The Colorado Springs industrial market has trended positively over the past 10 years. Though it is a very gradual trend, we are now at a point where we anticipate the market to slow or level off. The market will not see a lot of change throughout 2020, though we expect the market to stay positive due to the lack of new construction, high costs, possible hesitancy related to elections and lack of available quality industrial product.
Taylor Stamp, Quantum Commercial Group
The overall vacancy rate for the Colorado Springs industrial market started the year below 7 percent. That rate has dipped lower each quarter, nearing 5 percent at the end of 2019. We foresee room for the rate to continue dropping through 2020, but believe we may see a slight rise in the vacancy rate due to some new construction and existing occupants becoming more efficient with their spaces.
This industrial market has not seen the amount of new construction needed over the past two years to keep pace with the high demand the market has experienced. This will impact growth and trends throughout 2020. There was roughly 72,000 square feet of new industrial product under construction during 2019. When it comes to new construction starts in 2020, however, we should see upwards of 200,000 square feet to keep in line with the market demand.
We expect rental rates will continue to rise through 2020 as available industrial space becomes scarcer and as limited new product comes online, all while rates are near record highs. Rental rates will remain, on average, lower than Denver, which is reported to be around $9.92 per square foot (NNN), while Colorado Springs is currently $8.80 per square foot. The Colorado Springs market is nearly $1 per square foot higher than the national average, which is reported to be $8 per square foot.
Industrial sales volume was down in the Colorado Springs market through 2019, mainly due to a lack of options, while the average sale price per square foot continued to increase, nearing $100 per square foot. This number is in line with the national average, but much lower in comparison to the Denver market, where the average is around $130 per square foot.
From an investment standpoint, the industrial sales market is one of the best in Colorado for sellers. Cap rates mirror the rates of other investment property types, with the exception of apartments, and there are a large number of investors waiting on the sidelines for opportunities involving properties that are leased to strong tenants. However, landlords and sellers are hesitant to sell, given the potential promise of realizing further appreciation in the market, the uncertainty of selling in an election year and a lack of good 1031 options available. The result is the demand for good product will far exceed the available properties, pushing cap rates lower and sales prices higher through 2020.
We expect the Colorado Springs industrial market to be positive through 2020 and remain strong. However, due to the constraints of low vacancy rates, a lack of quality and new product and the high demand, the market will begin to flatten and level off. We believe this will be the trend through 2020 unless we see a large uptick in new construction.
— By Taylor Stamp, broker associate, Quantum Commercial Group. This article first appeared in the February 2020 issue of Western Real Estate Business magazine.