CREJ - Retail Properties Quarterly - August 2017
Most retail real estate owners have been bracing themselves for bad news. With all of the news of store closures and e-commerce growth, it would seem that retail vacancy rates would be well over 20 percent and that retail rents would have plummeted by now. But the fact is, this doom-and-gloom storyline is overblown. What goes unmentioned is the expanding retailers, including food stores, gyms, restaurants and other service or entertainment venues that do not fit the usual retailer profile. In the Colorado markets, the numbers have largely stayed flat in three of the largest markets (Boulder, Denver and Colorado Springs) while Fort Collins has seen vacancy rates increase from 14.2 percent from the end of 2016 to 15.7 percent at midyear. Colorado Springs has seen vacancy rate increase 0.2 percent to 13.6 percent at midyear; Boulder’s vacancy rate has remained flat at 12.4 percent; and Denver’s vacancy rate also stayed flat at 9.7 percent. On a year-to-date basis through June, asking rents have increased 2.6 percent in Denver, 0.2 percent in Colorado Springs, 0.5 percent in Boulder and 0.1 percent in Fort Collins. A more surprising yet reassuring statistic is the growth in retail jobs in the state. Looking at the growth in average retail employment in the first five months of 2017 compared to the first five months of 2016 shows that retail has grown in line with the overall economy. Retail employment has grown 0.5 percent in Boulder, 4.3 percent in Colorado Springs, 1.2 percent in Denver and 3.4 percent in Fort Collins. In less populated areas where there are no retail real estate statistics, the employment numbers are just as buoyant: Pueblo has seen year-over-year retail growth of 2.6 percent, Greeley has seen growth of 3 percent and Grand Junction has seen growth of 2.7 percent. So is Colorado immune to the problems hitting the retail sector? Not really. Already in 2017, Fort Collins saw the closing of at least one Safeway, and Boulder saw the closing of a Whole Foods. Over the last two years, Colorado Springs saw the closings of 122,630 square feet of retail stores, including Sports Authority and Golfsmith. The same two brands closed stores in Denver along with Haggen, Kmart and Neighborhood Walmart stores. Altogether, Denver has seen 440,100 sf of store closings of major brands. If these metros are seeing store closures and yet little to no change in vacancy rate along with positive employment growth, this suggests that other retailers are leasing the empty store space. This should not come as a surprise when considering how well the overall Colorado economy is doing. Year to date through May, the state has added 18,800 jobs in the seven main metropolitan areas (Boulder, Colorado Springs, Denver, Fort Collins, Greeley, Grand Junction and Pueblo) that make up 89 percent of the total state employment. This rounds out to an annual growth rate of 2 percent. Most of these added jobs – 12,300 – were added in Denver. Fort Collins added 2,500 jobs year to date; Boulder added 1,400 jobs, Greeley added 1,300 jobs, and the other markets have added fewer than 1,000 jobs each. More jobs means more demand for retail. Still, although the economic news is positive, many of the added employees are young – the demographic that prefers to shop online. What can we expect given the current state of the retail market? One interesting analysis is measuring retail employment per 1,000 residents. We calculated this measure for all 82 metros that we track, and we found that the U.S. metro average ratio of retail employees per 1,000 residents was 50. How do the Colorado markets compare? For the four counties in the Denver area, the measure averaged 47, healthier than the U.S. average. However, it was above 50 in Arapahoe and Jefferson counties. In Boulder County, there are 53 retail employees per 1,000 residents, 46 in Colorado Springs (El Paso County), 54 in Grand Junction (Larimer County), 34 in Greeley (Weld County) and 46 in Pueblo County. Thus, most counties in the state are not over-retailed. In sum, Colorado has not (nor will it) escaped the overall structural shift that the retail sector is undergoing with its shakeout of some older brands of retail stores. The good news is that Colorado is surviving the changes better than most states across the U.S. mainly due to the fact that the economy in Colorado is on sound footing. The good news is that developers are not building retail space as they had in past expansions, which will keep a cap on vacancy rate increases. Still, vacancy rates could increase in the next few quarters as the full impact of store closures is expected to hit in the third quarter, but the increase should not be too alarming given how the market has survived thus far this year.