Colorado Springs Real Estate Briefs: January 4, 2008

The 2008 federal budget contains promising news for the construction industry.

Ken Simonson, chief economist for the Associated General Contractors of America, said that U.S. Census Bureau data shows that new home construction will see net growth for the period 2006-2016, at an annual average rate of 1.7 percent, despite the current housing downturn.

That projected growth is not as robust as during the prior 10 years, but will be spurred by an aging population, he said.

Nonresidential construction is expected to grow at an average rate of 1.5 percent through 2016.

Jim Johnson, president of G.E. Johnson, said he agrees with Simonson at the macro level, but Colorado Springs is "in a unique position because of all the construction at Fort Carson."

Outside the military bases, Johnson sees commercial construction trending flat or downward.

"There are no schools pushing for big bond issues right now," he said. "Lewis Palmer, District 49 and School District 11 are all on the backside of their new school initiatives."

G.E. Johnson has focused on the health care arena, building facilities in Parker, Littleton and Denver. It also is building the new Penrose St. Francis Medical Center off Powers Boulevard, which is scheduled to be completed by April.

But Taxpayers Bill of Rights-restricted budgets mean cutbacks or delays for construction of municipal projects.

"Look at Colorado's population increase in the past few years," Johnson said. "We haven't added a single new prison bed in the last eight to 10 years."

More promising areas for construction companies during the coming year will be possible ground-breakings at Interquest Marketplace and at Colorado Crossing.

For now, Johnson said he will deploy crews to more active mountain communities, such as Aspen, Vail, Crested Butte and Steamboat Springs, as well as to the Denver area, where work is under way on Centura's St. Anthony Hospital.

"We're in discussions on a large downtown Denver mixed use-hotel center," he said. "And we also have several new projects in Wyoming -- so we'll stay busy."

Developers sit tight

The housing development community, hard-hit during 2007 by a 36 percent drop in housing starts, is poised for a return to business as usual, although most think fewer new projects will kick-off during the coming year.

LeRoy Landhuis, developer of 1,400-acre Lorson Ranch sees the announcement that nearly 10,000 new troops will be added to Fort Carson by 2013 as some of the year's best news.

"Of course decisions like that are always subject to politics down the road, but if close to that number of troops are added, many with families, that could mean they'll need anywhere from 2,000 to 3,500 new homes in the next five to six years," he said.

Landhuis sees the assignment as positive in view of debate about expanded training facilities at Pinon Canyon.

"I think that issue will be re-examined in a calm, rational way next year with the politicians working hard to find a solution," he said. "I just want them to get the training facility they need."

Landhuis said the growth of Fort Carson will benefit the southern half of Colorado Springs, where a handful of residential developments, including Lorson Ranch, are working through final entitlement issues.

"We have 102 fully developed lots and potential for 1,000, ready to come on line," he said. "By the third quarter, as the foreclosure and surplus inventory situation begins to improve, people may be ready to step up and buy homes."

Office, commercial stable

It's an unending chorus. Even the busiest commercial office brokers couch their optimism for 2008 with, "but what we really need in this town is more jobs, primary jobs."

In a December market outlook report, Sierra Commercial Real Estate veteran Kent Mau took a look at the coming year.

Their view: the market will be poised for growth, but will be otherwise "unremarkable." That said, Mau pointed to a 1 percent increase in office vacancies from 2006 to 2007.

"Expect 2008 to look like the last 18 months," he said, adding that the area's most desirable properties have been snapped up by local and out-of-state investors hungry for strong cap rates and steady rents.

Most Class A commercial office space is in one of three submarkets: near the Colorado Springs Airport, in the central business district and along north Interstate 25.

"The last 10 to 11 percent of commercial space in any market is the toughest to fill," Mau said. "If we added another 600 jobs, we'd be looking at close to 0 percent vacancy in existing Class A space."

The airport submarket offers more opportunity, however, as several large defense contractors have vacated leased space and companies like The Aerospace Co. and S.I. International have moved into their own properties.

The central business district continues to see a steady 9 percent vacancy rate, although the addition of redeveloped and new projects by LandCo or Nor'Wood downtown could significantly change that estimate.

By 2009, the market "should be about right for significant growth," Mau said.

Industrial mixed

As usual, the industrial picture is a slower-moving submarket.

With 30 million square feet of existing space, vacancy rates vary greatly, depending on submarket categories such as office/warehouse, research and development, distribution centers and manufacturing facilities.

Intel's 1.4 million square feet of space, scheduled to be vacated during 2008, will affect absorption rates, but not a great deal, said Sierra Commercial Real Estate industrial broker David Bacon.

Vacancy rates stood at 9.16 percent -- including sublease space -- at the end of 2007. During 2008, Bacon sees little demand for new speculative space. He based that trend in large part on a 40 percent drop in new housing permits.

Bacon also sees opportunity for "creative" investors to buy challenging properties, reinvest to make the space functional and offer it at a competitive lease rate.

Owner-user buildings, such as those developed at Claremont Business Park, industrial condos and self-owned storage units will be bright spots in the industrial sector he said.

Retail no longer at a boil

Retail broker Mark Useman of Sierra Commercial said that while the retail sector has been healthy during the last few years, the current economic climate and slow housing market could create concern.

"Retailers may be more conservative in their expansion plans for the next few years," he said.

Most expansion that will occur will be in the northeast part of El Paso County, with secondary growth expected to the south near Fort Carson.

Retail tenants seem to be most interested in new centers, such as the Monument Marketplace, Falcon Highlands, Colorado Crossing, InterQuest Marketplace, University Village and Briargate Crossing, he said.

Owners of older shopping centers in mature neighborhoods could see renewed opportunities for renovation, as visible at the former Shops at the Bluffs, which is being redeveloped by United Properties Inc.

Useman quoted vacancy rates of 3.23 percent for newer shopping centers. Retail centers built before 1994, however, could face vacancies of 15 percent.

The City Council is discussing incentives for shopping centers in older neighborhoods, which could generate increased sales tax revenue, some of which is lost when big box and mid-box retailers move outside the city limits.

Land: the real gold rush

Dale Wheeler, a Sierra land broker who partnered with Gary Hollenbeck to sell the Banning Lewis Ranch during 1989, sees no let-up in demand for undeveloped land.

"Barring any unforeseen political or economic disruptions, expect demand for residential and retail land, raw and entitled, to increase by the end of 2008 or early 2009," he said.

With out-of-state investors hovering over a dwindling supply, per square foot rates have spiked into the $7 to $8 range in fast-growing areas.

Wheeler said that residential developers had been the biggest land buyers, but that has changed. During 2008, he expects more land parcels to be purchased for retail or commercial use.

"(But) land for the development of office and industrial product will be less active until the job market creates increased opportunity," he said.

Creativity key

Steve Bach, a partner in Bach Real Estate Partners, like many brokers, agrees "that it all comes back to job creation."

He sees a softening commercial market based on a softening the U.S. economy and said that unless a large company makes a surprise announcement, the area will see a number of large floor plate spaces become available during 2008.

He goes a step farther, however.

"We've got to find a way to create new primary jobs -- and need, as a community working together, to think outside the box and reposition who we are a city," he said.

Bach said he hopes Intel will consider dividing its mammoth building into four or five sections which could be used by emerging companies, possibly in conjunction with the University of Colorado at Colorado Springs Department of Engineering or others.

"The Intel facility could become a national magnet for research and development for new sources of solar, wind and high altitude, for example," he said.

New horizons?

Bach said that 2008 will be a year of challenge and opportunity.

"It's a great time for us to re-engineer, to reinvent ourselves and to attract new high-quality employers," he said. "Energy is huge. Data centers are increasingly important to the health care industry. Maybe we need an initiative that includes UCCS, City Council and the State of Colorado."

As far the military influx, Bach expects a delayed and diluted benefit.

"The increased troops will be positive for the housing sector and anyone in retail to the south will benefit -- and car dealers too."

Credit: Becky Hurley