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Page 6 — Retail Properties Quarterly — November 2016
W hile making my daily
5-mile commute from my
house in Lower Highlands
to my office in the Baker
District, there are two
things that I always notice: traffic
and construction. It’s not hard to
spot cranes all over town, and Den-
ver’s population growth is evident
as soon as you get in your car. It’s
no secret that Denver has bounced
back quickly from the Great Reces-
sion, and population growth has
been a huge factor in the recovery.
While Denver’s multifamily market
has been the talk of the town, retail
property investors may be excited at
their prospects when evaluating the
growth in multifamily.
We believe that the multifamily
market may be a good leading indi-
cator for where the retail market is
headed for several reasons, but we’ll
focus on two here. The most impor-
tant is population growth because
retailers need to have customers in
order to pay rent to landlords. Since
a lot of people moving to Denver are
initially renters, we expect the rental
market to be a better indicator for
growth trends than the residential
sales market.
The other factor is multifamily
rental rates because, to a certain
extent, they are a reflection of the
health of the job market since new
residents need to be employed to
pay rent. While Denver’s multifamily
rental growth has been astounding,
it may be slowing down. Retailers
(and retail landlords) should wel-
come that because, absent a mar-
ket correction, retailers and retail
landlords can be the beneficiaries
of a slowing multifamily market.
Consumer confi-
dence is crucial to
the health of the
retail market. If
multifamily renters
believe that rents
will only continue
to go up, they will
be afraid to spend
money since they
will want to save
money to ensure
that they can con-
tinue to live in
Denver.
While Denver’s
job growth has
been strong, wages
have not kept up
with multifamily
rents, which is like-
ly a renter’s largest
expense. Along the
same lines, a con-
sumer’s disposable
income is crucial to
retailers. If a renter
is committed to
living in Denver at
all costs, then they
may forego other
expenditures (e.g.,
dining out, retail purchases) to stay
in Denver. When multifamily rent-
ers can more accurately predict their
expenses, they are more likely to go
out and shop without worrying if
what was disposable today should
have been saved for tomorrow.
Multifamily landlords have the
luxury of being able to quickly adjust
lease rates to the market because
leases usually are 12 months or
fewer and don’t involve complicated
tenant improvement allowances,
leasing commissions, lengthy mar-
keting times and other factors that
are a part of life of a retail landlord.
Retail landlords, on the other hand,
typically sign long-term (sometimes
20-plus years) leases with a lot of
moving parts, which helps to explain
some of the disparity between rental
growth between retail and multi-
family properties. Further, it is much
harder to lease a retail property in
a bad market because retailers may
completely halt their expansion
plans, even if rental rates plummet.
A multifamily developer is much
better equipped to make a deal work
in a bad market than a retail devel-
oper, particularly when rents need
to be at a certain (possibly unat-
tainable) rate for the deal to pencil
and/or satisfy a lender requirement.
Right before the Great Recession, a
Justin Krieger
Senior adviser,
Pinnacle Real
Estate Advisors,
Denver
Tom Ethington
Senior adviser,
Pinnacle Real
Estate Advisors,
Denver
Market Update
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Denver’s population annual growth rate from 2013 to 2018.