Despite the continuing economic uncertainty, the Denver market is maintaining its status as a major thriving city with respect to all aspects of growth from commercial real estate sectors. This growth is clearly apparent by all the cranes in operation as you drive down Interstate 25—the main arterial highway that runs north and south bound through the entire state. Though 1.2 million square feet of retail was built in 2013 – and 197,000 square feet was delivered in the first quarter of 2014 – most of the current cranes are working on medical, office and multifamily developments.
With all the national retailers setting their sights on the Denver market, there is a definite lack of A-grade retail centers that have availability. B-grade product is now being thoroughly analyzed as the next best option. Several of the national and regional tenants are in bidding wars against each other for the remaining A- and B-grade sites. The challenge of the development process is the growing cost of land and construction, which ultimately drives the rates up, thus limiting a huge pool of potential tenants.
The Denver retail market in the first quarter of 2014 experienced a positive net absorption of 820,357 square feet, according to CoStar. Submarkets performing particularly well include the Denver Central Business District and trendy urban neighborhoods like the Highlands, the Park Meadows trade area and Cherry Creek. The most down time for these vacancies in the aforementioned trade areas is no more than six months. Some of the struggling markets have occurred in the northwest and southwest. One factor that tends to get a lot of deals “killed” is the cost of the triple-nets, which can range from $5 to $12 per square foot, depending on the market. The larger portion of the triple-net breakdown is the real estate taxes.
The metro Denver region is also in the midst of some notable larger-scale developments like Union Station. This mixed-use, multi-model transportation hub includes hospitality, retail, office and a commuter rail that will make rounds to Denver International Airport. The project is attracting several new-to-market restaurants and continues to be a main focus for local restaurants looking to expand into this booming redeveloped region. Another noteworthy project is the Promenade at Castle Rock. This project is a proposed 900,000-square-foot, mixed-use commercial development composed of residential and retail offerings. The Foothills Mall in Fort Collins will be redeveloped into a 620,000-square-foot shopping center that will be half open-air and half indoors. It will contain about 800 multifamily units as well.
Trader Joe’s, Conns Home Plus, Garden Ridge, Tile Shop, Dollar Tree, Bed Bath & Beyond and Vitamin Cottage are some of the larger retailers poised for expansion in Colorado in 2014. There are also several self-inspired chef concepts coming into town as well, along with fitness, medical, regional and national restaurant concepts.
Sales activity was positive in 2013 and is showing signs it will be even stronger in 2014. Cap rates are averaging 8.09 percent, but can be 100 to 200 basis points lower for core retail assets. With Colorado being the third fastest-growing state in the country, housing vacancies will soon be absorbed, which will drive up the rents, increase retail sales and in turn support our commercial base as long as there are no unforeseen disruptions in our economy.
By Jason F. Kinsey, Vice President, Colliers International in Denver. This article originally appeared in the May 2014 issue of Western Real Estate Business magazine.