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February 2015 — Retail Properties Quarterly — Page 15
Shopping Trends
R etail in central Denver
neighborhoods is booming
with strong job growth, new
millennials arriving daily
and a limited supply of real
estate. This creates not only oppor-
tunities, but also several challenges
for the central retail markets. All
the new, young people downtown
is driving demand for housing as
well as places for these folks to eat,
shop, socialize and recreate. Central
Denver retailers are now defined as
hip, progressive, artisan, foodie and
trendy, which is what its young, rap-
idly growing population is looking
for.
The growing demographic is just
what retailers are looking for as well
– young, employed and without kids,
which means, unlike me, they have
time and money to spare.
The challenge for landlords, devel-
opers and investors is how to bal-
ance the need for predictable, stable
and creditworthy tenants with a
track record that banks and inves-
tors desire, with the demand for
hip and progressive entrepreneurs.
Something new and exciting could
be great for a property, but which
cool new restaurant or retailer is
going to have the long-term success
that makes the bank and investors
happy?
The other prevalent market
dynamic in central Denver has
been the new ground-floor retail
opportunities that have come with
the boom in multifamily develop-
ments. Though it has been great
to have new product provided in
mixed-use developments, it also has
been a challenge for retailers to get
comfortable with this product type.
Retailers are used to single-story
buildings with visibility, access and
ease of parking as top priorities
when choosing locations, and many
of these fundamentals are tested in
a mixed-use project.
My company is spending more
time than ever helping landlords
and tenants navigate these trends.
Our experience with urban proper-
ties, as well as with retailers and
landlords in traditional shopping
centers, has given us an opportunity
to help bring these two together.
The landlords of urban properties
take advantage of the hot market,
and the owners of traditional shop-
ping centers are able to attract new
active tenants.
Mixed-use retail. Millennials are
driving demand for urban housing
and thus creating the multifamily
construction boom we are currently
seeing. The good news for retail ten-
ants looking for space is that almost
all of the new large multifamily
developments include ground-floor
retail, which is helping to balance
some of the demand for new space.
The challenge is that many mixed-
use projects are built with the resi-
dential units as the primary focus,
leaving ground-floor retail spaces
struggling because they are not
traditional real estate assessment
models.
Access, visibility, parking and
other key aspects that retailers
typically are looking for are differ-
ent in an urban
setting than in a
traditional shop-
ping center, which
makes it difficult
for retailers to
assess these sites.
Since retail is only
a small portion of
the overall project,
there is not a con-
sistency in retail
dynamics that one
would find in more
traditional retail
settings, making it more difficult
to prelease some of these projects.
Because retailers have difficulty
applying traditional formulas (traf-
fic counts, ingress, egress, parking
stalls) and their spaces can be less
visible because they are a part of a
large vertical building, they prefer
to wait until projects are substan-
tially complete, and physically walk
the site to feel comfortable with
it. These projects tend to lease up
later into the development pro-
cess than single-story retail, and a
retailer who is not local has to be
really interested in order to make a
trip to walk the site. Working with
landlords to help gain perspective
on what retailers are looking for
at these sites, and tenants to help
them assess which opportunities
are right for them, is key throughout
this process.
From the developer perspective,
it is important to know that not
all ground-floor space has to be
retail. There are other ways to use
the ground-floor space if the cor-
rect retail dynamics are not there.
However, it is enticing because it
boosts the pro forma and activates
the front door of the project, while
empty ground-floor retail does noth-
ing to help the bottom line or the
appearance of a new development.
For retail in mixed-use buildings to
be successful, there has to be strong
pedestrian traffic and a surrounding
cluster of active retailers creating
enough activity to overcome a retail-
er’s traditional dependence on auto
traffic, easy access and parking.
Restaurants. The central Denver
restaurant market is hot, but beware
of the revolving door. 2014 was a
record year for restaurant openings
in Denver, as Westword tracked over
300 restaurant openings through-
out the year. (Almost one per day!)
Compare that with 2013, when there
were 200 restaurant openings. Hip,
new restaurants tend to open with
great fanfare and are quick to be
touted as a smashing success, while
restaurant closings seem to get
lost in the noise created by all the
grand-opening celebrations. West-
word also reported 100 restaurant
closings in 2014. This is still a very
healthy restaurant market for land-
lords, with a net gain of 200 restau-
rants. The challenge is how to avoid
being in the situation where your
space becomes a revolving door of
openings and closings, a trend that
never seems to work out for anyone.
With demand high and a limited
supply of restaurant space, the law
of supply and demand says rents
will keep pushing higher. With
higher lease rates and new entre-
preneurial restaurateurs who either
overlook their occupancy costs
due to the desire to get a space, or
are inclined to inflate their poten-
tial sales, many restaurants are in
trouble the day they sign their lease.
Restaurants generally look to keep
their rent plus triple-net expenses
in the range of 6 to 8
percent of their total
sales.
It is important for
landlords to under-
stand that the long-
term success of their
tenants is dependent
on keeping rents in
line with a restaurant’s
potential sales. Col-
lecting the highest
potential rent requires
finding tenants that
will achieve the high-
est sales in a particular
location. This can be
challenging because
much of the current
activity for restaurant
space is coming from
new one-off concepts.
A look at the sales-per-
square-foot numbers
of national brands can
help landlords under-
stand what the rent-to-
sales ratio looks like,
since most are familiar
with these concepts
and the average unit
sales are made public.
Restaurant chains like
Chipotle are attractive
to developers not only
because of their credit
rating (or because their
burritos are so tasty),
but also because they
have some of the stron-
gest sales-per-sf numbers of any
restaurant concept out there. A Chi-
potle store will average $2.17 million
in sales out of a regular size space of
2,580 sf. This breaks down to $840.69
per sf at 6 to 8 percent, meaning this
store can be profitable with gross
lease rates in the $50 to $65 per-sf
range for base rent plus triple-net
expenses.
With rents plus triple net expens-
es in central Denver reaching record
numbers, developers need to look
at whether the tenants they choose
can sustain high enough sales to
stay in business and avoid the costs
of the revolving door.s
John Livaditis
President, Axio
Commercial Real
Estate, Denver
Restaurants are repurposing old, industrial spaces like Linger, which used to be a
mortuary.
Over time vacancy rates have decreased while rental rates have increased for both
retail and restaurants.
Many developments incorporate mixed-used elements with
ground-floor retail space in apartment buildings, like at
River Clay.
Chipotle $840.69 per sf
Panera Bread $548 per sf
Noodles & Co. $453.46 per sf
Average gross sales