CREJ - Retail Properties Quarterly - February 2015
Retail is back on the scene in Denver with plenty of activity. Last year’s activity was marked by declining vacancies, increasing rents and -- several new national retailers entering the market. A strong local economy, population and employment growth, increasing personal income and a booming residential market all contributed to the retail sector’s resilience. 2015 will be another positive year in the sector, as the underlying fundamentals in the Denver metro area remain strong. Notable lease rate growth is anticipated to occur in the next 12 to 18 months due to space scarcity in A-trade areas such as Cherry Creek, Park Meadows, downtown and Boulder, along with moderate construction activity. Consumer activity was heightened in the metro area, Colorado and the U.S. during 2014, with retail sales increasing by 8.1 percent in the U.S. through October. Sales at the state level through May (the latest data available at the time of this article) were up 5.5 percent, and in Denver sales increased by 3.4 percent over last year. Consumer sentiment is also vastly improved, being pushed by cheaper gasoline and rising home prices in the area. As of December 2014, consumer sentiment in the region rose 19.4 percent over 2013, according the Mountain Region’s consumer confidence index.
Twenty new national retailers entered the market in 2014, with more expected in 2015. New retailers are drawn to Denver for several reasons, including the above-average personal income levels, steady population growth and the region’s solid residential market. Very few retailers are leaving the Denver market and business failures are still at a historic low. Residential development, including a strong multifamily market, contributes largely to retail health because it amplifies consumption of home furnishings, appliances and accessories. For example, Conn’s Home Plus, a home furnishings, electronics and appliance store, entered the market last year with six new stores in Colorado’s Front Range. The region’s healthy retail market benefits from a flourishing restaurant scene. According to the National Restaurant Association, Colorado ranked fifth in the nation for projected restaurant sales growth in 2014. While national chain restaurants still seek opportunities in the market, some of the best growth has been in fast-casual concepts and chef-driven restaurants. Quick-serve restaurants posted a strong year in 2014 with several new QSR options added to the market, such as Protein Bar and Pizzeria Locale. We expect this trend to continue in 2015, along with the expansion of several proven national sit-down chains, like Del Frisco’s Grille. Colorado is also the nation’s leading craft beer producer, with over 175 breweries and counting. While the larger breweries typically are in industrial spaces, many smaller breweries seek space in key retail areas. A very competitive grocery market will strengthen further in 2015. Some short-term vacancies and shifting are expected in the wake of the recent merger of Safeway and Cerberus, Albertsons’ parent company, but new stores likely will absorb the extra space. While 2014 saw the entry of Trader Joe’s to the market, there were also several new stores opened by Sprouts, Whole Foods, King Soopers and Walmart Neighborhood Market following residential growth patterns. Looking forward, the Union Station area of downtown will add two large grocery stores. A King Soopers is currently under construction and Whole Foods announced it will build a 56,000-square-foot store in the area as well. Denver’s urban core is now a place where people go to live, work, stay and play. Further redevelopment of obsolete space is expected in urban and infill areas in the near term as quality space becomes even scarcer and in higher demand. The market also will see mixed-use construction along transit lines following the substantial expansion of the region’s commuter and light-rail network. For example, the city of Westminster is in the final stages of approving plans for the Westminster Center – a 105-acre transit-oriented, mixed-use development on the site of the old Westminster Mall, which includes a significant share of land planned for retail. Vertical construction may begin as soon as the third quarter. Despite encouraging demand trends, local retailers will face new issues and ongoing challenges in 2015, ranging from big-box store consolidations to e-commerce. E-commerce sales account for an increasing share of total retail sales in the U.S., but remain a minor contributor overall. Total e-commerce sales increased 16.2 percent from third-quarter 2013 to third-quarter 2014, while total retail sales grew only 4.2 percent. However, thirdquarter 2014 e-commerce sales represented only 6.6 percent of total retail sales in the quarter. Stores are increasingly incorporating omnichannel strategies to appeal to multidimensional shoppers and this trend is becoming increasingly present in Denver. For example, sporting goods store Sierra Trading Post, which made its Denver debut in 2014, offers customers an extensive online catalogue and an in-store pick-up option. While big-box stores were expanding rapidly in the 1990s and early 2000s, a notable change in consumer habits led to smaller boxes becoming more desirable. Centers in key locations have repositioned or split their boxes to accommodate new users, thereby sustaining low vacancy rates in the A-trade areas. However, in secondary trade areas, the market is readjusting and nontraditional users are finding these leftover big-box spaces suitable for their product. Fitness clubs, churches, self-storage centers and entertainment venues like trampoline parks signed some of the largest leases in terms of square footage in 2014. Nontraditional use of these spaces will likely increase and the market will also see redevelopment of obsolete big boxes. Year-end vacancy in the market stood at 6.5 percent, which was the lowest level since 2008, when vacancy bottomed out at 6.4 percent. Availability in the market reached 10 percent in fourth-quarter 2014, its lowest level in six years. These figures are reflective of an overall tightening of the market around high-quality space, a trend especially evident in the Colorado Boulevard/Midtown submarket, which has the greatest proportion of high-quality space and the market’s lowest vacancy rate at less than 3 percent. Asking lease rates are reflective of these conditions, averaging $24.35 per sf triple net in fourth-quarter 2014. This submarket contains premium retail space in the Cherry Creek North area, which is at market-setting rates. A few highly anticipated mixed-use projects are under construction there. The overall market experienced an average lease rate of $15.80 per sf triple net in the final quarter of 2014, with a 45-cent increase year over year and the highest rate the market has seen since 2011. In light of robust consumerism, as well as continued broad-based economic growth, ongoing construction and overall positive absorption, Denver retail likely will continue on a path of restrained expansion through 2015.