Wow, 2015 was yet another strong year in the Denver retail market as the state continues to attract retailers from all over the nation. Our well-diversified economy, increase in population, almost record-low unemployment and increases in salaries contribute to the growth of Denver. It is the sixth fastest-growing city in the nation and the second-best city to start a new business, according to Forbes.
The Denver unemployment rate declined to 3.1 percent in October, which is the lowest unemployment rate we have seen since 2000. Job growth increased 2.5 percent for 2015, and the average hourly earnings of all employees grew to over $25 an hour, according to the U.S. Bureau of Labor and Statistics. In May, sales for retailers and restaurants jumped 1.2 percent and auto sales hit the highest level we have seen in over a decade. This comes as consumer confidence is up and being fueled by the lowest crude oil prices we have seen since 2003.
Through 2015, there was a little over 2 million square feet of positive net absorption across the Front Range. However, we did see net absorption slow down in the second quarter when Safeway closed nine underperforming store locations due, in part, to the number of grocery and specialty grocery store competitors in our market. This brought approximately 500,000 sf of retail space back to the market, some of which is located in prime trade areas and has been leased in whole or in part already.
Over the last four years, a total of about 6 million sf of new retail space was delivered. To put this in perspective, in 2007 over 5.7 million sf was delivered. There is a little less than 1.2 million sf under construction and through the rest of 2016 this should tick up as developers push projects through the pipeline.
The success of our market over the last couple of years can be credited to this slowdown of new construction projects as vacancy rates continue to drop and market rents climb. Class A retail space in Denver is in high demand and virtually nonexistent. The better-quality and better-located Class B locations have benefitted from the short supply; however, many retailers are exercising patience and have opted to wait until they can enter the market in a Class A location. Class C continues to struggle and will be a challenge to fully lease. Roughly 75 percent of the vacant space is made up of Class B and C properties.
Through second-quarter 2015, developers, with a few notable exceptions, were primarily looking to build smaller projects in urban-infill areas. In most cases, these developments are mixed-use projects with multistoried, multifamily apartments and first-floor retail in the hot trade areas such as the Lower Highlands, Lower Downtown and River North. As multifamily rents grow and urban land prices reach what may be the peak, we have seen a shift in the third and fourth quarters by developers. Some of the largest developments under construction now are in the suburban markets.
As 2015 came to a close, the total market vacancy rate – including shopping centers and freestanding retail product – was 5.2 percent across the Front Range. The number drops to 5 percent, from a high of 8.5 percent in 2009, if we only look at the Denver/Boulder metro area.
The strongest submarkets continue to be Colorado Boulevard/Cherry Creek at 2.2 percent; Boulder at 2.2 percent; Denver suburban southeast at 2.8 percent; Denver south at 3.7 percent; and Denver central at 4.5 percent. An interesting note: The downtown submarket started first-quarter 2015 with a vacancy rate of 4.1 percent and ended the fourth quarter at 5.5 percent due, in part, to approximately 47,000 sf of new retail space coming on line.
As we look at the average triple-net asking rents on a sf basis for available space across the Denver/Boulder metro area, three submarkets are showing double-digit decreases in pricing from fourth-quarter 2014 numbers. Colorado Boulevard/Cherry Creek is $26.69, down 16.7 percent; downtown is $26.34, down 15.4 percent; and Denver southwest is $13.53, down 15 percent. This is in direct relation to the lack of available Class A space in these trade areas.
However, most trophy centers are showing double-digit rent increases over the past year. The rest of the submarkets are showing solid rent growth, except for the last two listed below, which is due to conditions noted above. Following are the average triple-net asking rents on a sf basis:
- Denver northeast is $15.90, up 12.6 percent;
- Boulder is $23.88, up 8.8 percent;
- Denver northwest is $13.12, up 7.6 percent;
- Denver central is $17.45, up 5.7 percent;
- Denver southeast $18.63, up 5.7 percent;
- Aurora is $13.37, up 5.4 percent;
- Denver west is $14.68, up 3 percent; and
- Denver south is $18.13, up 0.6 percent.
Grocery, restaurants and service concepts that don’t compete with e-commerce lead brick-and-mortar retail expansion. The grocery segment is very active in Colorado. While Safeway/Albertsons is figuring out what its post-merger turnaround looks like, King Soopers and Whole Foods are dominating our market. Whole Foods had a challenging year nationally in the press and will continue to slug it out. Meanwhile, Sprouts, Vitamin Cottage and Walmart have created loyal customer bases and continue to expand and develop new store locations.
A big question this year is if the “Your Choice Colorado” coalition, backed by King Soopers, Safeway and Walmart, will get a citizen-led 2016 measure on the ballot to allow supermarkets and some convenience stores to sell full-strength beer and wine. The coalition needs close to 100,000 voter signatures to put the decision in the voters’ hands.
The initiative is strongly opposed by local liquor stores and craft brewers, which have successfully kept Colorado legislators from tackling the issue since 2008. With the craft-brewing boom, local breweries say it is much easier to get their products on local liquor store shelves. They fear if big chain supermarkets and convenience stores are allowed to sell full-strength beer and wine, those stores will only stock the most popular brands.
King Soopers had two notable openings this year. It opened the first downtown full-service grocery store at 20th Street and Chestnut Place (46,475 sf) in August. Because of the size constraints in this tight urban market, the store is located on the ground floor of a new five-story multifamily apartment development. In Parker, King Soopers redeveloped a formerly shuttered 55,000-sf location into one of its new 123,000-sf “superstores.”
Whole Foods has a flagship location in the works at 17th and Wewatta streets (57,000 sf), but this does not look like it will be delivered before 2017.
Vitamin Cottage was busy with two notable openings – the redevelopment of the former Elitch Lanes site on 38th Avenue and Tennyson (21,594 sf) and the redevelopment of the former Gunther Toody’s location at 4500 E. Alameda Ave. (20,000 sf).
Sprouts was active with store openings as well by backfilling a portion of the former Safeway at South Buckley Road and East Mexico Avenue (32,340 sf) and opening a location at First Avenue and Wadsworth Boulevard (27,000 sf).
Trader Joe’s signed a new lease for its sixth location at West Bowles Avenue and South Wadsworth Boulevard (21,954 sf).
The Denver Pavilions continues to attract new large-scale retailers with the addition of Uniqlo, a Japanese clothing store scheduled to open later this year. It will occupy the former Barnes & Noble space (27,500 sf), which closure was announced in October. In 2011, the Pavilions brought the first H&M to Colorado and now is expanding the H&M space to the third floor with an additional 10,000 sf that will feature the H&M exclusive home collection. This will be the sixth location in the nation for this concept and puts the Denver retail market in rarified company with the other locations in Boston, Washington, D.C., New Orleans and New York.
The Cherry Creek Shopping Center also opened a game changer, which is opposite the trend of decreasing big-box square footages, with the addition of the new 70,000-sf RH Gallery, the rebranded Restoration Hardware. The four-story building changes the landscape of the traditional windowless malls and lays a new foundation that will be duplicated by other malls and retailers.
Some other notable transactions across the Front Range include:
- Appliance Factory Outlet (338,651 sf) at 321 W. 84th Ave.;
- Costco Business Center (118,000 sf) at Alameda Square Shopping Center;
- Sportsman’s Warehouse (60,000 sf) at River Point;
- CarMax (52,568 sf) at 18220 Ponderosa Drive;
- Chuze Fitness (45,000 sf) at Thornton Marketplace;
- Ralph Schomp MINI (46,548 sf) at 1001 Plum Valley Lane;
- GameWorks (34,265 sf) at Northfield at Stapleton;
- Stein Mart (30,824 sf) at Arapahoe Crossing;
- Party City (19,949 sf) at 600 Center Drive;
- Buy Buy Baby (23,522 sf) at Arapahoe Crossing;
- Planet Fitness (22,000 sf) at Lakeside;
- Marshall’s (22,821 sf) at University Hills;
- PetSmart (17,460 sf) at River Point;
- Punch Bowl Social (17,000 sf) at Stapleton;
- Eddie Merlot’s (11,097 sf) at Vallagio;
- Ulta Beauty (10,560 sf) at 600 Center Drive;
- Solesdi (9,243 sf) at 2800 Walnut St.;
- Tattered Cover (8,005 sf) at Aspen Grove;
- Orvis (7,337 sf) at Avenue 2 Shops; and
- Cheesecake Factory (7,000 sf) at Southwest Plaza.
For 2016, all along the Front Range we are seeing new development take place, from Village at the Peaks (394,485 sf) in Longmont to the Promenade in Castle Rock, which will bring in a combined total of nearly 2.5 million sf once completed.
New construction may not be at a record-setting pace, but it is certainly on a firm foundation assuming that we will continue an annual net absorption of 2.2 million sf, our last three-year average. We will continue to see a high demand for Class A as well as for the better-quality and better-located Class B properties, lower vacancy rates and increased rents through the rest of the year.