CREJ

Page 4 — Retail Properties Quarterly — November 2021 www.crej.com Market Update A fter the onset of the coronavi- rus pandemic during the first quarter of 2020, commercial real estate credit and equity markets seized in response to being unable to underwrite the risks COVID-19 presented. In response, the federal government took measures to counterbalance and offset the pan- demic’s impact on financial markets, which in turn stabilized Denver’s retail markets.The federal government supplemented lost revenues in the economy through the Paycheck Protec- tion Program, government bond buying programs, increased unemployment benefits and lowering the federal funds rate. Simultaneously, the government- mandated business closures and stay- at-home orders that were intended to limit the spread of the virus slowed economic activity and changed con- sumers’ shopping behaviors. Metro Denver’s retail real estate market is experiencing new dynamics, an effect of the pandemic-induced changes. As vaccination rates increase and society returns to a new normal, following are the changes investors should consider when evaluating Denver’s retail market. n Significant buyer capital. A low interest rate lend- ing environment coupled with strong demand for housing and logistics ware- house space have led to record low cap rates in the multi- family and industrial markets. Many mul- tifamily and indus- trial landlords are choosing to sell and exchange into assets that offer higher risk-adjusted returns. The metro Denver area, which offers healthy retail market fundamentals relative to coastal cities, has been a tar- get for these investors. “Battle-tested” retail assets that have maintained occupancy with minimal rent deferral or abatement agreements and healthy historical accounts receivables are in high demand. These assets are considered lower risk and offer attractive yields relative to more expensive multifamily, indus- trial and data center assets. Some 1031 exchange buyers are bidding aggres- sively as a result of the desire to avoid capital gains taxes coupled with Denver retail assets’ average 50 basis point yield premium relative to comparable assets in coastal markets. While 1031 capital is a strong source of buyer funds, pension funds and private equity funds also are aggressively seeking battle-tested retail assets. It is estimated that there currently is $47 billion in “dry powder” capital that is chasing retail. Due to strong buyer demand and the current low interest rate lending environment, Denver retail cap rates have compressed 25 to 50 basis points on average year over year. n Continued positive rent growth. In the wake of COVID-19’s economic impacts, Denver’s unemployment rate peaked at 12.13% during the sec- ond quarter of 2020, led by dramatic employment decreases in the trade, transportation and utilities; leisure and hospitality; and other services employ- ment sectors. Denver’s unemployment rate has been positively correlated with retail space availability rates, which was demonstrated following the Great Recession when the 600 basis point increase in the unemployment rate corresponded to a 310 basis point increase in the availability rate. In stark contrast, the 980 basis point increase in the unemployment rate that followed the COVID-19 outbreak corresponded to a moderate 130 basis point increase in the availability rate. Despite retail business closures and stay-at-home orders, government intervention to support retail tenants, landlords and consumers blunted COVID-19’s impact on retail market availability rates. As Denver’s unemployment rate has swiftly receded from its second-quarter 2020 peak and shows signs of con- tinued downward momentum, avail- ability rates should follow suit under the assumption that an employed population is one that provides and consumes retail space. Historically, as Denver’s retail availability rates have trended downward and/or plateaued in Evaluating COVID-19’s impact on the Denver area Riki Hashimoto Executive managing director, Newmark Frazier Cavness Associate director, Newmark Please see Hashimoto, Page 25 Newmark Research Newmark Research