CREJ - page 4

Page 4
— Retail Properties Quarterly — August 2016
L
ed by stronger diversification
in the economy and steady
population growth, Denver
has experienced a height-
ened interest from foreign,
institutional and coastal capital in
the last cycle. Coupled with seg-
ment-specific tenant interest, this
lasting investment of new capital
is pushing our investment environ-
ment to new heights and shifting
our retail landscape through a new-
found interest in construction.
An elongated run of positive fun-
damentals accompanied by the his-
torical imbalance of new construc-
tion has created pent-up demand in
our retail market. Over the last 30
years, Denver has delivered an aver-
age of over 3.5 million square feet
of retail space on an annual basis.
Since 2010, this number has barely
eclipsed 1 million sf. However, in
the last four quarters combined, we
have experienced 1.5 million sf of
new construction. In first-quarter
2016 alone, there was nearly 400,000
sf of new retail construction com-
pleted with 1.35 million sf of build-
ing underway.
Looking at the entire Front Range,
the impact is even more dynamic.
JLL is tracking over 20 million sf of
new construction and redevelop-
ments in the retail space. These
projects will roll out in the next
several years. The largest sector is
power centers at over 10 million
sf, which includes the redevelop-
ment of the Foothills and Longmont
malls in Northern Colorado and the
Promenade at Castle Rock, where
construction is underway on over 1
million sf.
The grocery sec-
tor has been active
with several newly
opened or planned
grocery centers.
Sprouts, Trader
Joe’s, Whole Foods
and King Soopers
all are pursuing
deals in the mar-
ket. King Soopers
is looking to build
up its market
share, evidenced
by its first downtown location and
a number of 125,000-sf “market-
place” stores. Both Trader Joe’s and
Sprouts have completed ground-up
and leased locations throughout the
metro area. The most recent was
Trader Joe’s lease at West Bowles
and South Wadsworth, making it
the sixth location in Colorado.
Retail is a crucial element in a
number of mixed-use redevelop-
ments happening in urban set-
tings as well. Totaling nearly 2.5
million sf, these projects include
16 Market, Dairy Block, and 9th
and Colorado. The redevelopment
trend also is occurring in existing
shopping centers, evidenced by the
recent announcement of the trans-
formation of Regatta Plaza, which
includes 130,000 sf of retail space.
This will be a prevailing trend as
portfolio owners look to capitalize
on the rising market.
The current momentum undoubt-
edly will bring an increase in con-
struction in the next several years.
However, annual retail construction
will stay below the historical aver-
age of 3.5 million sf.
The largest inhibiting factor is the
impact of e-commerce on brick-
and-mortar retail. According to
the U.S. Commerce Department,
online sales accounted for more
than a third of total retail sales
growth in 2015, a number that is
over 10 percent of all retail sales.
Shown by the recent bankruptcies
of Sports Authority and Hastings,
as e-commerce evolves, we will see
the real estate around us change
and the magnitude of apparel, elec-
tronic and other dry goods retailers
reduced.
The active segment of the market
will come from service concepts
that don’t compete with e-com-
merce. Demand is high for grocers
and restaurant tenants who are
pressing to find quality locations in
Denver.
However, the demand is only one
aspect for development. Stricter
lending requirements, raising
cost of construction and onerous
entitlement policies will keep new
inventory in check. Municipali-
ties throughout the Denver met-
ropolitan area are contemplating
impact fees to help provide afford-
able housing as well as measures
to eliminate urban renewal areas.
Keeping entitlement costs under
control and providing tools to
enhance the public and private
relationships for redevelopment
is essential. This is true especially
for infill locations, which are most
desired by retailers, as they strive
for access to main traffic corridors
and densely populated areas.
Denver retail will remain highly
desirable for capital investment,
and cap rates for quality assets
will continue to compress. Para-
doxically, we will see a tapering
of retail investment sales for large
core assets as much of the existing
inventory is owned by portfolio-
minded operators who typically
do not sell. Furthermore, anchored
tenants in new grocery develop-
ments often strive to own their
stores. These shadow-anchored
shopping centers are less desir-
able to the most-aggressive insti-
tutional buyer pool because these
investments offer less control and a
smaller transaction size. The lack of
investment options accentuates the
supply-demand imbalance, further
enhancing value on the anchored
core assets.
A similar phenomenon exists for
smaller private capital assets under
$5 million. Due to a combination of
real estate exchange capital and a
lack of fruitful investment alterna-
tives for private money, a war chest
of capital is poised to react to Den-
ver. Values will continue to rise for
newly constructed or longer-leased
assets with brand name tenancy.
Although new retail construction
in Denver will be less extensive
than it has been in the past, it will
render the highest values we have
seen in our market. This cycle rep-
resents a first for Denver: a stable
economy. Denver’s economy has
never been as strong and its appeal
to capital has never been as wide or
deep.
s
Jason Schmidt
Executive vice
president, JLL,
Denver
Market Update
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