Pikes Peak region appears to be bucking the decline

The national news hasn't been pretty, especially for residential real estate and home builders. But during recent weeks, national media attention and financial analysis has begun to shift from the challenges of housing and bad mortgage debt to the commercial real estate sector.

Conventional wisdom says that retail -- and related development - - follows rooftops. When national new home construction and sales slowed dramatically, especially on the coasts and in large metropolitan areas, institutional mortgage investors like Lehman Bros., Morgan Stanley and Bear Stearns saw double-digit losses.

As a result, some investors who would be buying or selling properties are sitting on the sidelines, reluctant to venture into real estate.

They worry that the credit industry's shakeout will somehow lead to valuation erosion, higher cap rates and increased vacancies for commercial properties.

In the July-August issue of the Commercial Investment Real Estate magazine, senior economist Suzanne Mulvee of Property and Portfolio Research Inc., described the national economic picture as "slowing down."

In "Stay Tuned," she looked at each of the office, industrial, retail and multifamily sectors in an effort to answer the question, "Will slower growth and residential woes disrupt commercial real estate's performance?"

Her general answer was yes, based on poor job creation prospects for the U.S. economy and a decreasing pool of workers. At the same time, capital flows have slowed and risk premiums have "worn thin," she said.

Her advice to colleagues in the market: "Avoiding the markets that lose value will be the hallmark of successful investor over the next several years."

The Pikes Peak region has seldom followed lockstep with the national economy. Perhaps its darkest hour occurred during the Resolution Trust Corp.'s declaration that it was the "foreclosure capital of the country" from 1989 to 1991. Since those days, however, the ups and downs have remained manageable.

The Springs even managed to weather the tech bust of 2001 and 2002. Within three years, most abandoned sublease space was absorbed. In addition, new construction, fueled by the defense sector and the entry of large investors like Corporate Office Properties Trust, delivered hundreds of thousands of square feet of new office and industrial space to the market.

Today, local commercial brokers seem almost surprised at the stark differences between hard-hit areas such as Miami, San Diego, Phoenix, Las Vegas and Orange County and their own community.

"We didn't have the great new home surpluses and the overbuild situation you saw in other places," said Kent Mau, senior managing partner with Sierra Commercial Real Estate. "And I think the economy's effect on the local commercial market has so far been negligible."

Most local brokers and industry analysts interviewed last week by CSBJ acknowledged that while national economic trends and the international money supply do affect local business to some degree, they're puzzled at the suggestion that commercial activity in the area will suffer to any great degree.

The year in a nutshell

In a special Market Trends Online report posted Sept. 5, researchers for the Certified Commercial Investment Member organization provided the following overview of each of the country's commercial market segments:

Office: 78 million square feet of office space will come online by the end of the year and vacancy rates will range between 12.5 percent and 13.5 percent.

Industrial: Leasing and absorption is strongest in California and South Florida, although southwestern cities including Tucson, Ariz., Las Vegas and Albuquerque, N.M., are seeing increased warehouse and distribution demand.

Retail: Institutional and foreign investors accounted for 60 percent of all retail transactions during the first four months of the year.

Multifamily: Reverse condominium (former for-purchase condominium inventory reverts to for-lease owned by a single entity) conversions are occurring in many markets, but the vacancy rate should remain between 5.5 percent and 5.9 percent through the end of the year.

CCIM's prediction for the first quarter 2008:

SectorVacancy rateInventoryRent growth

Office13.3%3.4 million sf0.7%

Industrial9.2%12.3 million sf0.8%

Retail 8.6%1.6 million sf0.4%

Multifamily5.7%14 million units1.0%

Source: National Association of Realtors/TWR

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