Pikes Peak region's commercial real estate crystal ball clouded

The Pikes Peak region commercial real estate crystal ball is starting to haze over.

While deal-making euphoria reigned between 2005 and 2007, the mood in the local brokerage community is shifting to guarded optimism, as fewer deals are expected for at least the next year.

Sales volume reached $1.2 billion in 2006, a record year for the Pikes Peak region, but was only $800 million during 2007, according to Grubb & Ellis' 2008 forecast for Colorado Springs.

The company's forecasters predict that the fallout from over- zealous subprime lending will mean tighter commercial money and fewer closings during 2008 and 2009.

They see lenders resisting highly leveraged deals. At the same time, savvy investors have returned to putting cash flow and cap rates under the microscope -- in contrast to the last four years, when rosy proformas alone could get a deal done.

It won't be like 2007, when apartment sales hit $200 million. Retail buildings and 12 shopping centers accounted for $158.5 million, and office sales totaled $199 million. A total of 7.7 million square feet of improved property changed hands during the year. Fewer than 8,000 acres of vacant land sold at a price of $141.4 million -- down considerably from 2006, when investors paid more than $447 million for raw, developable ground.

The average price per square foot in Colorado Springs paid for improved properties slipped from $111.41 in 2006 to $98.18 in 2007, reflecting a trend that will continue this year, the report said.

Weighing in

That perspective was localized even more by brokers Dale Stamp, Mary Francis Cowan and Andrew Oyler in the report.

Their consensus: while even the best fortune teller can't foresee what will happen on a national level, the region will remain stable though outside investment may slow for the next 12 to 18 months.

"The cost of money is much higher today than it was six months ago," Stamp said, adding that a 20 percent down payment and higher investment returns are now required to get financing.

Those factors, along with spiking construction costs for new projects, could dampen the spirits of even the most seasoned investor.

"If you can earn 5 percent on your money, why risk something that won't net as much?" Stamp asked.

Cowan, who has closed a number of land deals along the North Powers Boulevard also sees a pull-back by at least three or four large investors who have been active in the region since 2005.

"Even getting an accurate valuation for a buyer today is harder because the market has shifted quickly," she said.

Oyler believes smaller investors are still active, but most are drawn to lower-risk tenant-in-common opportunities, designed to limit individual risk.

"I think a lot of smaller investors still have 1031 money -- and that's still an attractive place to put your money.

"Most investors are prepared to hold real estate," Stamp said. "You have to figure on at least five years. If you do your homework and get a decent deal, you rarely see losses."

The brokers agreed that horror stories are still few and far between, and population growth in the Pikes Peak region of 2 percent or better is assured.

Asked whether the area is becoming over-dependent on the defense sector, Oyler said he's not concerned.

"We still live in a place that a lot of people want to move in to," he said. "That keeps us competitive and stable, compared with other cities around the country."

With new development in progress along Interquest Parkway, Patriot Park and soon to begin at the Airport Business Park, Stamp was concerned that too much new product on the market all of a sudden might result in "cannibalizing" existing buildings. That, in turn, could hurt investors in older properties who lose tenants to new Class A landlords.

Stamp and Oyler both see new Class A office lease rates of $24 to $28 per square foot as hard to justify.

"We're averaging closer to $15 per square foot today," Stamp said. "I don't know how they'll [investor-landlords] make the numbers work. Land and buildings for medical use continue to perform better than most. Healthcare is one area that is almost recession- proof -- and doctors typically sign longer leases of seven to 10 years."

But Cowan sees investors shrinking from deals that in the past would have worked.

"All lenders and buyers -- even of 'safer' property are both looking more carefully before investing," she said.

Economy plays key role

So how does the national economy effect Pikes Peak-region investor transactions?

Goldman Sachs predicted this month that commercial real estate prices in the United States will drop 15 percent to 20 percent.

Likewise, Real Capital Analytics recently found the capitalization rate for central business district office property acquisitions nationwide, for example, dropped to 5.7 percent in the third quarter of 2007 from more than 7 percent at the start of 2006.

The Goldman report originally predicted that commercial real estate prices would drop by a 26 percent through 2009, with prices rebounding "no further than normalized levels."