CREJ - Retail Properties Quarterly - February 2015
The new year is in full swing and established retailers are looking to execute on expansion plans following a strong holiday sales season. New ideas are ready to blossom into new stores. That means as a retail broker, I am spending countless hours searching for the next great opportunity, or pitching strong projects that have space available or that are coming out of the ground. Though time and time again, I hear from my colleagues and clients, “There isn’t enough quality space available in the Denver metro right now.” However, there are still strategies that can lead to retail success for those retailers looking in the right places. Retailers large and small, established or upstart, all want one thing right now – quality space. When looking at vacancy rates, you would think that quality space exists in the market, and that it’s ripe for the taking. In reality, when focusing in on the 7 percent vacancy rate in Denver, you realize that most of that vacancy is not quality Class A space. Instead, vacancies are in Class B or C space that retailers just don’t want. The current vacancy is really conducive to demolition, or at least remolding and repositioning into a quality space that a retailer can sink his teeth into and have a high level of confidence in, which leads to strong sales projections. Unfortunately, that takes time and money, neither of which retailers want to waste. The most important factor right now seems to be time, because the quality space is not available. While owners and developers are trying to catch up to meet the current demand, retailers are competing for quality space. Demand for retail space is coming from a number of segments, but restaurant growth has accounted for more than 40 percent of all total unit growth over the past four years, according to Garrick Brown, economist with ChainLinks. This is the largest market segment and the largest demand driver for good reason. Every fast-casual operator I spoke with had dreams of becoming the next Chipotle, and they all have their own concept or spin on some traditional offering. But what seems to get overlooked is how tough it can be to break through to consumers when you’re surrounded by so many established names and other popular, emerging concepts. Denver is one of the hottest markets in the nation for emerging restaurant concepts, and is often called a foodie city, but that is not helping those who are trying to make an entrance. The old adage “location, location, location” has never been more important for standing out as an operator; unfortunately, the quality space to plant a flag doesn’t seem to exist. So what is a retailer to do? I am encouraging clients to consider looking outside of the Denver city limits, and I have presented projects in secondary markets that could be huge opportunities for retailers. These opportunities for expansion exist along the entire Colorado Front Range and even in the Western Slope and mountain communities, which often are considered secondary markets. The clear and present advantage is the frequent lack of competition and, even more so at this time in the market cycle, additional space availability. I often use a pie analogy asking, “If you only have the opportunity to get a small slice of a big pie, wouldn’t it be just as good, if not better, to get a bigger slice of a smaller pie? Or better yet, have the whole pie to yourself?” The other factor that often leads to success in secondary markets is lower costs, whether it is lower occupancy cost, staffing cost or marketing cost. There are some great success stories in smaller markets and some concepts worth watching and duplicating. For example, Spoons, a soup kitchen of sorts, is one of my favorites and one of my stops any time I am in Fort Collins. Another is Post, a Big Red F Restaurant Group concept, based around a brewery and chicken menu in Lafayette. There is also ToGo’s, one of California’s largest sandwich chains, with over 325 locations, which just opened its first Colorado store in Colorado Springs. These retailer successes translate into developer and owner success stories as well. Over the course of the last 12 months, I have seen new projects preleased, and, in some cases, fully leased before delivery in markets like Castle Rock, Loveland and Lafayette – some had written these off as locations not worth the time and money. Rather than writing these secondary markets off, I am encouraging my clients to focus on them as some of the best opportunities of 2015. Denver will continue to offer great opportunities, new projects, renovations, creative reuses and adaptions, but the secondary markets hold a lot of consumer dollars for those willing to go capture them. It will take some outside-the-box real estate searching and analysis, and some creative deal structure, but for a bigger piece of pie, it seems worth it to me.