Page 6
— Retail Properties Quarterly — February 2018
www.crej.comMarket Update
Denise Leal | 303.692.8838
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A
s Denver’s population growth
and consumer spending out-
pace national levels, investors
and retailers target Denver and
its attractive business climate
for future opportunities.The metro’s
retail market in 2017 was underpinned
by record-low unemployment that was
near 2.4 percent. Denver’s workforce
expanded by 1.6 percent last year, or
by more than 22,000 new hires. Robust
employment growth, particularly
among degreed positions in the health
care and information technology
industries, lured many new inhabitants
to the Mile High City.The influx of resi-
dents obtaining high-wage jobs helped
push the median household income
over $75,000, encouraging a 4.8 percent
boost in retail sales.This jump follows
a 2.8 percent increase in 2016. At a time
when much has been written about the
demise of retail, the thriving economy
has continued to entice retail investors
and retailers to the greater Denver area.
Nationally, the 2017 holiday sales
figures saw the largest year-over-year
increase since 2011, with 95 percent of
holiday shoppers buying merchandise
from brick-and-mortar stores. Depend-
ing on the source, the holiday sales
increase was somewhere between
4.5 and 6 percent; the higher end of
that range would put it as the largest
boost since 2005.The most significant
increases were seen in electronics,
appliances and home furnishings. In
addition, per a recent survey conducted
by the International Council of Shop-
ping Centers, holiday shoppers spent
an average of $842 for gifts, while
theincreased traffic also drove consu
mersto nongift-r lated purchases during
the holiday period. Holiday shoppers
spent an additional $261 (on average)
on entertainment, personal service
and food-related
purchases. Based
on current projec-
tions, retail sales are
projected to increase
another 4.5 to 5.5
percent in 2018.
In addition to this
year’s predicted
rise in retail sales,
the new tax law’s
favorable treatment
of pass-through
income makes own-
ing investment real
estate more attrac-
tive, while providing consumers with
more disposable income. Shopping
center investors, as well as real estate
investors of all types, will benefit from
the recent changes to the tax code.The
recent changes have reduced corpo-
rate tax rates on a portion of income
that flows from so-called pass-through
entities. Furthermore, real estate inves-
tors will be able to depreciate capital
investments in their property on an
accelerated basis.These changes will
increase the after-tax cash flow that
can be achieved from purchasing and
operating investment real estate. Lastly,
and just as important to retail own-
ers, cuts to personal income tax rates
will increase consumers’ disposable
income, creating additional upward
pressure on retail sales.
In 2017, a multitude of fitness centers
found their way into the metro area,
withVASA Fitness being one of the
most active, typically backfilling former
Safeway/Albertsons locations in neigh-
borhoodshopping centers. Grocers
t rgeting health-conscious consum-
ers continue to expand. Natural Gro-
cers opened two new locations, while
Sprouts Farmers Market and Lucky’s
Market made
announcements for
expansion. Restau-
rants of all types
expand at a signifi-
cant rate in Denver
and are highly
sought after by
landlords and con-
sumers alike.While
these tenants often
require more expen-
sive tenant improve-
ment packages, they
consistently drive
traffic to neighborhood centers and
are in high demand by a consuming
public that now spends more on dining
out than it does on groceries. Discount
retailers remained another strong retail
segment with the additions of several
Family Dollar and Save-A-Lot stores.
The retail expansion in these segments
offset much of what was predicted to
be a “retail apocalypse” in 2017.The
city’s growing economy will put retail’s
doom on hold once again.
This year, Denver’s employment
growth will outstrip the nationwide
rate while strengthening its labor pool
with the addition of 24,000 employees.
The energy sector will gain traction this
year as businesses create employment
opportunities for new drilling fields
east of the metro and existing fields
in northern Denver near Interstate 25.
Despite the inflow of energy-related
positions, the tech sector remains the
anchor behind the city’s expanding
workforce. As population growth con-
tinues its strong, upward trend due to
the recent supply of jobs, household
formation exceeds the national mea-
sure by a wide margin, which will
induce demand in the metro’s retail
market.
As preleasing activity in the Den-
ver metro area stays robust and
retail demand increases, vacancy
rates will post a 20-basis-point
decline this year, pushing the rate
to 4.8 percent. Demand drives the
average asking rent to $19.14 per
square foot, up from $18.21 per sf
at the end of 2017. Neighborhoods
in Cherry Creek and areas along
Colorado Boulevard extending from
Alameda Avenue to Colfax Avenue
continue to capture the highest
average asking rents, while some
northern suburbs and parts of
Aurora will be on the lower end of
the spectrum. These strengthening
retail metrics indicate a healthy and
improving market, which should
continue in 2018.
The Denver metro area’s healthy
business environment continues to
outpace the nation’s and attracts
national investors. Decreasing
vacancy rates should persist while
rents are projected to increase in
shopping centers across the Denver
metro area. Retail sales saw strong
gains in 2017 and should see con-
tinued growth in 2018. While there
has been significant concern over
the future of retail in the internet
era, the underlying fundamentals
remain healthy and improved in
a year when many were predict-
ing doom. The recent changes to
the tax code will benefit shopping
centers not only from an ownership
perspective, but also by providing
consumers with more disposable
income to spend on retail, entertain-
ment and personal services. While
there may be some headwinds due
to increasing interest rates, the
Denver retail market should register
another strong year in 2018.
V
Strong holiday sales propel healthy expectationsRyan Bowlby
Senior associate,
associate director,
National Retail
Group, Marcus &
Millichap, Denver
Drew Isaac
First vice president
investments,
Marcus &
Millichap, Denver