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Page 4 — Retail Properties Quarterly — May 2017
T he recent retail real estate
headlines have focused on
the negatives more often
than not. The list of store
closures and corporate bank-
ruptcies are growing difficult to
maintain and the task of backfilling
large-format vacancies has become a
head scratcher. However, the portion
of the story that has generated less
conversation is incredibly positive:
The consumer is strong. Through-
out this article, we will focus on the
positives. The store closures and
vacancies are a result of changing
consumer-spending patterns, not a
lack of consumer spending.
The way in which people spend
money has changed over the last
decade. Technology has emphasized
time savings whenever and wher-
ever possible in order to be more
productive and create additional
leisure time. These priorities do
not conflict with retail sales. The
amount of money in which people
spend on retail goods and services
has increased dramatically through-
out the e-commerce expansion.
When people have free time, they
are more prone to spend money on
retail offerings.
In the seven-county metro Denver
market, consumer spending has
increased 21 percent since 2007.
December 2015 compared to Decem-
ber 2016 saw metro Denver’s con-
sumer spending increase by 9.2 per-
cent, almost three times more than
the next closest major metropolitan
statistical area, Seattle. The year
2007 represented the all-time high
and prerecession peak with respect
to this data point.
Yet since 2007, the
Denver market
has expanded its
retail real estate
square footage by
8 percent. New
construction is
not diluting the
strength of well-
performing centers.
One of Colorado’s
most significant
economic driv-
ers also is a pri-
mary contributor
to the increase in
consumer spending – population
growth. All one needs to do is attend
a Rockies or Avalanche game to see
that people from all over the country
want to live here, and the data sup-
ports this as well. Since 2010, the
Denver metro population has grown
by approximately 11 percent, while
the U.S. population has grown by 4
percent.
The people who move to Colorado
are not simply loitering on the 16th
Street Mall causing headaches for
the Downtown Denver Partnership.
These people are moving to Colo-
rado to find employment, contribute
to our community and spend money
enjoying all that our beautiful state
has to offer. Population growth has
led to companies relocating and
expanding to Colorado to recruit
an educated workforce. Examples
include Charles Schwab, BP, Char-
ter Communications, Amazon and
Google. In turn, a healthy job market,
individual relocations from coastal
housing markets and a 3.2 percent
unemployment rate have created a
skyrocketing Denver metro housing
market that is putting more confi-
dence, excess equity and disposable
income into the wallets of retail con-
sumers.
Investors are well aware of the
trending strengths and risks cur-
rently impacting the market, and
properties are trading based on
risk-adjusted returns. The spread
in capitalization rates between A,
B and C class centers is histori-
cally wide. Our team currently has
disposition assignments with 400
basis points of spread in cap rate.
Moreover, lenders are identifying
the same topics. Acquisition financ-
ing spreads are two to three times
wider than they were 10 to 12 years
ago (prerecession). The market is
maintaining discipline and will lead
to more sustainable commercial
property values.
There is a lack of supply to satisfy
institutional investment demand.
The flight to safety and motivation
to place capital remain drivers in
this seller-friendly market of insti-
tutional offerings. Meanwhile, pri-
vate capital offerings are valued on
a case-by-case basis, and we would
classify supply/demand as being in
balance.
We often are asked to answer
various cliché inquiries such as,
when will we reach the peak; when
will the music stop; and how many
more innings are there in the
game? These client questions are
not entirely honest. What people
usually are asking is when will the
next Great Recession take place or
how long do we need to wait until
discounted acquisitions become
available?
We believe the market already has
reached a given peak, approximate-
ly 18 months ago. The lowest avail-
able interest rates are in the past.
Tenant uncertainties have increased
the risk assessment. And the energy
sector in Denver has momentarily
tempered job growth. However, the
Denver story is not coming to an
end anytime soon. People continue
to move to Colorado, and the cycle
of a given dollar is moving at a
rapid pace. The consumer is strong
and retailers are working to inno-
vate and continue improving the in-
store customer experience to create
the next wave of retail strength. s
Jon D.
Hendrickson
Managing director,
capital markets,
Cushman &
Wakefield, Denver
Market Update
We believe the
market already
has reached
a given peak,
approximately
18 months ago.