Office Sector
The Colorado Springs office market is facing demand challenges. However, as of the second quarter, trailing 12-month absorption bounced back into positive territory, amounting to -140,000 SF. Vacancies have decreased in the past year to 10.7%.
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 58,000 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.
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, and vacancies remain below the national benchmark of 14.0%. 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.
New deliveries in prior years have been concentrated in the Southeast and Northeast submarkets. Sapphire Investment Group renovated the Chidlaw Building at 2221 East Bijou Street into a 2-Star 281,000-SF office building. The building is a former United States Air Force facility in the Knob Hill neighborhood, near the Ent Air Force Base complex. The renovated amenities include a cafeteria and lounge, fitness facility, and auditorium.
Medical office space has dominated the pipeline in the Northeast Submarket where 24,500 SF has delivered in the last two years. Sharp General Contractors delivered a 20,000-SF medical office building in 2023. Family Care Center leased 5,000 SF in the building. Colorado Springs-based Nor’wood Development Group was behind the project 65,000-SF Interquest Office Medical Building that delivered in 2022. Woodmen Medical Plaza, totaling 59,000 SF, also delivered in late 2022 and is 100% occupied to tenants including Heart & Vascular and Rocky Mountain Infusion.
Rent growth is outperforming the national average at about 3.0% 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. Looking ahead, recovery is likely to be slow as the market digests available inventory amid tempered demand. However, at about $22.00/SF, Colorado Springs offers a substantial discount on rents relative to the national benchmark of $36.00/SF.
Colorado Springs is an affordable market and has benefited 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.
Industrial Sector
Demand in the Colorado Springs industrial market has been steady over the past few years, driven by aerospace, defense, manufacturing, and cybersecurity. The vacancy rate sits at 5.4%, below the national average of 7.2%. Annual net absorption amounted to 73,000 SF. The market has limited supply-pressure with space under construction amounting to 550,000 SF,
representing just 1.3% of current inventory.
Leasing activity improved in the past year, 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 2025. The company signed a 640,000-SF lease in July at 1615 Garden of the Gods Road, 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.”
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. New construction starts for speculative projects have slowed in the past year as developers continue to find it difficult to obtain financing. The pipeline is projected to remain minimal over the next year in this high interest rate environment.
In-line with national trends, rent growth in the Colorado Springs industrial market has decelerated following its peak achieved in 22Q3 when annual rent growth reached 7.8%. Average rents currently stand at $11.70/SF after moving by 1.6% in the past 12 months. Average rents were above the national average until late 2021, but have since fallen slightly below due to the market’s slower pace of rent growth.
Retail Sector
A resilient consumer base, limited construction, and steady leasing activity continues to benefit the Colorado Springs retail market. Retail availability remains low as of the second quarter at 5.7%, below the 10-year average of 6.5%. Low availability is beginning to impact leasing activity as tenants face challenges securing the right type of space.
Tenants continue to take down space in the Colorado Springs retail market, driven by quick service restaurants and service-oriented businesses. Tenants including UPS, Great Clips, and Snarf’s Sandwiches opened locations within the last year. Availability in the general retail segment has fallen to just 4.0%. This segment has also benefited from growth in discounters, cellular service retailers, and retailers in the home improvement categories. Meanwhile, mall availability remains stubbornly high at 10.4%. 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.
The construction pipeline remains subdued with 110,000 SF underway, representing 0.2% of total inventory. Roughly 40% of this space is available for prelease, which will provide opportunities for tenants looking to expand when most projects deliver in early 2025. However, virtually no projects broke ground in 2024 as developers responded to a high interest rate environment, making many projects financially unfeasible. This is setting the stage for fewer deliveries by the second half of 2025, which will likely result in tightening fundamentals.
Most of the development underway is located in the rapidly growing northern part of the metro along Interstate 25. This area of the metro benefits from rising population density, relatively high incomes, and proximity to Denver. Migration from the Denver metro to the Colorado Springs metro has provided a boost to population growth, and the northern part of Colorado Springs is a more likely destination for these entrants. A King Soopers-anchored strip center in the Flying Horse neighborhood is the largest project underway. The project is scheduled for completion in early 2025. According to the developer of the project, Barclay Group, customers will enjoy a traditional grocery shopping experience with added amenities such as Murray’s Cheese, Starbucks, sushi, and apparel.
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 $26/SF. Rent growth in the submarket has continuously outpaced the metro average for over five years.