by Josh Guernsey and Greg Roeder on July 8, 2016
The Cleveland Cavaliers overcoming a 3-1 series deficit to win the National Basketball Association championship serves as a reminder that whenever you get down, there is always the opportunity for a comeback.
In April 2011, the Larimer County real estate market was in the midst of a hangover from the recession of 2009-10. Big projects such as the Foothills Mall redevelopment and the Mason Street Corridor were not yet a reality. There was a very large, abandoned dog-racing track occupying prime real estate near Interstate 25 and U.S. Highway 34. The rapid development and expansion of competing health-care providers had not yet commenced and retail centers throughout the county were struggling to make it. There was a lingering uncertainty hovering over our market like a dense fog.
Fast forward to the summer of 2016. We have taken flight to an altitude of 30,000 feet and the fog is below us, serving as a reminder of how far we have come and what we may encounter again in the future. Market improvement over the last five years can be charted in three major categories: vacancy rates, base rents and new construction.
Two big takeaways from this data:
Despite challenges, developers are going all-in on new office and retail projects. The significant speculative development leading up to the Great Recession of 2009 -10 resulted in lingering high vacancy rates post-recession. Much of that excess space has been absorbed by the market, but significantly higher construction costs have made it challenging to feasibly develop new inventory. The RSMeans Construction Cost Index shows that commercial construction costs in our Northern Colorado market have increased 112 percent since the first quarter of 2011. As seen by the data above, developers are willing to accept these increased costs to build new inventory and are counting on employment and population growth to support it. That growth will apply more downward pressure to vacancy rates and lead to an increase in rent rates.
The industrial market is stronger than cold rolled steel. Unlike the office and retail segments, the industrial segment was not overbuilt during the years leading up to the recession. During the worst quarters of the recession, when vacancy rates trended north of 12 percent for retail and office space, vacancy rates for industrial space still hovered around 5 percent. We are seeing the strongest rent rate increases in this segment because of high demand, low inventory and high construction costs limiting the development of new inventory. A 6,500-square-foot flex office/warehouse space on Link Lane in Fort Collins recently leased for a base rent of $9.25 per square foot, a 54 percent increase from the $6 per-square-foot rent the previous tenant had paid.
Where does the Larimer County market go from here? We may have just experienced a Cleveland Cavaliers style comeback, but we shouldn’t plan the championship parade just yet. Even with the positive market activity, there will be challenges ahead. How the market reacts will determine our trajectory over the next five years.
Greg Roeder and Joshua Guernsey are commercial real estate brokers with Brinkman Partners in Fort Collins.