CREJ - Retail Properties Quarterly - February 2018
As Denver’s population growth and consumer spending outpace 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 residents 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. Depending 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 Shopping Centers, holiday shoppers spent an average of $842 for gifts, while the increased traffic also drove consumers to nongift-related purchases during the holiday period. Holiday shoppers spent an additional $261 (on average) on entertainment, personal service and food-related purchases. Based on current projections, 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 owning investment real estate more attractive, 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 corporate tax rates on a portion of income that flows from so-called pass-through entities. Furthermore, real estate investors 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 owners, 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, with VASA Fitness being one of the most active, typically backfilling former Safeway/Albertsons locations in neighborhood shopping centers. Grocers targeting health-conscious consumers continue to expand. Natural Grocers opened two new locations, while Sprouts Farmers Market and Lucky’s Market made announcements for expansion. Restaurants of all types expand at a significant rate in Denver and are highly sought after by landlords and consumers alike. While these tenants often require more expensive tenant improvement 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 continues its strong, upward trend due to the recent supply of jobs, household formation exceeds the national measure by a wide margin, which will induce demand in the metro’s retail market. As preleasing activity in the Denver 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 continued 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 predicting 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, entertainment 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.