Colorado Real Estate Journal - July 1, 2015
The Denver area retail market experienced healthy growth last year, with the market only becoming stronger this year. That was the consensus of about two dozen speakers who addressed more than 400 retail industry officials at the recent 2015 Retail Summit & Expo hosted by Colorado Real Estate Journal. “Looking back, 2104 was really a landmark year,” said Jon Weisiger, a senior vice president for brokerage services at CBRE, who moderated a broker update panel at the conference June 11 at the Inverness Hotel and Conference Center. “All signs are that we are heading into a vibrant economy,” Weisiger said. Garrette Matlock, a senior vice president at Marcus & Millichap, who was on the investment panel, couldn’t agree more. “I’ve been in this business for 30 years, over 30 years, and I have never seen a better retail environment,” Matlock said. Denver, he said, used to be considered a secondary market but now is considered a first-tier market. The overall retail vacancy rate is hovering around 6.2 percent, which he said is the lowest in at least eight years. Blended retail rent, for all property types, is about $16.73 per square foot, which is about $1 per sf, or 6.3 percent, higher than a year ago, he said. In the past 18 months, the Denver area market has absorbed about 250,000 sf of space and there is only about 500,000 sf under construction, Weisiger said. “That actually is a little surprising,” given the demand, Weisiger said. It also is a sign that the days of building the mega-malls may have come to a close. “We probably will never see a giant, 1.7 million-sf Southlands ever again,” said Allen Lampert, a partner at David Hicks Lampert. “A 500,000-square-foot center is possible at a great intersection and great rooftops around it,” Lampert said. Centers can’t count on the bigbox anchors they did in the past. “Home Depot will probably do another store,” and Lowe's also is focusing on bolstering its current stores, rather than building new ones, he said. Kohl’s may be one of the few big-box tenants still expanding, he said. Going forward, developers need to consider that millennials do not like shopping at cookiecutter stores, he said. Rather, they want the stores they shop at to be unique to their markets, he said. Still, there is no denying that the retail market is strong. When Justin Kliewer, a managing director at Newmark Grubb Knight Frank, was asked where the hottest markets are in the Denver area, he said a better question might be, “What is not hot in Denver and along the Front Range?” It is hard to find an area that is not hot, although downtown Denver and Cherry Creek are really sizzling, he said. There are 15 to 20 projects underway in LoDo and Union Station, representing more than 200,000 sf of space, he said. Tony Pierangeli, a senior vice president at SRS Real Estate Partners, said a few years ago landlords primarily were interested in filling empty space with any tenant. Today, demand is so strong from high-quality tenants that landlords have their pick of the litter. “It truly is a landlord’s market,” Pierangeli said. And while the overall retail market has a vacancy rate a bit above 6 percent, Class A space probably has a sub-4 percent vacancy rate, he said. “The biggest challenge is the sheer lack of opportunity” for tenants to find space, he said. The strong retail scene has attracted the attention of big real estate investment trusts and other investors. InvenTrust, for example, in April paid $57.1 million for the 216,325-sf Shops at Walnut Creek in Westminster. The $2.5 billion market cap real estate investment trust is based in Oak Brook, Illinois. Michael Podboy, chief investment officer of InvenTrust, said he looks at the retail landscape as an “ecosystem” in which he bundles things such as the location, job market and barriers to entry in that submarket. One thing he really likes about the Denver area is that it is so attractive to millennials. “I don’t think we have yet seen the full power” of that age group, Podboy said Other big investment players on the investment panel, including Debbie Godfrey, director of acquisitions for Ramco-Gershenson Properties Trust; Clint Marchuck, vice president of acquisitions for Vestar; and Scott Holmes, a senior vice president of American Realty Capital Properties Inc. were just as bullish and had similar takes on the Denver area retail market. However, that has made it tough on local investors, who don’t have the access to institutional or shareholder dollars. Steve Shoflick, president and chief operating officer of locally based Miller Real Estate Investments, noted that he has been doing deals in the Denver area for more than 35 years. But all of the institutional money pouring into the area has made it very difficult to compete, he said. Miller Real Estate is funded by individual investors and family offices and it doesn’t make sense for them to purchase Denver area properties at today’s low cap rates, he said. “There are not that many opportunities in this market,” Shoflick said. Increasingly, he has been going outside of Colorado to find investments, he said. However, one part of the state that is not enjoying a retail Renaissance is Colorado Springs. While Colorado Springs historically has lagged the Denver market by 12 to 18 months, it now is probably 18 to 24 months behind Denver, said Jay P. Carlson, managing broker and principal of Front Range Commercial LLC. “You are just not seeing the job growth in the Springs,” Carlson said. “Five to 10 years ago, we lost some high-paying manufacturing jobs and they have been replaced with (lower-paying) call center jobs.” Meanwhile, the specialty grocery store market has showed a lot of strength, said Brian P. Shorter, a managing director at SullivanHayes Brokerage. “Since the downturn, we have learned that their customer base is much more diverse” than originally anticipated, Shorter said. Grocers such as Sprouts Farmers Market and Natural Grocers not only do well in neighborhoods with high income, but also they do well in places like Aurora, where the demographics are not as strong, he said “Regardless of incomes … they have excelled,” he said.