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May 2017 — Retail Properties Quarterly — Page 25
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ing to our research. The cor-
responding increase in con-
sumer spending has encour-
aged a number of retailers
to expand their existing
footprint in the Denver metro
area, while a number of oth-
ers have entered the market
or are attempting to do so
when the right opportunity
arises.
These underlying funda-
mental trends, while not
as pronounced as they are
in Denver, also exist on
a national basis. Vacancy
rates are decreasing and are
projected to hit a 16-year
low in 2017. Rental rates
are increasing, and a con-
strained supply of new
retail construction has put a
premium on existing retail
space. Retail sales, excluding
the internet, increased on a
nationwide basis by 2.8 per-
cent in 2016.
So why is there such con-
cern over the impact of
online retail? After all, inter-
net sales currently account
for only 10 to 12 percent of
total retail sales. The con-
cern isn’t just the current
market share, but the rate at
which internet retail sales
have grown relative to brick-
and-mortar store sales. In
2016, for instance, internet
sales increased by 12 per-
cent on a year-over-year
basis, more than four times
greater than the increase in
brick-and-mortar store sales.
This has disproportionately
impacted larger retailers
offering products that are
easily found online at a less
expensive price. Electronic
and office supply retailers
have been obvious victims,
while department stores and
certain soft good retailers
have felt the impact as well.
While certain retail-
ers, or retail segments, are
negatively impacted by the
internet, not all retailers
are struggling. Food service
sales are up more than 50
percent since 2009, while
home improvement store
sales have risen almost
45 percent over that same
period. Value-oriented retail-
ers such as Five Below and
the TJX Cos. (Marshalls,
T.J. Maxx and HomeGoods)
saw significant increases in
their 2016 sales, 20 percent
and 7 percent, respectively.
Retailers such as Ulta, Dol-
lar General and T-Mobile are
expected to increase their
brick-and-mortar presence
on a national basis this year.
Health and fitness tenants
have been expanding and
are projected to absorb a
significant amount of retail
vacancy. Locally, VASA Fit-
ness opened its first Denver
metro area location at the
corner of South Buckley
Road and East Quincy Ave-
nue and is expected to grow
its footprint moving forward.
As internet retailers have
taken a larger share of the
market and increased their
reach into everyday retail
consumption, a constrained
supply of new retail con-
struction has put downward
pressure on brick-and-mor-
tar vacancies, while pushing
rents higher. Investors have
driven pricing for invest-
ment retail properties to
values, relative to income,
that have surpassed their
prerecession levels. There
is no question that internet
retail sales are impacting
shopping centers and put-
ting certain retailer’s busi-
ness models into question.
Moving forward, retail own-
ers will need to re-evaluate
what constitutes the optimal
tenant mix for their respec-
tive centers while focusing
on tenants that are difficult
to disintermediate through
online options. However, the
market fundamentals, espe-
cially in the Denver metro
area, demonstrate that retail
shopping centers are on
strong ground and remain a
sound investment product
type moving forward. s
Matlock
Marcus & Millichap
Retail construction and vacancies nationally from 2001 to 2017.
boldt. Similarly, Trader Joe’s
debuted at East Eighth Ave-
nue and Colorado Boulevard,
and Shake Shack’s premiere
spot is planned for 30th and
Larimer streets.
Along with demand, the
definition of street retail is
changing. Groceries can be
several blocks away rather
than directly adjacent to
stores that still benefit from
its food shopping traffic. A
hospital also can serve as
(nontraditional) anchor to
blocks-away retailers. And
restaurants and bars can be
first-to-the-block magnets
for enthusiastic revelers
and additional retail – for
example, more than 20
retailers have opened along
Tennyson Street in the
Berkeley neighborhood in
just five years with a similar
phenomenon developing on
17th Avenue in Uptown.
• Retail optimism. We
won’t be saying goodbye
to shopping malls anytime
soon. They are busy trans-
forming into experiential
sites with retail pop-ups,
museum-quality exhibit
tours, upscale, chef-driven
restaurants and extensive
kids’ zones that far exceed
soft sculpture play areas.
The International Council
of Shopping Centers said its
members saw occupancy
rates of 93.4 percent in sec-
ond quarter, the highest
since 2007.
At the same time, a selec-
tion of once online-only
retailers has opened street
retail locations. The stylish
eyeglass vendor Warby Park-
er encourages try-ons at
its growing roster of store-
fronts, which may number
70 by year’s end. Bonobos,
a menswear newly hybrid
retailer, has 34 locations
categorized as “guideshops.”
Like Warby Parker, your
order ships from a ware-
house to your home. It’s the
reverse of the now popular
buy-online-pick-up-in-store
model that’s helping to
rebuild traffic at brick-and-
mortar locations.
And that category killer,
Amazon? It committed
firmly to street retail with
five bookstores opened and
another six, most literally,
on the books. The company
also is testing three grocery
formats, including Amazon
Go, in which technology
supersedes checkout lines.
And despite cloudy retail
headlines, consumer senti-
ment remains optimistic in
2017 with highs not seen in
a decade, according to Kip-
linger’s economic forecasts.
Excluding gasoline, retail
sales in 2017 are expected
to rise by 4.2 percent, better
than the 3.8 percent growth
rate in 2016. While the Com-
merce Department reported
a drop in year-over-year
retail sales in March, sales
at electronics and appli-
ances stores recorded their
biggest rise since June
2015 and activity at cloth-
ing stores increased by the
most in a year.
So, as you evaluate your
investment strategy for the
next five years, be sure to
anoint street retail within
your royal family-style port-
folio. After all, there’s no
need to exchange a kingdom
for a horse when everything
looks like Clydesdales. s
Balafas