Despite seemingly optimistic projections of the Colorado Springs commercial real estate market, a recent first-quarter report indicates net absorption is down in all of the city’s office submarkets.
But the year’s first MarketView report for Class A/B office space — done quarterly by Cushman & Wakefield’s Colorado Springs Commercial group — found the negative absorption may not be as bad as it seems.
“On the surface, this counters our claims of an improving marketplace,” the report states. “However, there were two main factors to the negative absorption in the [first quarter of] 2014 and we believe these to be anomalies that will be corrected by positive absorption in the quarterly numbers to come.”
The group listed contributing factors such as lease expiration of previously unoccupied or underutilized space, and just four units selling that accounted for more than 122,000 square feet of newly available space.
The company also reported that average vacancy rates were up slightly at 20.84 percent in the first months of 2014, but down significantly compared to years past.
Among the quarter’s largest office transactions were 34,000-square-foot and 41,000-square-foot spaces at NorthCreek Office Complex (5755 Mark Dabling Blvd.), a 43,000-square-foot space at Patriot Interquest II (9925 Federal Drive) and a 46,000-square-foot space in a building owned and occupied by SAIC in the airport submarket.
“While these are large blocks of space, they will only be available for tenants that are 25,000 [square feet] and larger,” the report explained. “With an approximate average-size tenant in the office market closer to 5,000 [square feet], the majority of the office buildings did not feel the pinch that such numbers would indicate.”
The report explained while this would typically cause downward pressure on lease rate, this should not significantly affect the overall market, but “continue to show a rate disparity between [landlords] competing for the [more than] 25,000 [square foot] tenants vs. those in the 10,000 [square foot] and less range.”
Vacancy rates in Class A and B office space are “significantly down” since the height of recession in 2009, according to the report, which added that this trend should continue to track throughout the year.
Among the report’s most prominent vacancy rate findings was a drastic decrease in the medical office market during the year’s first quarter, attributed to changes in the marketplace.
Those changes were related to growth and transition of Memorial Hospital, UCHealth, and Colorado Springs Health Partners, and the relocation of “three of the largest orthopaedic groups in town,” according to the report.
The average vacancy rate in that market was just under 16 percent from January to March.
Class D apartment sales ‘hot’
Colorado-based apartment firm Commonwealth recently released its sales report for the first quarter of 2014, which shows a trend in Class-D multi-family sales.
Class A: Includes the best complexes in terms of location, amenities and construction quality. Typically includes larger units with washer/dryer hookups. Tenant population is typically white-collar.
Class B: Includes complexes located in a neighborhood setting. Amenities often include a pool and formal play area. Properties are typically better maintained and have better curb appeal than Class C complexes. Tenants are often young families and single parents.
Class C: In transition areas between commercial and residential areas. Often among other such complexes. Amenities often compare to Class B, but are typically not as well maintained. Tenant population is often varied and price more important than location and amenities.
Class D: Complexes in this category are typically more than 30 years old, in poor condition, have little or no amenities, in poor locations and have poor curb appeal.
Among the largest Class D transactions was Carlton Manor, a 36-unit complex at 1930 E. Bijou St. that sold for $1.52 million — $42,222 per unit, or $56 per square foot. Average price per unit for Class D product was $42,222 in the first months of 2014, up from $41,330 per unit the same time last year. These numbers are up dramatically since the rebound; the average price in 2008 was only $17,000 per unit.
“Location is obviously a very important part of this equation to make it work, as you can remodel junk and it will still be junk in the wrong location,” the report said. “Also important to not ‘over-build’ a complex for its location, as you will only draw a certain class of tenant in a certain location …. no matter the quality of the complex.”