The Colorado Springs Gazette final

Financial costs take a toll

Several major commercial construction projects in the Springs are now on hold.

BY WAYNE HEILMAN

Soaring material and labor costs, along with surging interest rates, have delayed several major commercial construction projects in Colorado Springs, including what would be the city’s tallest building.

Developers have slowed plans for a 25-story apartment complex and the redevelopment of the YMCA property, both in downtown, along with expansion of a local data center and several other apartment projects. None has canceled their projects, but developers and construction company executives acknowledge the projects are much more difficult to get underway as construction and financing costs escalate.

Still, higher costs and interest rates haven’t hit the commercial construction industry nearly as hard as they have the homebuilding industry.

Building permits issued for the construction of single-family, detached homes in El Paso County totaled just 547 from July through October — a nearly 72% plunge from the 1,952 permits issued during the

same four-month period last year, Pikes Peak Regional Building Department figures show. Local, state and national housing markets have seen sharp slowdowns triggered by mortgage rates doubling in the past year.

Jim Johnson, president and CEO of Colorado Springs-based GE Johnson Construction, one of the state’s largest contractors, called the combination of higher costs and rising interest rates “a bit of a double whammy.”

“I have experienced price escalation in my career in commodity material — copper or oil-based products — but usually we try to isolate those materials and try to find alternatives,” Johnson said.

That’s more difficult this time because of supply chain issues, he said. Meanwhile, he added, speculative projects might have been financially feasible just a few months ago but aren’t now.

Speculative projects, where a developer must find a user to lease office or industrial space, have been hit the hardest. Troy Stover, assistant aviation director for economic development at the Colorado Springs Airport, said speculative projects in the airport’s Peak Innovation Park have slowed significantly, but demand remains strong for projects built for specific users. He couldn’t identify which projects have been put on hold since none have signed contracts with the airport.

Kevin O’neil had hoped to have a 25-story, 316-unit apartment complex and an adjacent 11-story office building southwest of Cascade and Vermijo avenues under construction by this past summer or fall but said higher costs and his pending request to make the site an urban renewal district have delayed a groundbreaking until the second or third quarter of next year. He believes, though, that inflation is slowing and interest rate hikes will soon end.

The apartment tower, which includes a five-floor parking garage, would be nine stories taller than the 32-year-old Wells Fargo Tower, which has 15 stories of office space and a 16th floor that houses mechanical equipment, making it the city’s tallest for now.

“I thought we would be out of the ground by now, but we had to pause and re-pencil both projects. We had to eliminate the decorative facades, reduce the size of the units and make other adjustments like some of the creature comforts,” O’neil said. “Everyone delaying projects will cause the cost of labor to start falling and some of the supply chain issues are not as bad as they were. I think we will see another point higher in interest rates, but none after that.”

O’neil hasn’t canceled any of the six or seven projects he has in the planning stages, including several involving his cybersecurity and technology-focused Catalyst Campus that are scheduled to begin construction in the next year or so. He said office projects have become more difficult to develop since large amounts of space in northern Colorado Springs have come on the market recently from employers who have shifted many workers to remote status.

The YMCA of the Pikes Peak Region had hoped to begin construction in the second quarter of this year on its ambitious plan to build a new downtown recreation and wellness center topped by workforce housing just north of its 50-year-old existing center.

The project had been delayed by the COVID-19 pandemic, which also prompted a change in partners. Now the rising cost of materials, labor and financing have made it difficult to get the project underway, said Boyd Williams, the YMCA’S CEO.

“We are working hard at it every day. We have come up with multiple iterations to make it pencil out, but with construction costs up 40% and interest rates doubling, it has become more difficult,” Williams said.

“COVID set us back in our timing, but with all that has happened in the last 12 months, we are close but have not been able to get across the finish line. Everyone is supportive of this project, but the economics have given us more challenges to overcome.”

Omaha, Neb.-based White Lotus Group has been replaced as the YMCA’S partner in the project by Scott Henry, a former White Lotus executive who started Chicago affordable housing developer Celadon Partners. Plans for additional commercial buildings on the YMCA’S remaining parcels in the same block might or might not be part of future phases of the redevelopment project, but Williams said he has “no doubt” that new YMCA and housing components will be completed.

Johnson, of GE Johnson, said a local data center expansion project for which the company is general contractor was shelved in September for a year. He said he could not disclose anything else about the project because of a nondisclosure agreement with the owner.

Johnson said across-the-board cost increases prompted the data center owner to “reprioritize where to spend capital,” resulting in the project’s delay.

Health care and school clients are still going forward with construction projects, Johnson said, but they have scaled back and are “building less than they thought” to keep costs under control and within their budgets. Johnson said soaring material and labor costs and supply-chain delays have prompted the company to change how it bids on projects, now guaranteeing its prices for just 30 days, or a third of the 90-day guarantee it previously offered.

Brian Burns, president of Colorado Springs-based Bryan Construction, said several apartment projects on which the company is general contractor are on hold after escalating prices for materials and labor squeezed project budgets; rising interest rates, he said, were “the last straw.”

Owners aren’t yet canceling projects but instead hope that “things will normalize in the next year so that they can revisit” whether to go forward with them next year, he said.

“Material escalations have played a major role in project discussions. Trying to anticipate the cost for materials on projects that will take place over the span of years is almost impossible,” Burns said via email.

“Then factoring in the rising interest rates, we had several projects that were placed on hold by owners until the market can provide some relief. With that said, the majority of commercial work continues to move forward.”

Burns said demand across the state remains high for medical, senior housing and tenant improvement projects in existing buildings, such as remodeling and expansions.

While some measures of inflation have slowed in recent weeks and eased the strain on construction budgets, he said more commercial projects could be delayed or canceled if interest rates continue to rise and result in higher financing costs for developers and owners.

Michael Gifford, CEO of the 675-member Associated General Contractors of Colorado, said there aren’t many signs of a slowdown in commercial construction despite “headwinds” of rising material and labor costs as well as climbing financing costs. That’s because Colorado’s population continues to boom, road and other infrastructure projects remain at high levels and the state is still plagued by a housing shortfall of 50,000 to 100,000 units.

“More projects are going forward than not,” Gifford said. “But banks have been told by regulators to reduce their exposure to real estate, so that has meant that a smaller percentage of the project can be financed. We have seen some projects with substantial preleasing (activity) being told they need to raise more equity, which has resulted in some projects being delayed as developers try to raise additional equity. They are still able to raise capital, but it takes time.”

Gary Feffer, principal in Colorado Springs real estate firm Fountain Colony, said many speculative developers have “written off 2023,” but he believes many projects will resume in 2024.

“I don’t believe any slowdown will be of a long-term nature,” he said.

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2022-12-04T08:00:00.0000000Z

2022-12-04T08:00:00.0000000Z

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The Gazette, Colorado Springs