Page 6
— Retail Properties Quarterly — August 2016
O
ne of the most common ques-
tions we hear these days is,
“Howmuch longer will this up
cycle last?”The current eco-
nomic expansion has been in
effect for 84 months, and, while it has
been distinguished by modest to weak
growth on a national level, a diverse
economic base and sustained popula-
tion influx in the Denver metro area
led to strong income and job growth.
New retailers drawn by the growth
have entered the market, and existing
retailers have expanded their footprint
here. All of these factors, in combina-
tion with historically low interest rates,
have created an extremely competitive
environment among buyers of mult-
itenant retail shopping centers.
Capitalization rates for most retail
product types are equal to, or more
aggressive than, prerecession levels.
Investors nationwide are targeting the
Denver area, and international inves-
tors frequently entered the Denver
metro area when competing on larger,
institutional quality assets.
So how long can this cycle continue?
It will continue as long as interest rates
continue to be at, or near, all-time lows
and the underlying fundamentals
remain strong.
Denver county has grown by 13.8
percent since 2010, while the Denver
metro area, as a whole, has grown
by 10.5 percent. Contrast this to the
national average growth over the same
period of 5.1 percent and it’s easy to
see why Denver is near the top of a lot
of acquisition lists for investors who
purchase retail centers on a national
basis.
While there have been some nota-
ble exceptions, new construction of
anchored-retail centers of size has
been fairly limited
with most of the
new development
being smaller, urban
infill projects.The
limited supply of
new retail product
developed has led
to reduced vacancy
rates resulting in
upward pressure on
market rental rates.
While this has been
the case since the
downturn, we are
seeing signs that
it is beginning to
change as a num-
ber of anchored
retail centers of size
are under construction or have been
announced recently.
As these centers come on line and
new product becomes available, this
will impact the downward pressure
on vacancy rates, but will be offset, to
some degree, by continued population
growth and increasing demand for
retail products and services.
Grocery-anchored shopping centers
remain the most sought-after mult-
itenant retail product type among retail
investors. However, with so many trad-
ing hands over the last five years, the
availability of grocery-anchored shop-
ping centers in the Denver metro area
(with the grocer included in the offer-
ing) is extremely limited.This has com-
pressed cap rates for these centers to
levels that are, for the most part, more
aggressive than prerecession levels.
Due to the limited supply and aggres-
sive pricing many grocery-anchored
buyers have looked to secondary and
tertiary markets.
In addition to tar-
geting secondary
and tertiary mar-
kets, an increasing
number of value-
oriented buyers are
pursuing lifestyle
and power centers.
While there are a
number of investors
who see value in
these types of shop-
ping centers, bank-
ruptcies like Sports
Authority and the
continued impact
the internet is hav-
ing on bricks-and-mortar retailers have
steered some investors away. Assum-
ing the real estate and credit profiles
of the existing tenants are similar, a
power center typically will trade at a
capitalization rate of approximately 50
to 75 basis points higher than a com-
parable grocery-anchored center.
Private capital and entrepreneurial
investors seeking cash flow increas-
ingly are drawn to C- and B- centers
that are more or less stabilized.We’ve
seen the number of these transactions
increase substantially from a few years
ago when they made up only a small
fraction of the overall market.These
centers typically trade at capitalization
rates between 7.5 and 8.5 percent, and
because these centers can be financed
at debt with interest rates in the low-
to mid-4 percent range, they produce
an annual cash-on-cash return rang-
ing from 10 to 13 percent. In a national
investment environment that offers
very few options to produce that level
of yield, it’s easy to see why these cen-
ters are attractive to private investors.
While properties still are trading at or
near prerecession levels, there seems
to be a general sentiment among many
investors that we could be close to,
or have already seen, the peak of this
cycle with respect to pricing. Several
active owners reported that they are
receiving just a handful of offers on
properties that would have generated
a dozen or more offers (at a minimum)
a year ago. A reduction in the number
of offers from private parties can be
partially explained because there have
been fewer transactions on a national
level, which has reduced the number
of motivated 1031 exchange buyers.
With respect to offers from larger,
more institutional investors, it comes
down to uncertainty.There is a great
amount of uncertainty right now on a
macro level due to the fallout of Brexit,
the upcoming elections and the length
of time since the last down cycle.
While job creation and the underlying
fundamentals most likely will remain
strong in the metro area for the next 12
to 18 months, at least, many of these
larger investors have to manage their
risk across nationwide portfolios, not
just their assets in strong markets like
Denver.The apparent slowdown in
investor activity we are seeing could
prove to be momentary or it could be
a sign that we have, in fact, peaked in
terms of prices paid relative to income.
Whether the market has peaked or
whether we are in a temporary pause,
investors looking for yield will be hard
pressed to find investment opportu-
nities that produce yields similar to
multitenant retail centers. In a world
of investments defined by uncertainty,
well-located shopping centers in the
Denver metro area will continue to be
one of the best games in town.
s
Garrette
Matlock
Senior vice
president of
investments, senior
director, Marcus &
Millichap National
Retail Group,
Denver
Ryan Bowlby
Senior broker and
associate director,
Marcus & Millichap
National Retail
Group, Denver
Market Update
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