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— Retail Properties Quarterly — September 2015
W
ith 1.5 million square feet of
absorption in the past three
quarters, our retail market
is at a highpoint midway
through 2015. Marketwide
vacancy, which has been declining con-
sistently since 2012, is hovering around
5 percent and the average asking lease
rate is at $15.48 per sf, a 2 percent
increase from a year ago. Compared
to most markets around the country,
Denver fared well in the most recent
downturn and has not looked back.
Denver is experiencing positive
employment and housing growth.
Colorado had population growth of
approximately 1.65 percent in 2014,
ranking No. 4 in the nation. Our cur-
rent unemployment rate is 4.2 percent,
compared with 5.5 percent nationally.
We have had steady job growth since
the recession, ending 2014 with an
increase of approximately 60,000 jobs.
Our prosperity is a product of an
elongated run of positive economic
fundamentals accompanied by a his-
torical imbalance in the retail space
being delivered. Over the last 30 years,
Denver delivered an average of over
3.5 million sf of retail space on an
annual basis. Since 2010, this number
has barely eclipsed 1 million sf per
year, which is the case over the last 12
months as well.The current momen-
tum undoubtedly will bring an increase
in construction, yet it promises to stay
controlled as stricter lending require-
ments, rising cost of construction and
onerous entitlement policies will keep
new inventory in check. Additionally,
tenants are eager to find infill locations
where new development is more com-
plicated, costly and time-consuming.
Housing starts are up 19 percent
from this time last
year and we are on
track to exceed the
8,000 single-family
starts from 2014.
This is a figure that
is unmatched since
2007. Addition-
ally, there are 40,000
multifamily units
under construction
or planned in the
metropolitan area.
This construction
is a direct impact
of the millennial
generation, which is widely seen by
retailers as a lasting consumer base.
Denver was the No. 2 city in the nation
for millennial population growth in
2014, according to Slate.com, trailing
only Austin,Texas. It is estimated that
22 percent of Denver’s population is
millennials.
Another main factor contributing
to Denver’s success is the diversifica-
tion in our economy. Prior to this cycle
Denver was known for having an up-
and-down, boom-bust economy.The
new economy boasts growth in key
industries such as health care, finan-
cial services, technology, aerospace and
energy, none of which has more than
18 percent of the economy, energy
included.This diversification brings
sustainability to our current market
trends and creates a fundamental
shift in Denver’s appeal to investors
worldwide.This dynamic resulted in
Urban Land Institute ranking Denver
the No. 4 market for commercial real
estate investment in 2015, and Busi-
ness Insider Magazine ranking Denver
as the most comprehensive city for
economic growth. Recent sales in Den-
ver show a steady line of new buyers
to our market. Led by Canadian capi-
tal, these buyers consistently include
institutional-grade international capital
for the first time. For most capital, the
main concern is not with wanting to
be in Denver, but rather finding enough
larger, quality assets to purchase.
Denver earned a spot at the table
when there is a record amount of
capital available to invest in real
estate (reported to be up 25 percent,
to nearly $250 billion).The cards are
stacked in our favor.Values for retail
properties will continue to climb, as
the lack of available space will drive
lease rates higher.With quality (credit
and lease term) as the main factor,
cap rates will continue to compress,
especially for the highly sought-after
grocery-anchored and power centers.
Single-tenant and small-format retail
will experience the same success as
anchored assets and remain the option
of choice for private trade buyers.
We will see increased construction at
a controlled pace. Even with the recent
closings of several Safeway stores, the
grocery sector will continue to surge,
evidenced by the recent opening of
Evergreen’s King Sooper’s Marketplace
at Serenity Ridge in Aurora. Others
in the sector, such as Sprouts,Trader
Joe's andWhole Foods, also will see
new store openings. Fueled by unprec-
edented cap rates for large quality proj-
ects, we already are seeing develop-
ment and there will be more to come
including Promenade at Castle Rock,
Glendale Riverwalk and University of
Colorado's Ninth Avenue campus, as
well as others.
Although the number of transactions
will increase, retail investment sales
volumes may taper. Cap rates also may
rise, based on the nature of the product
offered to the market. Sales volume
was down in 2014 as a number of high-
profile power centers were sold in 2013,
which was kicked off by the sub-6 cap
rate sale for the south Denver mar-
ketplace. Although Denver has been
a value-add trader's market, grocery-
anchored shopping centers histori-
cally have traded to portfolio-minded
ownership.This phenomenon, coupled
with the number of power center and
grocery-anchored sales in the last few
years, has left few larger, quality assets
for the investment marketplace.With
new development lagging, the imbal-
ance between supply and demand
will widen and cap rates will continue
to compress.The average annual cap
rate for investment sales has bounced
around over the past few years, but
this is tied directly to certain types of
assets rolling through the cycle at dif-
ferent times.The value trend on any
given asset is up and this will continue
unless we have a notable increase in
interest rates.
Available debt continues to create
value in the marketplace as 10-year
Treasury rates are close to all-time
lows, near 2 percent. Interest rates
are so low that the spread for lend-
ers remains historically high. Unless
there is an unexpected dramatic hike
in interest rates, cap rates should not
move in direct proportion to rises in
interest rates, as lenders take up the
cushion in current spreads. In Denver,
the impacts of aggressive capital and
increasing fundamentals will have a
greater impact on value then any antic-
ipated movement of interest rates.
s
Jason Schmidt
Executive vice
president, Jones
Lang LaSalle,
Denver
Market Update
