Post-COVID: Is Commercial Real Estate in Colorado Springs a Safe Investment?

 

Every investment carries some amount of risk. Those that are wise will seek information concerning the extent of the risk. It’s not surprising that investors and business owners alike are asking what the risk factor is for commercial real estate in Colorado Springs now that lockdowns are over, restrictions have been lifted, and the economy is starting to return to normal.

Is now a good time to sell? Should I wait to buy? Is a long-term lease a wise decision right now? Should I get out of office space and look to other sectors of commercial real estate? 

The only definitive answer to all of those questions is…time. As with any investment or business decision, there is no way to tell what the future will bring. We all know this first-hand from the unforeseen pandemic we’ve waded through the past 18 months. However, one can look at data and seek the information necessary to help inform those decisions and mitigate risk as much as possible.

Below we’ve provided a quick overview of the commercial real estate market in Colorado Springs as we close the halfway point for 2021. 

 

Commercial Real Estate Across the Nation

Real estate is primarily a local game, but looking at the trends across the nation can help provide context to our own local understanding. Top highlights for the commercial real estate market across the US include the following:

 

Overall Upward Market Movement

SIOR (Society of Industrial and Office Realtors) provided positive facts regarding the state of the industry in their recent report.

 Overall market confidence has reached the highest level since the start of the pandemic (7.3 out of 10; 8 out of 10 for industrial).

Leasing activity in the 1st quarter of 2021 far surpassed the 4th quarter of 2020, increasing in every sector, with over 30% increase in industrial leasing activity.

Deals are being completed, not stalled. On-time transactions have more than doubled since Q2 2020, and on-hold transactions have dropped by 83%. 

77% of industrial brokers in SIOR’s survey indicated that Q1 2021 has been a seller’s market for industrial owners, with site acquisition prices increasing at a steady pace.

 

Returning Confidence Among Investors

According to the recent WMRE/Marcus & Millichap Investor Sentiment Survey, investor sentiment jumped 25 points from the second half of 2020 back up to its pre-pandemic index score of 165. 

Additionally, more than half of respondents to the aforementioned survey said they have “an abundance of capital ready to invest.” 

Many investors are looking to finish 2021 with an increased portfolio, capitalizing on the readily available financing for most property types as well as bargain deals available in the sectors that were hit harder by the pandemic (office and retail). The inevitable rise in interest rates also has many investors eager to obtain financing now while rates remain low. 

 

Shift in Markets

The M&M Investor Sentiment Survey also indicated that investors have turned their attention to smaller markets due to pandemic-related shifts in demographics and workplace environments. 

Real estate investors divide metro markets into tiers and most often focus their investing capital on Primary (Tier 1) and Secondary (Tier II) markets. Primary markets are large metropolitan areas considered “gateway” markets. These include cities such as Los Angeles, New York, San Francisco, Boston, etc. Secondary markets, generally between 2 – 5 million in population, also garner much attention from investors. 

Tertiary markets (Tier III markets) average under 1 million in population and normally see less outside investment interest. But with the migration of workers from primary and secondary markets, investors have identified upcoming opportunities within smaller metro areas. Thus smaller markets are seeing an increase in both new development and existing property transactions.

 

Sectors within CRE Affected

We would be remiss to say that commercial real estate was not affected at all. Specific sectors within commercial real estate were hit hard by the pandemic, namely office and retail. It is interesting to note, however, that even though these sectors as a whole saw decline, there were some subsets within the sectors that were not affected. 

Conversely, other sectors actually saw sustained growth or stabilization after an initial dip in the spring of 2020 – industrial and multifamily. 

With the sudden and nearly unmanageable boom in E-commerce due to COVID lockdowns, businesses were scrambling to find more warehouse space crucial to their supply chain operations. “In the U.S., just shy of one-quarter of all investment transactions were for industrial assets in 2020 — a record for the market.” (Real Capital Analytics) Industrial property owners and developers were and are positioned to thrive in this market.

As to multi-family success, the supply chain disruption for building materials and consequent decrease in housing availability forced many would-be home buyers to continue renting. This has provided unexpected stability for multi-family investments, especially as tenant concessions approach pre-pandemic levels. 

 

Commercial Real Estate in Colorado Springs

On a local level, Colorado Springs real estate conditions echo many of the trends seen throughout the country. 

 

Gaining Attention as Growth Economy

Perhaps the most impactful change within Colorado Springs commercial real estate comes from the shift of both private and public investors towards tertiary markets. While Colorado Springs is only just beginning to catch the attention of outside investors, the growth is projected to continue. 

For tertiary markets to be enticing to investors, basic economic growth indicators must be present, two of them being population growth and employment growth. 

In 2020, Colorado Springs averaged 1.17% population growth, above the national average of .5%.

According to Ryan Gedney, senior economist for the Colorado Department of Labor and Employment, the Colorado Springs job market is recovering faster than any other metro area in the state and in the majority of the nation. With almost 90% of jobs lost already recovered, Colorado Springs is on track to a full recovery and continued employment growth (Gazette – Colorado Springs recovery of jobs on fast track – No. 1 in state). 

 

Colorado Springs Pulse

Growth factors and a variety of other indications show potential for continued growth in the Colorado Springs economy. Just a few of the recent highlights for the city speak to its potential:

• Most confident workforce in the nation (LinkedIn, Workforce Insights)
• Named in top 10 for new corporate location projects for mid-sized cities (Site Selectors Guild)
• Ranked in top 10 cities in the nation that Millennials are moving to for both living and starting a business (SmartAsset)
• Colorado listed as the #2 state for positive recovery and economic stability (U.S. News & World Report)

 

What Should Your Next Step be in Commercial Real Estate?

We can’t tell you to sell or hold, buy now or wait for 2022 because much of it depends on your individual situation and long-term goals. But we can provide you with comprehensive market knowledge based upon the economy as a whole yet localized to Colorado Springs. 

Our commercial real estate brokers are experts at analyzing deals and providing financial analysis and financial modeling to help you mitigate risks and increase upside potential. Call us today to learn how the current market conditions for commercial real estate in Colorado Springs can be utilized to your best advantage.