Office Sector
Annual absorption in Colorado Springs commercial real estate is now in the red as companies reassess their footprints. Vacancy now registers 10.7%, the highest level reached since 2014. While vacancy remains elevated relative to historic standards, it still remains below the national benchmark of 13.8% as the local market has not been as impacted by changing office utilization patterns that have swept the nation. However, the market still has a sizeable amount of sublease inventory to work through with 410,000 SF available, representing 1.3% of the market.
Leasing activity picked up in the past year. Nooks LLC, a company that offers classified spaces as a service for both industry and government customers, signed the largest lease, taking 57,727 SF at NorthCreek Office Complex in the Northwest Submarket. The company took occupancy in September. The acceleration in leasing activity will likely help to keep vacancies in check. CoStar’s Base Case forecast calls for vacancies to remain relatively flat through the end of the year.
The Colorado Springs office market is facing demand challenges. As of 2024q2, trailing 12-month absorption has slipped into negative territory, amounting to -210,000 SF. The negative net absorption is dispersed across the market, with the CBD, Northeast, and Southeast submarkets posting the largest tenant move-outs. Vacancies have increased by 0.7% in the past year to 10.7%, the highest to be recorded dating back to 2014. Still, to a certain degree, the city is in better shape than most comparable markets and has avoided the worst of the disruption that most other areas are facing due to changing office utilization patterns. While vacancies have increased in the last year, they still remain below the national benchmark of 13.8%. With no projects under construction, the market has no supply-side risk in the near term, which should help in keeping vacancies in check. According to CoStar’s Base Case forecast, vacancies in Colorado Springs are projected to remain relatively flat going forward, while national vacancies are projected to continue rising through 2026. Rent growth is outperforming the national average at about 2.4% positive annual gains, compared with 0.9% rent gains from the national index. However, when adjusting for inflation, real rent growth continues to trend negative. Colorado Springs is an affordable market and has benefitted as some investors have been priced out of core gateway markets. The city has attracted investors in the pandemic era due to its growing population and highly skilled workforce.
Sales
High interest rates and an uncertain office market has put a dent on investment activity in Colorado Springs. Trailing 12-month investment volume totals $87.8 million, below the market’s annual 10-year average of $237 million. Most sales in the past year have traded for under $10 million.
In the largest sale in the past year, Healthcare Realty Trust purchased Research One, a 42,770-SF 3 Star office building located at 8540 Scarborough Drive in July from American Design. The asset traded for $11.45 million ($268/SF), representing a 6.66% cap rate. American Design purchased the asset in 2015 for $700,000 in an owner-user transaction.
Investors have targeted fully-leased buildings to tenants in the booming aerospace and defense industries, including Midtown Realty Group’s acquisition of 12515 Academy Ridge View from STORE Capital for $43.5 million ($354/SF) in January 2021. The building totals 123,000 SF of RBA and was fully occupied by Kratos Defense & Security Solutions, Inc. at the time of sale.
In a portfolio deal, Alturas purchased the Northcreek Office Complex, comprised of three buildings in the Northwest submarket for $46.6 million ($143/SF) from Younan Properties. Occupancy at the time of sale in February 2021 was 87% and notable tenants include CSAA Insurance, First Source Group, and Pima Medical Institute. The buyer’s motivation for this acquisition was the ability to grow their Colorado Springs portfolio with an asset in an excellent market with a diverse portfolio of high-quality tenants.
Industrial Sector
Leasing activity in the Colorado Springs industrial market has picked up in the past six months. Annual net absorption amounted to 400,000 SF. Demand has been concentrated in the Northwest Submarket where 535,000 SF has been absorbed in the past 12 months.
Leasing activity also improved, driven by a major lease in the Northwest Submarket. Swiss-based Meyer Burger opened a new solar cell manufacturing facility that will bring 350 jobs to Colorado Springs by the end of 2024. The company signed a 640,000-SF lease in July at 1615 Garden of the Gods Rd., a former semiconductor fabrication plant, and occupied the space in late 2023. According to Johnna Reeder Kleymeyer, president and CEO of the Colorado Springs Chamber & Economic Development Corporation, “The new Colorado Springs footprint will be Meyer Burger’s first site in the Western Hemisphere to manufacture the chips and wafers that power cutting-edge solar technology.”
Vacancy registers 4.3% after contracting by -0.9% in the past year. The market has limited supply pressure with space under construction representing just 2.0% of current inventory.
Demand in the Colorado Springs industrial market has been steady over the past few years, driven by aerospace, defense, smart manufacturing, and cybersecurity. The vacancy rate sits at 4.3%, below the national average of 6.2%. Annual net absorption amounted to 400,000 SF. The market has limited supply-pressure with space under construction amounting to 830,000 SF, representing just 2.0% of current inventory.
E-commerce is booming, but retail sales at brick-and-mortar locations have also risen, leading to increased demand for distribution centers across the city where goods can be stored before reaching the consumer. Retailers and logistics providers are increasing their industrial footprints to improve their distribution networks and bulk up on inventories. Tenants have spread out across the market, but East Colorado Springs, near the airport, continues to drive the majority of logistics demand.
While demand has held steady, rent growth has decelerated in the past year to just 2.8%. Rents have held up best in Teller County and Southeast Colorado Springs. The pace of rent growth remains below the national annual average of 5.1%. CoStar’s base case forecast projects annual rent growth to increase by 1.1% in 2024 before rebounding in 2025.
Construction
While most markets across the U.S. experienced a run up in construction activity in the last year, the pipeline in Colorado Springs has remained steady. About 830,000 SF is currently under construction, representing just 2.0%
of the market’s current inventory.
The current pipeline is concentrated in the Southeast Submarket near the Colorado Springs Airport, where Amazon opened its massive, 4-million-SF distribution center in the third quarter of 2021. Amazon’s distribution site has the capacity to employ over a thousand workers and has become an economic driver in the historically distressed southeastern part of the city.
About 286,000 SF is under construction in the Southeast Submarket. PepsiCo broke ground on its new 115,000-SF distribution facility in early 2023. According to a press release from PepsiCo, the new Colorado Springs facility will deliver in early 2024 and will “expand supply chain operations for popular product brands such as Pepsi, Gatorade, Celsius, and Rockstar, and boost future growth in southern Colorado for years to come.”
New construction starts for speculative projects have slowed in the past year as developers find it increasingly difficult to obtain financing. The pipeline is projected to remain minimal over the next year in this high interest rate environment.
Retail Sector
The Colorado Springs retail market remains in a position of strength. With 190,000 SF delivered in the past year and another 220,000 SF under construction, the supply pipeline is beginning to put upward pressure on vacancies. Still, the vacancy rate remains near historic lows at 4.4%.
Leasing is active in the Colorado Springs retail market, driven by quick service restaurants. In-N-Out, Whataburger, Popeyes, and Subway, to name a few, opened locations within the last year. Vacancy in the general retail segment has fallen to just 2.0%. This segment has also benefited from growth in discounters, cellular service retailers, and retailers in the home improvement categories. Meanwhile, mall vacancies remain stubbornly high at 14.3%. Availabilities in Chapel Hills Mall and The Citadel are primary drivers of elevated mall vacancies. The mall sector has struggled to gain traction on a macro basis, even as retail as a whole has posted a strong comeback.
Buoyed by by several universities and nearby military bases that provide an inelastic source of demand for goods, the retail market is on stable footing. Additionally, household and job growth rates continue to outpace the national average, providing the backbone for consumer spending in Colorado Springs.
Average triple net asking rent now sits at $20.00/SF. Rents are projected to continue decelerating over the coming quarters, and inflation is expected to weigh on the real rate of rental growth, likely keeping it in line with or slightly below the average growth rate seen during the five years preceding the pandemic.
In the past decade, the market has featured a stable and diverse labor market and fast-growing median household incomes that are higher than the national average. Additionally, the presence of several universities and military bases, recreational tourism, and defense contractors traditionally buttress demand for the retail sector.
Rent
Strong demand and compressed vacancies pushed retail rents higher in the last year, increasing by 3.9%. Average triple net asking rents currently sit at an all-time high of $20.00/SF. However, rent growth did not keep up with inflation in the past year, and the real rate of annual rent growth in Colorado Springs is in negative territory. Landlords in prime locations will likely be able to overcome inflation as leases roll.
The top-performing submarkets in Colorado Springs are those charging the highest rents (and by extension, the submarkets which have the best locations and retail demographics). The Northeast Submarket commands the highest retail rents in the metro by a notable margin, nearly $24/SF. Rent growth in the submarket has continuously outpaced the metro average for over five years.