FEATURE ARTICLE, MAY 2007

MIDDLE MARKET BROKERAGE OUTLOOK
Prime commercial real estate opportunities in secondary markets are plentiful across the West.
Gary Guenther, Mark Mimms, Doug Carter and Dean Corey

Commercial real estate visionaries know their way around obstacles in the well-worn paths through major markets, but they also know that opening doors today in secondary sectors could lead to tomorrow’s new success stories. With that in mind, Western Real Estate Business checked in with market specialists in Bellevue, Washington; Fresno, California; and Colorado Springs, Colorado, to see what market conditions are like and what commercial real estate opportunities may lie ahead.

Bellevue, Washington

Guenther

Once considered a sleepy bedroom community to the east of Seattle, the city of Bellevue has developed into one of the fastest growing and most dynamic real estate markets in the country. Already the second largest urban core in Washington and the major destination on the east side of Seattle, downtown Bellevue is in the midst of an unprecedented construction boom.

Including current construction and projects in the pipeline, the amount of downtown Bellevue Class A office space will increase from 5.5 million square feet to more than 8 million square feet. Retail space will grow from 3.8 million square feet to nearly 5 million square feet, and apartment and condo supply will expand from 3,500 units to more than 6,000 units during the next few years.

Bellevue’s office vacancy rate has plummeted from more than 30 percent in 2002 to 5.2 percent today. Forecasted demand should absorb the new construction space coming to market, keeping vacancy rates below 5 percent and providing upward pressure on rental rates through at least 2010.

The city’s employment growth rate has continued to out perform the rest of the nation, spurring expansion by local businesses. Microsoft, based in nearby Redmond, is one of the main drivers of the area office market. The software giant recently announced plans to lease 1.3 million square feet to house 4,000 employees in two Schnitzer Northwest projects currently under construction in Bellevue. Bellevue is also home to some of the largest companies in the state of Washington, including Paccar, Puget Energy, Symetra Financial, Eddie Bauer and Expedia.

Bellevue Square, one of the top shopping centers on the West Coast with 1.3 million square feet, has aggressive expansion plans, which include creating a shopping destination similar to Chicago’s “Magnificent Mile.” A few blocks away Neiman Marcus has signed a lease for 125,000 square feet of retail space and will be the anchor tenant of a new 300,000-square-foot, upscale, open-air retail project.

The Bellevue office investment market continues to stay hot. The 305,835-square-foot Civica Office Commons sold for a record-setting $575 per square foot 18 months after it had traded for a then-record $462 per square foot. In addition, more than 50 percent of the Bellevue central business district was sold by Equity Office Properties to Beacon Capital, which then traded a portion to Archon Group for reportedly more than $400 per square foot.

The above factors are just some of the reasons why Bellevue is becoming a cosmopolitan, commercial, retail and residential powerhouse, positioning itself to become a major metropolis of the Northwest.

— Gary Guenther is a senior vice president with GVA Kidder Mathews in Bellevue.

Fresno, California

Thanks in part to those relocating from San Francisco and Los Angeles in search of lower costs, Fresno remains one of Central California’s largest tertiary commercial markets and offers high occupancy, rents and values.

Apartments, which are among the most positively influenced by area growth, are riding the coattails of a near doubling of single-family home prices in the last 3 years and high land costs that make new construction cost prohibitive. Multifamily vacancies sit at just 3 percent and rents, which average $0.85 per square foot, are expected to soon reach $1 per square foot. Values also have improved significantly to between $65,000 and $95,000 per unit, with some conversion-ready properties achieving $125,000 per unit.

Growth keeps other commercial sectors strong as well, with vacancies of just 5 to 8 percent for office and 5 percent for retail and industrial. Rents per square foot per month range from $1.50 to $2.25 for office, $1.40 to $3.25 for retail and $0.30 to $0.55 for industrial.

The northern submarkets of Herndon, Palmdale and Clovis represent most of Fresno’s 675,000 square feet of new office construction, built primarily by local developers for local businesses and new single-tenant renters from San Francisco and Los Angeles. Also in the north Clovis area is a proposed retail power center project and the new four-district River Park, developed by Fresno-based Lance-Kashian & Company and home to Borders Books & Music, Macaroni Grill, Old Navy and Sports Authority, among many others. Leading the industrial sector is the 180-acre Central Valley Research & Technology Business Park, initiated by the City of Clovis to entice technology companies to the area and complement a spectrum of distribution facilities in this centrally located marketplace.

As for the future, Fresno’s greatest advantage may lie in its potential for rent growth. Investors should monitor interest rates and Fresno’s cap rates, which are among the most competitive in California, and watch for opportunity in the higher-end northwest and the growing southwest, which is experiencing increased new homebuilding activity and has close to 1 million square feet of office and retail being developed by Lance-Kashian & Company. Across the market, rising rents also are pricing out many blue-collar workers, a trend that is increasing demand for affordable housing.

— Mark Mimms is managing director of Sperry Van Ness’ Fresno office.

Colorado Springs, Colorado

Corey

With nothing but growth on the horizon, the outlook for Colorado Springs commercial real estate is solid. Absorption is historically high and vacancy rates are low — at 6.4 percent for retail, 6.6 percent for industrial, 6.9 percent for office and 9.6 percent for multifamily. Though apartments may be one of the softest products, they’re showing slow improvement citywide and are bolstered by little new development activity.

In most submarkets, average price per square foot also is exceeding historic highs. Average per-square-foot sale prices in 2006 were $124 for office, $67 for industrial and $160 for retail; multifamily went for $71,102 per unit. Rents per-square-foot currently average $10.70 for office, $7.46 for industrial and $15.20 for retail, though larger properties are renting for as high as $25 per square foot. Multifamily units are renting at an average $682 per unit. Across the board, larger Class A properties are outperforming smaller properties.

In 2006, more than $344 million was invested in Colorado Springs, representing the second highest level ever in the metro area. Total 2007 retail sales are expected to exceed $12 billion. To the south, Ft. Carson is a significant contributor to the market’s growth and is expected to add 30,000 soldiers by 2010, expanding Colorado Springs from 575,000 to 625,000 residents. In preparation, several new developments already are underway, including a student/single soldier multifamily concept catering to new troops.

In other submarkets, the widening of Interstate 25 is creating market momentum, as is new hospital construction, with Memorial Hospital North adding three buildings, Penrose Hospital adding an east bed tower and a $200 million Penrose Hospital North campus, and the USAF Hospital at the Air Force Academy expanding by 45,000 square feet.

Clearly, Colorado Springs is healthy on many fronts. For those looking to invest in the long-term, the outlook is particularly good, since replacement costs continue to curb development and will keep values and rents strong, and military allocation and deployment is anticipated to remain strong and stable during at least the next 3 to 5 years.

— Doug Carter and Dean Corey are managing directors for Sperry Van Ness in Colorado Springs and Denver, respectively.


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