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The Colorado Springs office market took steps forward in 2018, with the overall vacancy rate dipping below 10 percent and a big increase in the amount of space that was occupied over the course of the year, according to brokerage Quantum Commercial Group.

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Colorado Springs’ commercial real estate market continued to make post-recession strides this year and is poised for another solid year in 2019, according to a new forecast by Quantum Commercial Group, a local brokerage.

Still, the commercial market — including its key office, industrial and retail sectors — won’t be without challenges next year.

First, the good news: Employers, retailers, restaurants and other businesses have discovered Colorado Springs, Quantum officials say. They like the city’s quality of life, population growth, improved economy, cheaper costs to do business and housing prices that — while on the rise — remain lower than Denver’s and other markets.

“Colorado Springs has been found,” said Dale Stamp, Quantum Commercial’s president. “Not only for national retailers. People in general, through your travels, everybody says wonderful things about Colorado Springs.”

The Springs is gaining a reputation as “the best value on the Front Range,” said Jack Mason, a Quantum broker. “From a cost-of-living standpoint. Pretty much all aspects.”

Some business people think Colorado Springs is where Denver was three or four years ago — positioned for growth and about to take off, Mason said. A wave of new stores and restaurants are evidence of the Springs’ growing popularity; Duluth Trading Co., Raising Cane’s Chicken Fingers and In-N-Out Burger have opened or announced they’re on their way.

Here’s a look at what the Quantum forecast and brokers say about key segments of the commercial market heading into 2019:

• Offices — The local vacancy rate dipped just below 10 percent in 2018 after peaking at 17 percent during the recession. Also, nearly 300,000 square feet of additional office space was occupied this year, the most since 2013, a key commercial yardstick.

Credit strong job growth in 2018 for the improved office market, although increased leasing has resulted mostly from the expansion of existing employers, with only a handful of lease deals coming about because of market newcomers. Office leasing activity was strongest on the city’s north side and downtown.

The same should continue in 2019, although not necessarily at the same pace. The office vacancy rate will be flat or even tick up slightly.

“We predict more, maybe not as strong, but good job growth in the year to come and that will lead to more absorption of space,” said broker Russell Stroud.

A new office project under construction at the north side, Victory Ridge mixed-use development, will add 109,000 square feet of speculative space. But few additional speculative projects — those built on the expectation tenants will come along later — are expected because lease rates haven’t risen to a point where developers can justify spending money to construct them.

“Those (lease) rates are going to have to keep going up in that north corridor for probably a few more years before we’ll see new development,” Stroud said.

• Industrial — The vacancy rate for warehouses, manufacturing plants and other industrial buildings fell to 6.6 percent in 2018 after several years of hovering around 9 percent. Asking rents jumped to $8.56 per square foot this year, about $2 more than three years ago. Medical marijuana growers and construction-related businesses — contractors, builders, suppliers and repair shops which have expanded to handle weather-damaged homes, cars and the like — have driven the demand for industrial space.

Some new industrial projects are underway, but not as many as there could be. High construction costs and the inability to find qualified workers — a problem dogging all commercial sectors and the residential market — have deterred the construction of industrial buildings. Like office spaces, developers aren’t yet sure rents are high enough for them to get a return on their investment if they construct a speculative building.

The Springs also continues to lack state-of-the-art industrial buildings and warehouses that have high ceilings and doors to accommodate large vehicles and equipment. Those newer buildings also are designed to allow trailer-trucks to drive through and more easily drop off loads or pick up shipments .

“We still have a lot of obsolete facilities out near the airport that groups don’t really want to go in there and remodel because it can be too costly,” said broker Taylor Stamp, Dale’s son.

Still, demand for industrial space should remain strong in 2019. If a major industrial employer comes to town, vendors and suppliers might follow who would spur development of modern industrial structures, Taylor Stamp added.

• Retail — Steady population gains over the last few years and strong job growth have made retail arguably the healthiest of the commercial sectors.

The retail vacancy rate slid to a little more than 5 percent in 2018; it was about 7 percent in 2011. Average asking rents rose to $13.41 per square foot this month, after having been just above $11 a few years ago. On the city’s rapidly growing northeast side, retail rents were more than $25 per square foot.

Along with population and job gains, the growth of the city’s military bases, defense contractors tourism and universities, along with higher household incomes, will continue to propel retail growth in 2019. Vacancy rates also could dip to 4.8 percent. And absorption should exceed 300,000 square feet next year after having totaled about 192,000 square feet this year.

“Retail fundamentals will continue to look good in 2019,” according to Quantum’s forecast.

• Investments. Out-of-town and out-of-state investors are continuing to look for quality, income-producing properties across all industry sectors in Colorado Springs. Several out-of-market buyers, for example, have purchased large, local apartment complexes of 200 units and up because vacancy rates are low and rents have hit record highs.

”Our low unemployment, our job growth, I think we’re perceived more as having a better diversified economy,” broker Mary Frances Cowan said. All the fundamentals that are present in this market right now, the investors really like what they see.”

Business writer, Colorado Springs Gazette

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