CREJ - Retail Properties Quarterly - November 2017
Denver’s roaring economy continues to attract businesses and new residents, sustaining demand for goods, services and retail real estate. Ongoing job growth well above the national average has supported the unemployment rate contracting to 2.2 percent by the end of the second quarter, one of the lowest rates in the nation. By the end of the year, the metro’s labor force is expected to expand by 2.4 percent. In addition, a rise in high-paying positions has supported rising median household incomes, which is $17,100 more in Denver than the national median and translates to higher spending power. These positive economic trends have created robust demand for retail goods and services at a time when marketwide concern over the state of retail as a product type has been prevalent. The largest retail developments are occurring in the outskirts of Denver in suburban communities such as Castle Rock and Thornton. Alberta Development continues to deliver new retail square footage as part of the planned 1-million-sf Promenade at Castle Rock. A 139,000-sf Sam’s Club and a 125,000-sf King Soopers opened earlier this year, joining Ulta Beauty and several smaller-scale retailers. On the northern end of the Denver metro area, Simon broke ground on the Denver Premium Outlets, which will contain 80 outlet stores totaling more than 330,000 sf. While the larger retail developments mostly are occurring in the outlying suburban communities, in the urban core, older neighborhoods are being redeveloped with mixed-use apartment and office buildings that also include retail components. The most notable is the 9th and Colorado Project, which is being developed by Continuum and will include between 235,000 and 300,000 sf of retail space once the project is fully completed. In the first half of the year, 284,000 sf of new space was delivered, with the bulk of the activity occurring in the northwest submarket. By the end of 2017, builders are slated to complete a total of 750,000 sf of new retail space. While this is an increase of 110,000 sf from last year, it’s important to note that the pace of development still is far below the long-term average prior to the recession. Developers’ restrained and cautious approach to new retail projects since the recession has kept the market in balance and tenant and investor demand for premium retail product at very high levels. Despite the increased deliveries this year and a changing retail landscape, strong retail demand will compress vacancies in the Denver area. While the third quarter saw a slight increase in the vacancy rate due to new product coming on line, the full-year 2017 absorption levels will once again outpace new inventory, resulting in the vacancy rate dropping 20 basis points and building on last year’s 40-basis-point drop. And, as retail vacancies fall, rents will continue to rise. Overall, demand for retail space is driving rent growth in Denver. As of June 30, the average asking rent increased to $17.47 per sf and is expected to climb 4.8 percent to $17.60 per sf by the end of 2017, the largest percentage increase in nine years and surpassing the prerecession high. While new retail construction routinely commands $30 to $40 per sf for well located shop space premises. Denver’s positive retail real estate performance and the area’s favorable long-term growth outlook continues to attract investors. Single-tenant restaurants and fast-food stores remain the prime choice of many buyers, driving yields into the 5 percent range. Many investors who have been priced out of this market were able to achieve more attractive yields – in the low 6 percent range – in recently constructed multitenant strip centers with long-term leases and attractive tenant mixes. One such asset we recently sold in Stapleton was leased to eight tenants, seven of which had signed 10-year leases with absolutely no landlord responsibility to cover any property expenses. These types of multitenant assets are uniquely positioned to appeal to investors more familiar with single-tenant, net-leased properties. Grocery-anchored retail shopping centers, with the grocer included in the collateral, continue to be the most sought-after retail product, particularly by institutional investors. A limited supply, coupled with an ever-increasing pool of institutions, pension funds and real estate investment trusts solely targeting these assets has driven yields on these properties into the low- to mid-5 percent range. Recent notable transactions in this space include Bear Valley Shopping Center, which sold for $46 million, and the Orchards, which sold for $38 million. Both shopping centers are anchored by King Soopers. A balanced market with restrained new development has not only led to favorable changes in market rents and vacancy rates, but also it has created pent-up demand with investors looking to purchase in one of the strongest and most vibrant midmarket economies in the country. Denver continues to be one of the most appealing markets for retail investors and, based on the current market fundamentals, it appears that will remain the case for the foreseeable future.