represents 10 percent of the city’s Class A space, said Ben Lowe, a research analyst with Sierra Commercial Real Estate.
“That has suddenly brought a lot of attention to Colorado Springs,” he said. “Even if one of these investors doesn’t end up purchasing that portfolio, they’re now familiar with our area and environment.”
The vacancy rate in industrial space dropped below 10 percent for the first time in years, according to Sierra’s report.
A lot of that positive activity resulted from a couple of significant deals: Diversified Machine Systems, which took a 70,000-square-foot space located off of Garden of the Gods Road, and Tech For Less, which moved out of the market last year but returned this year, Lowe said.
The Wal-Mart data center and the Bal Seal plant are two new built-to-suit industrial facilities that add to inventory without impacting vacancy, something brokers say is a positive for the market.
But there’s a reason they had to build their own facilities.
While vacancy rates below 10 percent usually spur speculative industrial development, Lowe said he hasn’t seen any yet, probably because rents just bottomed out and have only rebounded to $6.35 per square foot. But the lack of new construction could be a problem, he said.
There is a shortage of manufacturing in Colorado Springs and it’s not a growing job sector, though economists argue it’s the biggest job multiplier in the commercial sector.
“There’s a lack of good, larger, quality space,” Lowe said. “You’re pretty limited in Colorado Springs if you’re looking for more than 100,000 square feet.”
He said it could impact economic development and wondered if it was on the Regional Business Alliance’s radar. Joe Raso, president and CEO of the alliance, did not respond to a request for comment.
Overall retail vacancy increased slightly from 11.01 percent in fourth quarter 2012 to 11.57 percent in first quarter 2013, according to Sierra’s report.
But Lowe said one store was responsible for that jump in vacancy. When Target at Platte Avenue and Academy Boulevard closed in January, it left behind an empty 130,000-square-foot building.
“The numbers look bad and that whole part of town right now is struggling,” Lowe said.
But new Wal-Mart neighborhood markets in the central area have resulted in some smaller spaces around them beginning to fill up, and the same is true around the new Lowe’s store in the Citadel Crossing shopping center.
Brokers at Quantum said they have seen a lot of retail interest lately.
“The good news is that retail follows rooftops,” Oyler said. “And as residential real estate picks up, retail probably will, too.”