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Page 8 — Retail Properties Quarterly — February 2017
Investment Market
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denver | fort collins | colorado springs | 303.692.8838
Denise Leal | 303.407.6724
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E ven with the changing land-
scape of retail, 2016 was
another strong year for the
retail industry. Wages grew,
the unemployment rate fell
and the holiday season saw spend-
ing growth. Amidst the struggles of
department stores and a growing
e-commerce environment, Denver’s
retail real estate industry has never
been stronger.
Year-end vacancy saw a slight
decrease from the third quarter,
moving from 4.8 to 4.6 percent. In
fact, vacancy stayed below 5 per-
cent in 2016, accentuating a down-
ward trend that started in 2009. Net
absorption totaled over 2 million
square feet and rents ended the
year at $16.23, nearly a 4 percent
increase from last year.
We are now 91 months into the
recovery, a month away from the
third-longest cycle since World War
II. Things have been going so well
many are asking if 2017 is the year
that the cycle will turn downward.
What we will find, especially in
Denver, is there remains room to
run.
Economically, Denver is solid as
evidenced by the 2.9 percent unem-
ployment rate, as compared to a
national rate of 4.6 percent. More
impressive is Denver’s job growth at
3.7 percent; two times the national
rate of 1.8 percent. A key factor in
Denver’s growth is the wide band
of industries including financial
services, health care, technology
and others. This diversified growt
renders Denv r’s hi orical reputa-
tion as a boom-and-bust economy
irrelevant.
Accompanying
our past reputa-
tion is a tendency
to overbuild.
Throughout this
cycle, retail con-
struction has
lagged its fun-
damentals. Over
the last 30 years,
Denver has deliv-
ered 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. Although con-
struction has picked up consider-
ably in 2016, we will continue to
operate well below the 30-year aver-
age. Current levels are even below
figures from the late 1980s, the
bleakest period in the last 30 years.
In 2016, a total of 1.6 million sf of
retail space was built in Denver and
at the end of the year there was
an equal amount under construc-
tion. Annual retail deliveries in this
range will become the new norm
even though fundamentals will
remain strong.
The controls on construction will
be heavily impacted by the lending
environment. Having been active
for several years, banks are over-
weighed in their commercial loan
portfolios, especially in construc-
tion. This restraint will have the
ffect on the small-format,
lopers, who historically
have had a major impact on Den-
ver’s growth. The rising cost of con-
struction and onerous entitlement
policies also will have a controlling
effect on new inventory.
Many are concerned with an
increase in retail inventory because
of the global impact of e-commerce
on brick-and-mortar retail. It is
important to note that 2016 was a
year of growth for online retailers;
however, penetration of traditional
retail is still only about 10 percent,
according to JLL research. It is true
that last year was rough for depart-
ment stores and some appeal retail-
ers. Locally, e-commerce contribut-
ed to the demise of Sports Author-
ity, and Sears/Kmart are closing
stores in Denver.
Retail continues to evolve, as
evidenced by the redevelopment
at several malls, including in Fort
Collins and Longmont. In 2017 and
beyond, closed department stores
will create opportunity for own-
ers to reinvigorate their properties,
turning now unproductive anchors
over to new, attractive and mixed-
use environments. This shift will
better position these assets and
their remaining tenants in the
“experiential retail” space at a time
when even online retailers are look-
ing for a physical location.
One factor that would have a
waning impact on this cycle would
be an elongated period of raising
interest rates; this provides some
reason for concern. Treasuries
are up 50 basis points from early
November; this combined with the
widening commercial mortgage-
backed securities and bank spreads
have increased the overall inter-
est rates. It is important to keep
this in perspective when looking
forward in 2017. Lending rates are
still well under 5 percent, which
historically is very low. Therefore,
the spread between interest rates
and cap rates remains favorable.
Moreover, currently the 10-year
Treasury rate is 2.4 percent. In our
current 91-month cycle, Treasuries
have been at 3 percent on several
occasions, and since mid-December
rates have been declining.
At the same time, capital still is
interested in real estate, especially
domestically. The yields provided
by real estate remain favorable to
alternative investments and the
U.S. has become a safe bet for for-
eign capital. Denver experienced
a heightened interest from insti-
tutional and coastal capital in the
last cycle and, for the first time, has
had consist attention from capital
around the world. This is a trend
that shows no signs of changing.
In fact, capital in Denver remains
frustrated in the inability to find
enough quality retail product to
buy; desire to place capital is not in
question.
The Denver economy has proven
its resilience during this long recov-
ery period. It is this engine that has
fueled an extended period of posi-
tive retail fundamentals, which is
being held in check with limited
construction. This positive envi-
ronment coupled with capital’s
demand for yield will once again
put Denver in an elevated posi-
tion that will continue throughout
2017.s
Jason Schmidt
Executive vice
president, JLL,
Denver