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Office Sector

A strong recovery in the labor market provided Colorado Springs with a needed boost to the office sector in the last year. To a certain degree, the city is in better shape than most comparable markets and avoided the worst of the disruption that some other areas faced during the peak of the pandemic. While fundamentals are improving, there is still uncertainty surrounding the pandemic’s long-term impact on office space with many employers testing hybrid work models and right sizing their office footprint.

Several quarters of negative net absorption put upward pressure on office vacancies, which peaked at 9.7% in 21Q2. Absorption has returned to positive territory, and vacancies have since compressed to 9.4%. The vacancy rate in Colorado Springs has remained below the national benchmark dating back to 2018, giving landlords pricing power relative to other markets. Rent growth is outperforming the national average at about 5.9% positive annual gains, compared with flat rent gains from the national index.

Real estate in Colorado Springs is drawing significant interest from investors, with the market positioned for growth for a number of years to come. The market experienced outsized deal flow in the second half of 2021. 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.

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Industrial Sector

A boom in consumer spending is boosting Colorado Springs industrial fundamentals. The pandemic accelerated the rise of e-commerce, but retail sales at brick-and-mortar locations are also rising, 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. Consistent demand, in conjunction with minimal supply pressure, has kept vacancies low near 5.0%.

Amazon positioned itself to take full advantage of the shift to e-commerce, both locally and on a national scale. The online retailer has aggressively expanded in Colorado Springs, leasing a 4-million SF build-to-suit distribution and sorting center in 2018. The complex, located in the airport’s Peak Innovation Park in the Southeast submarket, delivered in October 2021 and is adjacent to a delivery station that Amazon opened in 2020. Amazon plans to hire 1,000 workers at the new location. In total, Amazon plans to hire 2,200 people across the Colorado Springs metro.

With the retail sector facing challenges related to the rise of online buying, retail-to-industrial conversions are gaining traction, though these can be complicated to execute. Amazon has taken over a former Sam’s Club in the East submarket, leasing 135,000 SF in March 2021. Construction on the conversion wrapped up in late 2021.

High demand for industrial product is driving rent growth. Annually, rents have increased by 6.9%. However, the pace of rent growth remains below the national annual average of 12.2%.

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Retail Sector

Consumers continue to spend at a record clip in 2022, driving improvement in the retail sector. Retail sales began to accelerate in mid-2020 as savings added up, wages increased, and fiscal support provided by the U.S. government provided consumers with additional funds at their disposal. The positive momentum continues. Retail sales excluding auto, gasoline, and non-store retailers, a measure that best encapsulates brick-and-mortar retail sales, pushed to a new record high of $378 billion in March.

Retailers are once again in expansion mode. Over 900,000 SF was leased in 2021, which is just shy of the 1.0 million SF of leasing activity recorded in 2019 heading into the pandemic. New construction starts have also increased in the last year. While most construction activity consists of small single-tenant build-to-suits, Falcon Marketplace shopping center broke ground in mid-2021 and will add 180,000 SF of retail space to the Northeast submarket when it delivers in early 2023.

Strong demand for retail space continues to put downward pressure on vacancies. In the last four quarters, the vacancy rate has declined by 180 basis points. With both retail sales and inflation rising, retail asking rents increased at their fastest clip in over a decade during the past year at 4.0%. Average triple net asking rent now sits at $18.50/SF. Rents are projected to continue rising over the coming quarters. However, 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.

A compelling demographic story has driven investors to the metro. Sales volume reached a record high, near $410 million, in 2021 as investor appetite for well-located retail assets with minimal leasing risk remained robust during the year. Based on CoStar’s Price Index, values have climbed, and cap rates have compressed.

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