Strong employment, rising rents bode well for retail

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Strong employment growth, decreasing vacancies and rising rents indicate a positive 2016 retail market, as demographic trends attract investors to the area, according to Marcus & Millichap. Marcus & Millichap’s 2016 Retail Investment Forecast provides these Denver observations:

Steady hiring across many of Denver’s major employment sectors will benefit retail operations this year as vacancy constricts and rents rise. Job growth over the past few years has pushed employment nearly 10 percent above the pre-recession peak. As the market continues to progress economically, consumer confidence is building and retail sales will increase 7 percent this year, the fastest pace in more than a decade.

National retailers such as Sam’s Club, Wal-Mart and Gander Mountain are expressing more confidence in the market as they open new stores this year.

This bright outlook is driving retail development of 1 million square feet of space in 2016. This includes the 140,000-square-foot Stanley Marketplace, which will come online in Aurora fully leased. Six restaurants, a deli and boutique grocery store were selected from applicants seeking space in the new center.

This strong demand for space has contributed to vacancy tightening across the metro and just three submarkets recorded a rate above 6 percent at the end of last year. Tight conditions and solid retailer demand have buyers seeking multitenant properties throughout the Denver metro this year, with cap rates averaging in the low- to mid-7 percent range.

Institutional grade buyers are expanding portfolios in the region, targeting high-quality centers trading at initial yields beginning near 6 percent. Private investors, however, will remain the main buyer segment, and competition for assets priced below $10 million will rise this year as out-of-state buyers seek properties in the market.

Investors in search of upside may find opportunities along future light-rail stops. These properties stand to benefit from increased foot traffic as rail extensions are opened over the next few years.

Single-tenant product receives the bulk of investor attention, with demand most robust for auto repair, restaurant and fast-food establishments.

2016 Market Forecast

NRI Rank: 14, down 7 places – A slower pace of rent growth and job additions drove Denver out of the top ten this year.

Employment: Denver employment will expand 1.9 percent this year, or by 26,000 positions. In 2015, companies created 24,200 jobs for a staff expansion of 1.8 percent.

Construction: 1 million square feet – Builders will deliver 1 million sf of retail space in 2016, an annual stock expansion of 0.8 percent. Developers brought 700,000 sf online last year.

Vacancy: Down 40 bps – Vacancy will retreat 40 basis points in the coming months to 5.3 percent by year end. The rate declined 10 basis points in 2015.

Rent: Up 1.8 percent – Asking-rent growth will gain steam this year, rising 1.8 percent annually to $16.36 per square foot. Last year, the average asking rent dipped 0.3 percent

Investment: Out-of-state investors are increasing competition for metro assets, resulting in many local buyers being priced out of the metro area. Local investors are beginning to target secondary and tertiary markets nearby, such as Colorado Springs, Fort Collins and Pueblo.

Click here for the full report.

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