The current expansion of the US economy will soon become the second longest expansion in modern history. Northern Colorado is directly feeling the impact of this with strong, positive rates of job creation year-over-year and generally low unemployment.
We’re also seeing major trends/shifts within the real estate industry.
Hospitality and multifamily are two of the biggest trending asset classes in the area while demand for retail and industrial continues to increase throughout Northern Colorado. 2017 saw nearly 3 million square feet of new office, industrial, retail, and multifamily space delivered. Following the first quarter of 2018, projections are already tracking beyond that number with 3,314,100 additional square feet delivered across those same property types, excluding office.
Base rents have been hovering between $14 and $16 per square foot as far back as Q1 2016, which is less than half of those seen in Denver and averaged across the nation. Office space in Northern Colorado is seeing a drop-in vacancy rates mostly due to the fact that rents aren’t high enough to justify new construction. In fact, currently there is no delivery of new construction office product projected in 2018.
However, there have been some notable lease transactions in 2017 and 2018, namely Madwire (102,000 square feet), Schneider Electric (30,227 square feet), and Regus (14,392 square feet) in Fort Collins and US Dept. of Veterans Affairs (23,287 square feet) in Loveland, showing us that Northern Colorado still has a healthy demand for office space.
The retail industry in Northern Colorado is witnessing a shift toward efficiency and a repositioning of junior/larger box stores. Base rents in this asset class have seen an increase since Q2 2016 with a significant uptick in Q1 2017. With retail base rent in Northern Colorado averaging $17.50 per square foot, the region is now close to Denver’s average and 80% higher than the national average, which is a little over $14 per square foot.
Within the retail industry, restaurants, entertainment, fitness, and healthcare sectors are booming. In fact, restaurant sales have now surpassed that of grocers.
Similar to the rest of the state, Northern Colorado’s vacancy rates have been steadily decreasing as respective base rents have been increasing over the past four years. Base rents have been hovering between $8 and $10 per square foot the last year, providing pockets for speculative development opportunities.
Overall, the major challenges within the real estate industry include interest rate increases, high construction costs, longer city approvals, and increased labor costs. While the Federal Reserve is likely to increase interest rates in 2018 and the new Tax Reform bill has the marketplace awaiting further clarity, investors are likely to move toward a more “Risk vs. Reward of Development” mentality while chasing yield-stabilized assets and adjusting their return expectations. However, the strong demand for core assets in Northern Colorado will continue to push us forward into 2018 and beyond.
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