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February 2015 — Retail Properties Quarterly — Page 23
add retail properties in the Colorado
market, they’re forced to be aggres-
sive in order to compete. Bridge
lenders typically will fund 70 to 75
percent of an acquisition price, and
also will fund 100 percent of future
“good news capital” (capital for
tenant improvements and leasing
commissions) as leases are signed.
Bridge lenders typically must be
comfortable that the value-add
business plan can get executed
within 36 months. By the time a
bridge loan is fully funded, often
bridge lenders will have financed 80
to 85 percent of the overall capital
stack.
Even though the real estate mar-
ket is flooded with capital, capital
sources each have their own specific
lending appetites, and it’s beneficial
to understand where each capital
source will be most competitive. For
stabilized assets, life companies will
continue to compete best on deals
with low leverage, grocery or drug
anchors, low tenant rollover risk
and quality tenant lineups. They’re
also the best option for borrowers
who seek forward-rate locks six to
12 months in advance. CMBS lend-
ers consistently step up on higher
leverage-deals, and their renewed
focus on servicing and speed of exe-
cution has made them more com-
petitive. Overall, it’s a great time to
leverage retail properties. Best wishes
for a prosperous 2015!s
This silver lining for most, however,
does have a potential downside in
certain areas where “fracking,” drill-
ing and exploration make up a sig-
nificant percentage of the employ-
ment base. Negative impacts could
substantially outweigh the positive
ones in areas such as Weld County
and the Western Slope.
Between January 2008 and year-
end 2014, the Denver metro area was
among the top 10 metro areas in
the nation for job creation. For 2014,
the Denver-Boulder metro area is
on track to create over 42,000 jobs,
increasing employment by 3.2 per-
cent (7 percent above prerecession
levels). Moving forward, Leeds School
of Business at the University of Colo-
rado Boulder is projecting that Colo-
rado will be among the top 10 states
in 2015 with respect to job growth. It
is projecting 61,300 additional jobs
at the state level. Declining oil prices
will negatively impact job creation in
the energy exploration sector, which
could be an issue particularly for
communities heavily reliant on the
recent energy boom.
New job creation and increased
consumer spending, fundamental
drivers behind retailer’s demand for
space, have spawned the reduction
in vacancy rates. Metro Denver’s
vacancy rate peaked soon after
the 2009 recession ended, and has
been on a steady decline since then.
Overall retail vacancy rates in the
Denver-Boulder metro area have
declined from 6.5 percent at the end
of 2013 to approximately 5.8 percent
by the end of 2014. Much sought-
after retail space in the Denver-
Boulder metro area, especially the
Colorado Boulevard/Cherry Creek
submarket, has a vacancy rate of 2.4
percent, while vacancy remains the
highest in the northwestern sub-
urbs, about 8.5 percent at the end
of 2014. We are projecting an overall
retail vacancy rate in the low 5 per-
cent range at year-end 2015.
The number of new retail develop-
ments has been limited to a great
extent by tightening credit require-
ments from lenders. Lenders are
requiring developers to have some
“skin” in the game, to have more
signed leases from creditworthy
tenants in hand and, in general, are
not making loans on “spec” develop-
ments. Loan-to-value ratios are also
more conservative. This has led to
more disciplined decision making
by developers, and an emphasis by
a number of them to focus on rede-
veloping and rehabbing older, infill
shopping centers. As a result, con-
struction deliveries of retail square
footage were limited to approxi-
mately 850,000 sf in 2014. In com-
parison, Denver metro area’s histori-
cal average of retail square footage
delivered annually over the last 32
years is about 3.6 million sf, accord-
ing to CoStar.
Limited supply of new product
coupled with declining vacancy
rates have led to increasing asking
rental rates. Average overall rental
rates peaked in 2008 in the mid-$17
per sf range, and troughed in 2011
at close to $15. The 2014 year-end
average rental rate is approximately
$15.75, an increase of 2.5 percent
over the previous year, and a 6 per-
cent rise since bottoming out during
the recession. While average asking
rents remain lower than their pre-
recession highs, it appears asking
rental rates have turned a corner
after remaining relatively flat for
several years.
To recap our 2015 Colorado retail
forecast for the Denver-Boulder
metro area, we believe that new
construction will be muted, with
very little spec space being built,
and most developers will concen-
trate on infill redevelopment and
upgrades to existing properties.
Overall vacancy will decline 75 to 80
basis points to almost 5 percent, and
rental rates will increase 3.2 percent
to $16.33 per sf. On the transaction
side, demand for properties will
continue to outstrip supply, result-
ing in a seller’s market; cap rates
will continue under pressure, with
cap rate compression in secondary
and tertiary areas, as well as with
B- and C-quality properties, so the
difference in cap rates between top
properties and others will narrow
considerably. Demand will continue
to be strong for larger, high-quality
institutional properties and grocery-
anchored centers.
One risk to our forecast is that
if interest rates were to increase
abruptly, the red-hot high end of
the investment market likely will be
tempered until sellers and buyers
adjust to the new equilibrium the
higher interest rates would create.
Additionally, if the oil price decline
is foretelling of a much softer
economy than currently anticipated,
employment, growth and retail sales
could be affected.s