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— Retail Properties Quarterly — February 2018
www.crej.comT
he morning of Aug. 28
marked a new paradigm
for retail real estate when
Amazon announced its
purchase of Whole Foods.
E-commerce’s menacing effects on
brick-and-mortar retail had been
discussed for years. However, this
was the decisive tipping point for
the industry to take notice. Prior to
this event, retail investment sales
in Denver of large-format shopping
centers were in the sub-7 percent
cap range, a phenomenon first
realized in 2013 with the sub-6 per-
cent sale of South Denver Market-
place and, more recently, the sale
of Aspen Grove at 6.2 percent.
In September, soon after the
Whole Foods transaction, Sam
Zell said on CNBC, “Investing in
the (retail) space right now is like
catching a falling knife.” His rea-
sons: Excess inventory and the
effect of e-commerce. Zell high-
lighted U.S. inventory as 4 to 5
times more per capita than in
Europe. Additionally, the U.S. Cen-
sus will show that retail space in
the United States grew 180 percent
from 1970 to 2010, while the popu-
lation grew 52 percent.
Zell’s comments are bold given
the nature of the national econ-
omy. The national gross domes-
tic product has been growing for
eight years, and unemployment is
under 5 percent. According to JLL
research, the national retail vacan-
cy rate in the third quarter, just
after Zell’s statement, was 4.5 per-
cent – decisively healthy. Bolstered
by an 18-month build up in posi-
tive wage growth,
2017 holiday
sales were excel-
lent. According to
Mastercard, the
holiday shopping
season for in-store
retail in the U.S.
was up 4.9 percent
as compared to
2016.
This is more
consistent with
what we are expe-
riencing in Denver as evidenced
by retail fundamentals. Since 2009,
there has been a clear positive
trend. Overall, vacancy has stayed
under 5 percent and 2017 ended at
4.5 percent. Rental rates continue
to rise, quoted at $17.81 per square
foot at the end of 2017, a 5.95 per-
cent increase from 2016. The mar-
ket also had nearly 1 million sf of
absorption in the fourth quarter
alone.
The most meaningful statistics
for the health of Denver’s retail is
new construction. In the last 35
years, Denver has experienced an
average of over 3.5 million sf of
annual construction. This number
has been contained in recent years.
For a five-year period, including
2010 through 2014, the average
annual construction was 1.2 mil-
lion sf. In 2015 and 2016, the aver-
age was 1.7 million sf, and 2017
ended at 2.2 million. This number
likely will increase in 2018 as 1.9
million sf was under construc-
tion at the end of last year, but the
upward trend likely will taper.
The 2017-2018 projects are largely
made up of occupied buildings
with tenants such as Scheels,
Sam’s Club, Walmart and King
Soopers. The current market is
disciplined, operating at a fraction
of the historical base. Given the
demeanor in retail and its tenants,
controlled expansion will continue.
Despite the positive trends, there
is no denying that the landscape
in retail is changing. Building on
past bankruptcies, several retailers
with stores in the Denver market
filed for bankruptcy in 2017. These
include The Limited, Gordmans,
RadioShack, Gander Mountain and
Payless ShoeSource.
Given the positive fundamentals
and the controlled expansion, what
is the lasting impact of e-com-
merce? According to eMarketer,
90 percent of purchases remain in
stores. Additionally, retailers are
adapting to customers by blend-
ing the online and in-store experi-
ence. In fact, Amazon opened its
first bookstore in 2015 and now has
dozens with plans to expand. Other
e-commerce companies are open-
ing their first physical stores as
they experiment with omnichannel
distribution, some examples being
IndoChino, Bonobos and Warby
Parker.
As some retailers disappeared,
others are finding equilibrium.
The face of retail is changing, but
the need for it is not fading. Since
2014, 17 malls across the country
simply took the word “mall” out
of their names to start catering to
the changing marketplace. The fact
remains that convenience and vis-
ibility are inherent in retail and it
represents the best real estate in a
marketplace. “Main and Main” has
tended to last for generations and
this will continue even if the sig-
nage and services provided change
for the next generation. This will
apply in Denver where the econ-
omy is more diverse than in past
generations, and employment and
population trends are robust.
In contrast, retail sales vol-
ume has been consistently down.
According to our research, national
volumes declined 21.4 percent
last year; CoStar statistics shows
a similar 20 percent for Denver
using a yearly third-quarter com-
parison. The emotional reaction
to e-commerce has pushed buy-
ers to hedge risk into core offer-
ings consisting of urban or grocery
retail where cap rates will continue
to compress. Given the historical
lack of urban retail and grocery
operators’ tendency to own their
stores, these types of deals are dif-
ficult to find in Denver. Debt also
remains favorable for this class,
enticing owners to hold assets.
Value-add and opportunistic assets
are uncommon as a result of the
elongated performance of local
retail trends, contributing to the
continued decline in the sales vol-
ume. As emotions settle, the sup-
ply/demand imbalance will favor
sellers. Buyers will widen their
scope, creating new opportunities
for owners in Denver to maximize
proceeds.
V
As retail landscape changes, look to positive trendsInvestment Market
Jason Schmidt
Executive vice
president, JLL,
Denver