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Page 6 — Retail Properties Quarterly — May 2017
Market Update
I s the internet killing retail as
an investment product type?
If you have been following the
recent store closure announce-
ments, one might be inclined
to believe that was the case. Macy’s,
J.C. Penney, Abercrombie & Fitch,
Gander Mountain, Sears/Kmart and
Whole Foods are among a number
of retailers closing stores across
the country. Others such as Sports
Authority, The Limited, HH Gregg
and American Apparel have filed
bankruptcy and either went out of
business completely or are moving
to an online presence only. However,
this frequently discussed narrative
overlooks the fact that while some
retailers have faced difficulties, due
to a constrained supply of new retail
construction, shopping center fun-
damentals are strong and improving.
The Denver metro area has seen
its fair share of store closures, yet in
total vacancies continue to decline.
Rents continue to increase. There
is no shortage of demand for well-
located, appropriately priced retail
shopping centers. In fact, investor
demand for retail centers far outpac-
es supply. These trends are seen on a
national level as well.
The internet clearly is having a
negative impact on certain types of
retailers, and it is forcing landlords
to revise their tenant line-ups to
favor food service, health and value-
oriented retailers, but its cumulative
impact has not changed the appeal
and viability of shopping centers as
an investment.
Since peaking in fourth-quarter
2009, the Denver metro area retail
vacancy rate has fallen every year
and is projected to
hit 4.8 percent in
2017. This is despite
the area absorbing
a number of clo-
sures during this
period from retail-
ers such as Safe-
way/Albertsons,
Sports Authority,
Office Depot/Office
Max and Golf
Smith, to name a
few.
As the vacancy
rate has decreased,
rents have been
increasing. Retail
rents grew by 3.6
percent in 2016
and are projected to increase by 3.1
percent to $17.19 per square foot
in 2017. The driving factor at work
here is that while population and
consumer demand have increased,
the supply of new retail construction
has remained relatively constrained.
Since the recession, deliveries of new
retail construction have been less
than one-third of what they averaged
prior to the recession. This has put a
significant premium on viable retail
shopping centers for tenants and
investors.
Well-located shopping centers in
the Denver metro area continue to
be highly sought after and are trad-
ing at more aggressive values relative
to income than they were prior to
the recession. Assuming a property
is properly priced, numerous offers
can be generated in relatively short
periods of time. Newly constructed
small strip retail centers, often fea-
turing restaurants
and food-service-
related retailers,
are highly coveted
by 1031 exchange
buyers looking for
passive income.
Most likely we
have seen the
peak of this cycle
with respect to
capitalization rate
compression; how-
ever, this is largely
a product of the
changing interest
rate environment.
The 10-year Trea-
sury has increased 60 basis points
since the election (at the time of this
writing), and the federal funds rate
is projected to
see an additional
six increases
over the next 18
months. Assum-
ing the Fed con-
tinues increasing
interest rates,
there is a strong
possibility that
the 10-year Trea-
sury reaches 3
percent by the
end of 2017 for
the first time
since December
2013. As interest
rates rise, buy-
ers will require
higher capital-
ization rates to
achieve their
targeted returns.
It’s important to point out that
capitalization rates have decreased
every year, on a year-over-year basis,
since 2010 – the same period of time
that has seen exponential growth in
internet retail sales.
Strong and stable job creation in
the Denver metro area continues
in 2017 and is expected to create
another 41,500 jobs by the end of
the year. This is in spite of the fact
that the unemployment rate in Colo-
rado is at 2.9 percent, its lowest level
since 2001. Continued job creation,
combined with a low unemployment
rate, has led to several consecutive
years of wage growth. Incomes in
Denver have seen an increase of
nearly 25 percent since 2010, accord-
VISIONARIES EXCEEDING EXPECTATIONS
ONE PROJECT AT A TIME
AN EMPLOYEE OWNED, COLORADO CORPORATION
Garrette
Matlock
Senior vice
president of
investments and
senior director,
Marcus &
Millichap, National
Retail Group,
Denver
Ryan Bowlby
Senior broker
and associate
director, Marcus &
Millichap, National
Retail Group,
Denver
Marcus & Millichap
Denver’s asking rent and vacancy trends from 2013 to 2017