Challenges, opportunities in crystal ball for 2016

The holidays have come and gone, 2016 is here, and it is time to pair new year’s resolutions with predictions for the year to come.

Last year proved to be one of solid fundamentals in the commercial real estate world. Rising rents, declining vacancy and increased absorption was the narrative for nearly every property type and every municipality in Northern Colorado.  So what does our crystal ball say for 2016?

Investment: Northern Colorado will continue to see strong investment interest in the region. Out-of-state investors will continue to gravitate towards Northern Colorado because of our strong employment, population growth, education and quality of life attributes. The influx of outside capital investment also will be largely propelled as investors chase more attractive yields on the Front Range as compared to what can be achieved in potentially overheated coastal and primary metro markets where they have historically invested. The result: Local investors will face stark competition for good investment deals, pricing will continue to escalate, and cap rates will remain low.

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New development and value-add pro formas will continue to be stressed with rising construction and land costs.  Construction price increases have outpaced rent growth in recent years, with cost increases as high as 10 percent to 15 percent between labor and materials in 2015. Landlords, investors and developers will need to push lease rates in order to compensate for higher escalated costs.

Retail: Retail vacancy rates will likely see some fluctuation this year and next with the delivery of several prominent new projects. New malls in Fort Collins and Longmont will continue lease-up throughout 2016, a planned Scheels Sports-anchored retail development in Johnstown bringing north of 800,000 square feet to the market, and other retail projects such as the 50,000 square feet of planned retail at Harmony Commons, at Harmony Road and Lady Moon Drive in Fort Collins.

The new deliveries may test the overall demand for certain types of retail space in our market, and is certain to create a “musical chairs” effect: tenants moving within our market to position themselves for future success: for example, Sports Authority’s plans to close its downtown location and open in Foothills Mall. Christy Sports is moving out of the Foothills Mall redevelopment and positioning itself next to Sierra Trading Post at The Square. The mall will be a magnet for soft goods and specialty retailers lured by large anchors and entertainment-centric amenities. Many of the tenants it will recruit already are leasing space elsewhere in our market.

Office/Industrial: This year will be a continuation of many of the trends we saw in 2015 in regards to the office and industrial sectors. Vacancy levels are at five-year lows in both office and industrial product types, and rates will steadily increase as vacant space remains scarce and construction costs increase.

According to CoStar Group data, the current office vacancy rates for Larimer and Weld counties are 3.8 percent and 4.2 percent, respectively. The vacancy rate for both counties has steadily trended downward over the past five years, while construction starts have been increasing nearly 20 percent year-over-year since 2012. Even more-so than in 2015, 2016 will see new office starts driven by organic business expansion as well as new companies migrating to the region.

The industrial product type in Larimer and Weld counties has trended similarly to office with vacancy levels at near all-time lows and new construction driven predominately by user demand. This year will see continued rate increases and extremely low vacancy as construction pricing continues to depress the delivery of new speculative space.

Commercial real estate market fundamentals are and will continue to be strong in 2016. We do see a need for situational awareness. An election year, projected rising interest rates, high construction costs and late-stage market cycles all have the potential for creating some market turbulence.

Josh Guernsey and Heather Matz are broker-partners at Brinkman Partners Commercial Brokerage in Fort Collins. Jake Arnold, Greg Roeder and the Brinkman team contributed to this report.