NoCo ready for speculative office development

Larimer and Weld counties appear to have recovered from the Great Recession.

There are more jobs now than ever, with an unemployment rate of 3.4 percent in Larimer County and 4.1 percent in Weld County, lower than Colorado’s and the national average. Northern Colorado enjoys a very diverse base of industries which will ensure a healthy economy for years to come. The prominent pillars of the economy include education, health-care services, agriculture, technology, energy and real estate and professional services.

With these vibrant industries and an improved labor force comes the need for additional office space. There are a number of factors that previously have previously held developers at bay from taking the risk on the speculative development.

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Since the Great Recession, businesses have had a very conservative perspective on their office-space utilization. Office occupants in Northern Colorado previously utilized 250 to 300 square feet per employee, and that average now is closer to 200 square feet per employee. Therefore, over the last couple of years the existing office inventory has accommodated 20 percent to 25 percent more employees without adding new buildings. According to Corenet Global Research, nationally the average square foot per employee dropped from 225 square feet to 176 square feet between 2010 and 2012. Many industry experts expect this ratio to drop to 100 to 150 square feet per person by 2017.

Although this trend has minimized regional absorption over the last five years coming out of the recession, approximately one-half of all regional vacancy is in Class C properties which have become either functionally obsolete or not a preference for businesses. There is more than 2 million square feet of Class C space in Northern Colorado, and it is time for much of this inventory to be either significantly upgraded or replaced.

An additional significant factor in preventing new office construction is the disparity between achievable rental rates and the high occupancy costs necessary to justify new construction. Most recently Class A office space has leased at a gross occupancy cost of $28 to $30 per square foot annually. The high cost of construction dictates gross rents of greater than $30 per square foot in order for developers to achieve the return on investment to justify the risk of investing in new speculative construction. Now that the inventory has been depleted and rents are increasing, Northern Colorado is ready for speculative office space.

Sixty percent of the office space in the market is Class B, and the vacancy rate in this category has been reduced to 5.7 percent as of the end of the second quarter of 2015. In the second quarter of 2015, Northern Colorado experienced a shift from most office absorption occurring in the Class B properties, to 40 percent of the existing Class A vacant space being leased, resulting in a vacancy rate in Class A office space of less than 3 percent.

Fort Collins has 50 percent of all the office space in Larimer and Weld counties and boasts an occupancy rate of 96 percent in its Class A and B office properties. A business needing greater than 10,000 square feet of Class A space will have virtually no options until new speculative office space is constructed.

Only two speculative office buildings are under construction in Northern Colorado, and both are in the Centerra development in Loveland. The first breaking ground was McWhinney’s Hahns Peak Two at 1880 Fall River Road, which commenced construction in July. This building will be a two-story, 56,000-square-foot Class A building with a delivery date of March 2016. Although no new tenants have been announced for Hahns Peak Two, Centerra is one of the most popular submarkets and competes well for tenants with Old Town Fort Collins and the Harmony corridor submarkets. The vacancy rate in Centerra is 6.8 percent as compared with a vacancy rate of 24 percent in the depths of the Great Recession.

The second speculative Class A office building under construction is a single-story, 15,000-square-foot building on Rocky Mountain Avenue on property recently sold by University of Colorado Health. The developer is Rocky Mountain North, LLC, which also is constructing a new corporate headquarters for Meyer Natural Foods.

The last time Northern Colorado experienced speculative office development was from 2004 to 2007, when Centerra took the lead with 10 new projects, expanding its market presence to approximately 900,000 square feet or 10 percent of all Class A and B office space in Northern Colorado.

Ron Kuehl is a broker with Realtec Loveland.