CREJ - Retail Properties Quarterly - November 2016
In 2015, Colorado retail investment sales volume approached $1.3 billion, matching the historical peak volume previously set in 2006. Year to date, the Colorado Front Range has yielded approximately 120 investment-grade net-leased retail commercial transactions totaling over $640 million in value, excluding regional mall sales. While Denver and surrounding communities remain a high-priority investment target for institutional capital, higher total number of transactions and smaller average transaction size indicate that private capital investors are the primary driving force behind the retail investment transaction velocity along the Front Range. As owners evaluate their capacity to take advantage of rising values (compressing cap rates) in the face of global capital markets unrest, it is critically important to understand the variable factors driving investment decisions in an uber-competitive marketplace. • Private capital investors are the primary driving force in the marketplace. Private capital investment in the Colorado retail sector is expected to increase year over year for the fifth straight year, eclipsing $500 million in total investment for the second-consecutive year in 2016. The number of retail investment transactions closed by private capital investors as a measure of the total has grown from roughly 80 percent in 2013 to over 95 percent in 2016. • Single-tenant net-lease sales churning. Colorado single-tenant net-leased transactions for 2016 are setting record-low cap rates while accounting for a larger share of overall transaction volume in the sector. Contributing factors include increased competition among retailers securing leases for stand-alone units; enhanced pipeline of vertical new development completions being delivered to the marketplace; competitive demand from time-sensitive 1031 exchange buyers seeking passive cash-flow investments secured by credit-backed tenants; and low yields in the bond market continuing to make commercial real estate an attractive tangible investment even at historically low cap rates. • IRS 1031 exchange laws encourage continued CRE investment. Many retail commercial properties listed for sale see offers from an investor executing a 1031 like-kind property exchange. The time-sensitive nature of these investors often make them an appealing option for sellers looking for an efficient sale execution. The top-tier Denver investment brokers are importing active and aggressive 1031 buyers from around the country and, in some cases, globally to purchase assets in Colorado. Many of these buyers are first-time investors to the state and often are trading across asset classes. Timing plays a crucial role in executing with a 1031 buyer as these investors often trade in and out of the market on expedited timing intervals of 45 to 90 days. • Capital outreach is key to driving value. Since 2012 the CBRE Denver Retail Investment Group has transacted with over 90 unique investors, 70 percent of which were either first-time buyers of retail property in Colorado, based outside the state of Colorado or both. While not as skewed to outside investors as the CBRE sale portfolio, the overall market trend tracks a comparable trajectory. • Debt terms are a deciding factor in value for private capital investors. Average cap rates paid for strip center and shadow-anchored retail has compressed year-over-year four years running. In 2016, cap rates for these property types are approaching 7 percent on average with best-in-class assets trading at 5.75 to 6.5 percent. At these cap rates, the market is approaching pricing in which it is not possible for many leveraged investors to achieve a positive leverage position over the initial term of ownership. Outlier all-cash investors continue to post record cap rates, however, it is no coincidence that the average market cap rate may find a ceiling that correlates roughly with a point of positive leverage assuming typical market debt terms available to the private capital investor. • Livin’ the dream in Denver. A best-in-class airport, interconnected multimodal mass transit, strong job growth, world-class recreational pursuits and 300-plus days of sunshine per year all contribute to Denver’s popularity. The list of benefits to calling the Colorado Front Range home is having a huge impact with out-of-market investors and retail tenants alike taking note and planting their flag in Colorado. Limited new construction starts, a growing population and high tenant demand is driving tangible rent growth for properties along the Front Range. Savvy investors are seeking opportunities in well-located, underutilized and undermanaged properties that offer a path to value creation through driving net-operating-income growth. Understanding the micro environment impacting the complex web of factors influencing commercial real estate investment in a given property sector and geographic location is critical for an investor/seller to ensure an optimal outcome when implementing a strategic disposition or recapitalization effort. An investment brokerage adviser must demonstrate real-time working knowledge of the most active and aggressive buyers in the market along with a deep understanding of the variable factors driving investment decisions.