CREJ - Retail Properties Quarterly - May 3, 2017
The recent retail real estate headlines have focused on the negatives more often than not. The list of store closures and corporate bankruptcies are growing difficult to maintain and the task of backfilling large-format vacancies has become a head scratcher. However, the portion of the story that has generated less conversation is incredibly positive: The consumer is strong. Throughout this article, we will focus on the positives. The store closures and vacancies are a result of changing consumer-spending patterns, not a lack of consumer spending. The way in which people spend money has changed over the last decade. Technology has emphasized time savings whenever and wherever possible in order to be more productive and create additional leisure time. These priorities do not conflict with retail sales. The amount of money in which people spend on retail goods and services has increased dramatically throughout the e-commerce expansion. When people have free time, they are more prone to spend money on retail offerings. In the seven-county metro Denver market, consumer spending has increased 21 percent since 2007. December 2015 compared to December 2016 saw metro Denver’s consumer spending increase by 9.2 percent, almost three times more than the next closest major metropolitan statistical area, Seattle. The year 2007 represented the all-time high and prerecession peak with respect to this data point. Yet since 2007, the Denver market has expanded its retail real estate square footage by 8 percent. New construction is not diluting the strength of well performing centers. One of Colorado’s most significant economic drivers also is a primary contributor to the increase in consumer spending – population growth. All one needs to do is attend a Rockies or Avalanche game to see that people from all over the country want to live here, and the data supports this as well. Since 2010, the Denver metro population has grown by approximately 11 percent, while the U.S. population has grown by 4 percent. The people who move to Colorado are not simply loitering on the 16th Street Mall causing headaches for the Downtown Denver Partnership. These people are moving to Colorado to find employment, contribute to our community and spend money enjoying all that our beautiful state has to offer. Population growth has led to companies relocating and expanding to Colorado to recruit an educated workforce. Examples include Charles Schwab, BP, Charter Communications, Amazon and Google. In turn, a healthy job market, individual relocations from coastal housing markets and a 3.2 percent unemployment rate have created a skyrocketing Denver metro housing market that is putting more confidence, excess equity and disposable income into the wallets of retail consumers. Investors are well aware of the trending strengths and risks currently impacting the market, and properties are trading based on risk-adjusted returns. The spread
in capitalization rates between A, B and C class centers is historically wide. Our team currently has disposition assignments with 400 basis points of spread in cap rate. Moreover, lenders are identifying the same topics. Acquisition financing spreads are two to three times wider than they were 10 to 12 years ago (prerecession). The market is maintaining discipline and will lead to more sustainable commercial property values. There is a lack of supply to satisfy institutional investment demand. The flight to safety and motivation to place capital remain drivers in this seller-friendly market of institutional offerings. Meanwhile, private capital offerings are valued on a case-by-case basis, and we would classify supply/demand as being in balance. We often are asked to answer various cliché inquiries such as, when will we reach the peak; when will the music stop; and how many more innings are there in the game? These client questions are not entirely honest. What people usually are asking is when will the next Great Recession take place or how long do we need to wait until discounted acquisitions become available? We believe the market already has reached a given peak, approximately 18 months ago. The lowest available interest rates are in the past. Tenant uncertainties have increased the risk assessment. And the energy sector in Denver has momentarily tempered job growth. However, the Denver story is not coming to an end anytime soon. People continue to move to Colorado, and the cycle of a given dollar is moving at a rapid pace. The consumer is strong and retailers are working to innovate and continue improving the in store customer experience to create the next wave of retail strength.