Forecast says downturn won't be as bad as slump in late '80s

The slumping economy has taken its toll on Colorado Springs' commercial real estate market: empty offices and storefronts, delayed construction projects and financially strapped developers.

Now, the question is how long the downturn will last and what will happen to the market until a recovery takes hold.

A 2009 forecast by Springs' commercial brokerage Grubb & Ellis/Quantum Commercial Group suggests commercial real estate will continue to feel pain this year. Yet the downturn won't be as bad as the area's last major real estate slump in the late 1980s, and there will be opportunities for tenants to jockey for lower rents and for investors to buy discounted properties, the forecast suggests.

A rebound won't occur until at least the second half of the year, predicted Dale Stamp, Grubb & Ellis/Quantum president. In the meantime, the office and retail sectors likely will bear the biggest brunt of the economic downturn, according to the company's forecast. A forecast last month by another local commercial brokerage suggested some of the same conditions will exist in 2009.

Office vacancy rates that ended the year in the high single-digits will push to into the low double digits in 2009; homebuilders, mortgage companies and others tied to the sagging housing market are among the businesses that have scaled back their office space needs.

Meanwhile, few, if any, office buildings will be constructed unless developers and landlords have large portions of the structures leased ahead of time.

Area businesses will continue to downsize their operations and seek discounts on their leases or perhaps a month of free rent. While such reductions and concessions won't be made across the board, a tenant with solid credit and who's willing to commit to a long-term lease will be highly sought after by landlords in what has become a very competitive market, said Mary Frances Cowan, a broker who specializes in office and investment properties with Grubb & Ellis/Quantum.

Major retail closings, including Circuit City, Western Warehouse and Linens ‘n Things, have left big holes in major shopping centers and will force some landlords to lower rents, Stamp said.

Still, developers and landlords looking to fill storefronts will negotiate, which will give smaller, mom-and-pop retailers a chance to expand into more prominently located shopping centers they couldn't afford in the past, said Candace Seaton, a Grubb & Ellis/Quantum retail specialist. Also, landlords will have the opportunity to offer shoppers a wider variety of stores instead of the usual national franchisees, she said.

The industrial vacancy rate reached nearly 10 percent last year, mainly because large buildings, such as the Intel Corp. computer chipmaking plant, remain empty. Smaller industrial buildings of 25,000 square feet or less are in demand, but don't expect much construction this year because of higher construction costs and unless developers have them pre-leased.

Investors who want to buy buildings and land, but who need to borrow money to do so, might have difficulty finding wiling sellers. But investors with cash will find properties and buildings offered at big discounts, according to the Grubb & Ellis/Quantum forecast.

"Sellers who need to sell or who are committed to sell understand that financing is challenging," Cowan said. "When a cash buyer comes along, and they need to sell or have to sell, then it's certainly carries a lot of weight right now. There will be opportunities in this market in 2009. Cash is really driving some deals."

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