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Colorado Springs Area to Overtake Denver as Property Demand Moves South

Development Sparks Tourist Area Transformation as Denver Gets Too Pricey
October 4, 2018
A 752,000-square-foot office building formerly fully leased by Verizon is more than half vacant, making it the largest chunk of existing office space available in Colorado.




Nestled in the shadow of the legendary Pikes Peak in the Rocky Mountains, Colorado’s second-largest city sits between a sleepy tourist town and an expansive prairie south of Denver, the bustling state capital. But now, Colorado Springs, long known just as a destination for tourists and military families, is luring so many new residents its county is projected to outgrow Denver in 15 years to become the state's biggest, spurring a development surge.

As prices in Denver keep rising and demand moves south toward more affordable housing, the population of Colorado Springs, known to locals as "the Springs," grew 11 percent from 2010 to 2017 to more than 467,000. It’s showing signs of only speeding up.

"Colorado Springs is on the radar nationally," said Tatiana Bailey, director of the Economic Forum at the University of Colorado’s Colorado Springs Campus. "Especially on the West Coast. It’s a thriving market but without the super-inflated prices."

The growth has boosted Colorado Springs’ home county, El Paso, to a point that it is now expected to overtake Denver County in roughly 2033 and maintain the No. 1 spot from there on, topping more than 1 million residents in 2043, according to data from the Colorado State Demographer Elizabeth Garner. El Paso is expected to reach its 1 million resident milestone well before Denver County even as the two counties have traded the top spot as state’s most populous county for years.

With Colorado Springs' strong economic base, home to the Air Force Academy and offices of major corporations, the area has been ripe for a boom. Developers are already underway on multifamily, retail and entertainment projects as others watch the growth with plans for the future. Local officials are grappling with setting up transportation and other networks to keep pace with the expected crowd and buildings.

Denver County, for its part, is bursting at the seams. Housing inventory has been at record lows for well over a year and home prices keep climbing. Denver suburbs have already begun absorbing those seeking a respite from Denver's cost and traffic congestion.

Price escalations, particularly for housing, in Denver have made many building and property shoppers look south in search of more affordable options, said Tammy Fields, chief economic development officer for the Colorado Springs Chamber of Commerce and Economic Development Corp.

The median price for a home in Colorado Springs in the second quarter this year was $323,600, compared with Denver’s median of $462,900, according to data provided by the University of Colorado at Colorado Springs’ Economic Forum.

Unincorporated areas around Colorado Springs are growing even faster than the city proper, and new residents to those areas, as well as a variety of smaller surrounding towns, spell opportunity for commercial real estate and economic development in the city itself.


Development


Denver developers are making their way south, attracted by wide swaths of available land that come at lower prices and the area’s growth trajectory that promises plenty of users for multifamily, retail and entertainment development.

Colorado Springs’ northern edge is in the midst of growth, with several multifamily or retail and entertainment construction projects either underway or recently completed that are beginning to change the area’s long-held status as a bedroom community for commuters to Denver.

Etkin Johnson Real Estate Partners, one of Denver’s busiest locally based developers, is constructing an apartment complex that is the first step in a 77-acre office, retail and hotel development.

And Confluent Development is nearing completion on a multi-tenant retail project that is planned to bring Snooze, a Denver-born breakfast restaurant with a cult following, to Colorado Springs.

Development in employment-heavy property types such as office and industrial, though, is slower to come.

The entire Colorado Springs area office market includes 28.9 million square feet, just slightly more than the square footage contained in Denver’s central business district, which clocks in at 27.8 million square feet, according to CoStar data.

But in Colorado Springs, the sprawling office market stretches well beyond the city limits in a more even fashion than in Denver, where office developers built densely downtown and in the Denver Tech Center in a southwestern corner of the city.

The northeastern part of the Colorado Springs area has the most office space, with 8.6 million square feet, more than twice what exists in the city’s central business district at 3.5 million square feet.

Across the entire area, 202,000 square feet of office space are under construction, according to CoStar, roughly keeping pace with the 12-month annual absorption of 215,000 square feet. But as older space in the city is absorbed, new construction is expected to follow, local experts say.

Colorado Springs was a bit slower to emerge from the recession, said Jared May, a senior associate at brokerage CBRE Group Inc.’s Colorado Springs office. But with vacancy rates falling from 12.3 percent at the end of 2014 to less than 10 percent today, there’s growing incentive for new construction.

"Vacancy rates are coming down and lease rates are starting to go up," said Bailey. "As you get absorption, things shift."

If the economic cycle holds out long enough, Bailey said, market fundamentals will justify new office development.

"If we continue and don’t have a downturn, I think we’re essentially going to see vacancy rates get low enough that we’ll start to see some construction," Bailey said. "But because projects are so long-term, once the market starts to cool, companies will pull back."

And there are some significant spaces left to be absorbed, Fields said. A 750,000-square-foot building formerly occupied entirely by Verizon is now less than half leased by the cell phone provider and other tenants, according to CoStar. The other 490,000 square feet of office space is vacant, making it the largest existing block of available office space in the state.

The industrial market is busier, May said. Like most of the Front Range, vacancy rates in Colorado Springs are dropping quickly for industrial properties, driving development. Earlier this year, Indianapolis-based Scannell Properties completed a 131,000-square-foot industrial project in Colorado Springs’ southeast quadrant, the largest industrial project completed in the city in more than a decade.

The city council this year approved preliminary plans for Banning Lewis Ranch, an 18,000-acre mixed use development that was annexed on the city’s eastern side three decades ago.

Strong Economic Bones

The city’s employment base is broadening and diversifying, which is also expected to help spur development, Bailey said.

The city’s hospitality sector is robust as it's closer to the mountains than Denver and with the benefit of tourism hotspots like Garden of the Gods, a National Natural Landmark.

Home to the U.S. Air Force Academy, Peterson and Schriever Air Force Bases and the U.S. Army’s Fort Carson, it’s a stronghold for military and defense-related businesses of varying kinds.

But other industries are growing fast in the area, too.

Information technology, in particular, is on the rise, Bailey said, with companies like financial services provider T. Rowe Price, tech-based businesses HP, Broadcomm, Xerox, as well as telecommunications provider Verizon and insurers.

Zurich Insurance, Wells Fargo, USAA, the financial services provider that caters to service members and veterans, have presences in the region. Insurer Progressive maintains its second-largest office, after its Cleveland headquarters, in Colorado Springs, according to economic development chief Fields.

Colorado Springs colleges and universities are led by University of Colorado at Colorado Springs, the fastest-growing campus in the University of Colorado system, and the highly selective Air Force Academy. They churn out thousands of new graduates per year, providing a deep talent pool for potential employers.

Add in the fact that highly educated graduates from elsewhere in Colorado seeking cheaper housing and proximity to the mountains are increasingly flowing into Colorado Springs, and that’s a point Fields and her organization can sell in today’s tight employment market where finding talent tops many priority lists for the country’s biggest companies.

Basically, Fields said, Colorado Springs isn’t just a military and tourism town anymore.

"There’s so much more depth to our community than people realize," she said.

Growing Pains

Of course, no growth comes without challenges, and like the rest of Colorado, one of the biggest in El Paso County is transportation. The sprawling city has bus service, but no light rail, and traffic and roads are increasingly a problem.

In 2016, Colorado Springs Mayor John Suthers led an effort to pass a sales tax to raise money for road improvements. The five-year plan is expected to raise $50 million to fund road work.

Also critical to a community that is connected to the Front Range but also disjointed from the bustling Denver metro area is the planned expansion of I-25, the north-south artery that runs through the state.

Officials in August broke ground on a construction project that will widen the road to three lanes for 12 miles between Castle Rock, Denver’s furthest-south suburb, and Colorado Springs.

The project is expected to alleviate sometimes crippling congestion that occurs between the two cities as commuters and tourists make their way along the Front Range, and keeping that flow of people open is critical to an area preparing to become the state’s most populated as brimming Denver overflows to the south and Colorado Springs’ star rises further outside of Colorado.

Molly Armbrister, Denver Market Reporter  CoStar Group   
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