CREJ

Page 10 — Retail Properties Quarterly — November 2021 www.crej.com Outlook BLUE WEST CAPITAL ROBERT EDWARDS Managing Partner 720.966.1630 TOM ETHINGTON Managing Partner 720.966.1624 CARLY KELLY WELCOMES. . . WWW.BLUEWESTCAPITAL.COM LOHI PLAZA Denver, CO $7,525,000 • Completed over $800M in investment sales transactions throughout the U.S. • Over 10 years experience in investment sales DIRECTOR | INVESTMENT SALES 720.828.6290 KRISSY SIMMONS • Robust commercial real estate background with over 9 years experience in marketing • Leads marketing & communication initatives DIRECTOR | MARKETING 720.966.1631 JOSH LORENZEN • Supports team with market analysis, CRE valuations & database management • 3 years experience in commercial real estate investment sales ANALYST | INVESTMENT SALES 720.821.2520 FEATURED COLORADO LISTINGS SAFESLPASH SWIM SCHOOL Parker, CO $3,334,000 7-ELEVEN Fort Lupon, CO $9,953,000 NET LEASE RETAIL CENTER Lakewood, CO $5,762,000 SHAWN DICKMANN Associate 720.828.8310 BRANDON GAYESKI Associate Director 720.966.1627 MELANIE WILLIFORD Director of Operations 720.989.1031 BRANDON WRIGHT Associate 720.828.7457 ZACH WRIGHT Director & Partner 720.966.1628 T he strong economic rebound over the summer triggered a rapid recovery in retail investor demand, and this momentum is expected to continue well into next year. Ten- ants’ sales increased, delinquen- cies are down, and the majority of landlords are back to pre-pandemic collections. Although headwinds remain with supply chain issues and labor shortages, strong con- sumer demand is forecast to continue and strengthen in 2022. While some rents are being reset, the majority of recent retail loans we’ve closed indicate pre-pandemic rents are holding or increasing. Retail development historically has been tempered compared to other product types. With the addition of inflationary costs to build, com- bined with higher land values, new retail supply will be limited. At the peak of pandemic uncer- tainty, contrarian investors were able to acquire quality, essential anchored retail properties with sus- tainable cash returns above 7% at an attractive basis below replacement cost. However, cap rates have com- pressed for grocery-anchored cen- ters as well as credit tenant leases, and the window to take advantage of market dislocation has started to close. For a while, lenders were able to get rate premiums of 50 to 100 basis points and cherry-pick high- quality properties with experienced borrowers. Now mainstream lenders are opening up to a wider range of retail properties vs. grocery or essen- tial tenant anchor criteria. The outlook for retail six months after the economy reopened has become less uncer- tain, especially when compared to office proper- ties, for example. Unlike office product, the accel- eration of e-com- merce was playing out well before the pandemic hit, and retail already was rapidly evolving; investors were able to underwrite the risk. The combination of these factors has resulted in more demand for qual- ity retail with sustainable cash flow. The need for lenders to achieve higher returns in their mortgage portfolios intensified over the course of the year. Balance sheet lenders like insurance companies and banks have expressed frustra- tion and fatigue chasing asset class- es with the lowest risk (multifamily, industrial, self-storage) and com- peting at spreads that have been driven down to historic lows. The common thread for lenders financ- ing retail properties is the need for a sustainable cash flow story and good supporting data. An attrac- tive story typically includes strong ownership experience, no remain- ing COVID-19 relief and increasing tenant sales. Properties occupied by essential tenants along with inline tenants serving the rooftops are in the most demand. Unanchored neighborhood strip centers located in good demographic infill locations with an internet-resistant tenant mix serving the trade area typically are the next best story. The COVID-19 pandemic acceler- ated e-commerce trends, and the lockdowns and mask mandates devastated many retailers and res- taurants. However, the silver lining is investors have more clarity on how to underwrite risk compared to a year ago. Pricing discovery has been occurring, and cap rates have compressed recently on higher- quality grocery-anchored proper- ties, which suggests investors are shifting to alternative risk-adjusted returns in retail. Reduced uncertain- ty in the retail sector, higher equity demand and a normalizing labor market/supply chain in the com- ing months will bring more lenders back into the market and increase capital for retail investments in 2022. In the meantime, we’ll have to hope that Santa’s reindeer can pull the cargo ships to shore in time for the holidays. s peterk@essexfg.com Financing follows as market enjoys a rapid rebound Peter Keepper Principal, Essex Financial Group An unanchored center at the southeast corner of Interstate 25 and 120th called Webster Lake Promenade underwent a cash-out refinance with an insurance company for a 20-year fixed-rate term with a 30-year amortization.