FEATURE ARTICLE

Denver’s Retail Real Estate Market is Red-Hot, But Can It Last?

MARKET REPORT

Retail Market Analysis, Q2 2019

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574 Santa Fe Dr, Suite 300Denver, CO 80204303.518.7406wheelhousecommercial.com

AUGUST 2019 | ISSUE VIII

THE WHEELHOUSE REPORT In-depth market information on Denver’s commercial real estate market.

By Mark W. Kennedy, President

Denver’s Retail Real Estate Market is Red-Hot, But Can It Last?

It’s a great time to own retail property in the Denver market. Over the past 11

years, Denver’s retail real estate market has soared, enjoying record-setting

rent growth, thanks to fantastic demographic growth, record low vacancy,

and historically low unemployment rates.

But as several economic factors point to storm clouds on the horizon, a

burning question remains: Is the party about to end?

DENVER TOPS THE NATION IN RETAIL RENT GROWTHSince the bottom of the recession in 2012, Denver’s rent growth has been the

strongest in the top 50 metropolitan markets – averaging 5% annually where

nationally the rate was just 2%. At the peak of the recession, the Denver

metro retail vacancy rate was over 9%, and today it’s around 4.2%. Due, in

large part to a lack of supply, vacancies should remain close to historic lows

for at least another year or two.

The Wheelhouse Report is

produced by Wheelhouse

Commercial, a full-service

commercial property

management company

headquartered in

Denver, Colorado.

Each month we bring you

in-depth market news and

data on all segments of

Denver’s commercial real

estate market.

THE WHEELHOUSE REPORT | AUGUST 2019 PAGE 2

Can Denver’s Red-Hot Retail Real Estate Market Last? (from previous page)

FEATURE ARTICLE

Excellent demographics also contribute to these

near-record occupancy and rent rates. One

reason is that Denver continues to be a magnet for

relocation. Since 2012, the Denver Metro area has

added almost 400,000 people, with 30% of those

moving to the city of Denver and more arriving

every day. Millennials make up the majority

of these transplants. Denver has become the

nation’s number two destination for millennials

(25- to 34-year-olds) behind only Houston.

DOWNTOWN SUBMARKETS OUTPERFORM THE RESTWhile the entire Denver metro area is growing,

retail rents in highest performing submarkets

have seen remarkable gains this cycle. This

mirrors a trend playing out nationally, where

tenants are shelling out unprecedented chunks of

cash for a limited set of top-tier locations.

Downtown retail rents have surpassed the

peak of the last cycle by 50%. Moreover, a

concerted movement of households, wealth,

and employment to downtown submarkets have

pushed rents in the Downtown and Cherry Creek

Submarkets well beyond their historical levels;

as a result, vacancies in these areas have been

razor-thin for years.

There has even been renewed strength in several

suburban retail submarkets. While many saw

lackluster rent growth earlier in the cycle, they’ve

emerged as the cycle has progressed as well.

CLICKS-TO-BRICKS FUEL DEMANDAnother interesting retail industry trend is adding

fuel to the fire. The rise of “Clicks-to-Bricks” –

brick and mortar stores opened by online sellers

– is adding to demand for retail space. While this

trend is expected to continue, it’s still too early to

measure their long-term impact on the overall

retail market.

CAN DENVER’S HOT RETAIL REAL ESTATE MARKET LAST?All good things must come to an end. As we

officially entered the longest economic expansion

coming out of recession in U.S. history, all

indications point to a slow-down soon. While

it’s hard to predict when the slow-down will hit,

some say Q4 2019, others say Q3 to Q4 2020.

An economic downturn, coupled with other

market factors such as increasing housing costs,

growing labor costs, triple net charges, big-box

vacancies and online retail sales, will all have an

impact on retail rents and vacancies.

ONLINE SALES CUT INTO LOCAL PROFITSOnline sales now account for over 14% of all

retail sales in the US, and continue to threaten

local retail as well. As this trend continues, local

retailers will continue to feel the pinch from lost

sales. Online retail sales increased by 15% in 2018

alone and this upward trajectory is expected to

continue.

THE MARKET IMPACT OF RISING HOME PRICESDenver’s home prices have grown rapidly over

the past several years in home prices; the average

sales price for a home in the Denver metro area

now hovers around $400,000. Several factors

contribute to these increases.

Our historically low unemployment rate of 3.2%,

coupled with the building boom, has significantly

increased labor demand and costs. The original

THE WHEELHOUSE REPORT: July 2019

THE WHEELHOUSE REPORT | AUGUST 2019 PAGE 3

Can Denver’s Red-Hot Retail Real Estate Market Last? (from previous page)

FEATURE ARTICLE

version of the Construction Defect Law was rather

onerous on builders and essentially stopped

construction of condos in the Denver Metro area

after the 2008 crash. There has been no significant

amount of condo development since then.

A 2017 reform to the law has opened some condo

development, but it is not a significant amount.

Condos are the entry-level housing for many

young people. Shutting down condo development

forced young buyers into single-family homes,

increasing demand (and thus prices) on those

properties.

TRIPLE NET CHARGES ON THE RISEAs property values go up, so do their tax

assessments. Significant increases in property

taxes over the past two assessment periods

(2017 and 2019) have resulted in huge jumps in

triple-net charges to tenants. In some markets,

particularly the hot downtown market, property

taxes have increased by 70% or more. Some

retailers will be able to absorb this increase, while

some, especially smaller tenants, may not. With

so many retailers surviving on slim margins, this

may force some tenants to default.

BIG BOX VACANCIES ARE GOING UPBig-box tenants continue to struggle in the

changing retail world. Toys R Us/Babies R US went

bankrupt, and JC Penny’s, Macy’s, CVS, and Sears

all have had store closures. Sears, with its more

than 700 remaining stores, always seems to be on

the brink of bankruptcy. Many of these vacancies

are being repurposed for smaller tenants since

the number of 100,000+ sf tenants is very limited.

But, repurposing big-box stores is expensive and

lease up cycles are very long.

THE IMPACT OF LABOR COSTSIf there is any one situation that will cause the

booming market to fizzle, it will be labor costs.

As labor costs increase, prices for new buildings,

renovations, and repairs increase. As the prices

rise, the potential market for products and

services will decrease, reducing competition,

and therefore, prices. This death spiral can have

a wide-ranging impact across all aspects of the

economy, and once started, it will be hard to stop.

During this economic recovery, labor costs have

increased dramatically. A massive building boom

has factored into near-record unemployment

rates, increasing labor costs in every industry.

In particular, the competition for skilled trade

labor is fierce. In some instances, labor costs

for construction have increased by 40%. These

increases are necessarily passed along to the

buyer.

DENVER’S QUALITY OF LIFE STILL A DRAWBut, Denver’s retail future is not all doom and

gloom. The Front Range’s population growth has

been the secret sauce fueling the retail sector’s

strong performance and is expected to continue.

The high quality of life, coupled with lower costs

of living compared to the coasts, make Denver

an attractive place to live. Most experts predict

Denver’s retail real estate market will continue

to outperform the rest of the nation for the next

several years.

THE WHEELHOUSE REPORT: July 2019

THE WHEELHOUSE REPORT | AUGUST 2019 PAGE 5

THE WHEELHOUSE REPORT: July 2019

Retail Market Analysis: Denver Metro Q2 2019MARKET REPORT

The table below reports some of the key market indicators from 10 submarkets across the greater Denver

retail market, during Q2 2019.

RETAIL MARKET DATA: DENVER METRO Q2 2019*

SUBMARKET VACANCYRATE

AVAILABILITYRATE

MARKETRENT/SF

ANNUALRENT GROWTH

INVENTORYSF

12-MONTHDELIVERED SF

UNDER CONSTR.SF

UNDER CONSTR.% OF INVENTORY

12-MONTH NETABSORPTION SF

Overall Denver 4.4% 6.0% $23.01 2.5% 154M 1.2M 1.4M 1.4% 678K

West 5.1% 6.7% $20.21 1.8% 24,033,238 106,984 34,412 0.1% -101,122

Northwest 5.7% 6.7% $20.22 2.3% 24,658,001 140,780 135,393 0.5% 27,418

Central 3.2% 4.8% $22.66 1.9% 20,984,032 199,646 139,102 0.7% -42,286

South 4.1% 5.1% $28.91 2.1% 18,138,218 61,645 38,624 0.2% 136,388

Southeast 4.5% 5.4% $25.01 2.6% 15,222,380 132,570 62,789 0.4% 52,091

Northeast 5.4% 8.1% $21.42 2.6% 15,139,991 269,559 493,889 3.3% 285,498

Aurora 4.9% 6.3% $17.29 2.0% 12,001,178 39,274 158,164 1.3% -24,608

Southwest 3.1% 5.4% $20.79 3.0% 10,367,937 46,384 50,335 0.5% 150,770

Colorado Blvd/Cherry Creek 3.0% 4.5% $43.72 1.9% 5,178,275 61,500 30,000 0.6% 54,604

Downtown 2.6% 6.7% $32.81 1.7% 3,379,979 0 206,240 6.1% -10,390

* Source: CoStar. The information contained in this newsletter is obtained from sources deemed reliable; however, Wheelhouse Commercial cannot guarantee the accuracy of the information provided.

The feature article this month more fully

describes the historical, current, and projected

status of the Denver retail market. We will only

highlight a few of the more outstanding trends in

the local submarkets here.

MARKET RENTSRetail rents have increased by 5% annually over

the past five years. The two submarkets that had

experience negative year-over-year rent growth

as reported last quarter, Cherry Creek and

Downtown, have reversed that short-lived event.

This is pretty remarkable considering that they

are two of the highest performing submarkets in

the nation in terms of rent growth. In fact, rent

growth is up across most of the submarkets this

quarter, ranging from 1.7% to 3.0%. The forecast

is for rental rates to continue to realize moderate

THE WHEELHOUSE REPORT | AUGUST 2019 PAGE 6

Retail Market Analysis: Denver Metro Q2 2019MARKET REPORT

growth over the next few years, albeit at a slower

pace than has been seen since the nadir of 2012,

but positive nonetheless.

VACANCY RATESVacancy peaked at 9% during the great recession

and now remain at historically low-levels, at

4.4% for the overall market. The vacancy rate

throughout the metro area has remained below

5% since mid-2015. It is quite impressive that

the highest submarket vacancy, in the Northeast

corridor, is only at 5.4%. The downtown

submarket remains incredibly tight at 1.7%. As

with rent growth, the forecast is to now enter

into a leveling-off period, with vacancy rates only

trending only slightly up or down, depending

on the type of retail (mall, neighborhood center,

strip center, etc.).

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