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Better times ahead in 2018 for Colorado Springs' commercial market, forecast says

December 27, 2017 Updated: December 27, 2017 at 6:33 pm
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A rainbow hangs in the evening sky above downtown Colorado Springs Saturday, July 6, 2013. Light afternoon showers this week have given relief to lawns all over the Pikes Peak region. Photo by Mark Reis, The Gazette

Colorado Springs' surging economy led to better times for most segments of the local commercial real estate market in 2017, a trend that should continue next year.

"Everything's humming along," Dale Stamp, president of Springs brokerage Quantum Commercial Group, said Wednesday.

A recently released forecast by Quantum generally predicts lower vacancy rates and higher asking rents for commercial market segments in 2018. Low unemployment, an influx of new and expanding businesses, a growing population and a steady demand for homes and apartments are helping to boost the commercial market, according to Quantum's forecast and several of the company's brokers.

Highlights of the brokerage's 2018 forecast include:

- The office market vacancy rate ended 2017 at 11.4 percent; it had been close to 20 percent in the years just after the Great Recession. The rate should dip slightly in 2018, while average rents that were in the low $20s per square foot should remain about the same next year.

The office market, however, has been the slowest commercial segment to recover from the Great Recession, according to Quantum's forecast.

Some employers who want to add jobs can't find qualified workers, and therefore aren't filling up offices with as many bodies as might be expected in a growing economy, Quantum's forecast says. Also, the area still hasn't seen an influx of major employers with large numbers of jobs.

So even as the office market improves, and more space is occupied on a year-over-year basis, the gains are coming at a slower pace, said Russell Stroud, an office and investment specialist for Quantum.

Other businesses are scaling back on the amount of space they set aside per employee, while some companies are using "co-working" or shared spaces instead of occupying larger amounts of office space.

Until demand increases, don't expect construction of speculative office projects - space built on the expectation that tenants will come along at a later time. Only the medical and health care fields are seeing office construction, said Mary Frances Cowan, a Quantum broker and office and investment specialist.

Among office trends, some older buildings are being sold and converted to other uses, Cowan said. One example: The former Leidos building near Peterson Air Force Base was sold this year to organizers of a charter school.

- The industrial market's 9 percent to 10 percent vacancy rate in 2017 should decline to 8 percent to 9 percent in 2018. Average asking rents of nearly $7.50 per square foot should continue to climb in 2018.

The industrial vacancy rate is misleading because it's inflated by larger, obsolete spaces, Quantum says. Much of the demand is for smaller spaces of 20,000 square feet or less, where the vacancy rate is closer to 3 percent.

But there aren't enough smaller spaces to meet that demand because developers are hesitant to construct industrial spaces of that size. Building material prices are spiking and construction is costly; developers would have to charge sky-high rents to recover their investment costs, but aren't likely to get them at this time in the Springs market, said brokers Andy Oyler and Jack Mason.

Even so, Quantum expects the demand to continue, especially for industrial spaces with-up-to date ceiling heights, docks and garage doors. As a result, and even with rising building costs, industrial construction eventually should ramp up, Quantum's forecast predicts. In fact, the company expects the addition of industrial users such as cybersecurity companies and data centers who are turning their attention to secondary cities such as the Springs.

- More rooftops have meant an increased demand for retail space, especially on the Springs' north side and other fast-growing areas. Next year, the retail vacancy rate will start off at 5.9 percent, but drop to 5.5 percent by year's end. Average rents of $12.54 per square foot should rise 25 cents by the end of 2018.

Even as several national retailers battle online rivals, store and restaurant construction will continue in the Springs - although mainly for specific users. The question for retailers will be whether their per-square-foot sales will cover overhead costs, which include leasing brick-and-mortar spaces, according to Quantum's forecast.

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