Investor Demand Outpaces Retail Property Listings in Booming Denver Metro

Richard Bird, Marcus & Millichap

Richard Bird, Marcus & Millichap

A booming Denver economy has strengthened the local real estate market, creating strong demand across all property sectors, including multifamily, housing, office and retail. The wealth effect stemming from robust employment and rising home values will specifically drive retail sales in the Denver metro this year. A thriving retail market will attract new tenants to the metro, and facilitate healthy rent growth.

Employers will continue to expand in the metro, pushing total employment to a new high and drawing additional residents to the metro. Hiring will expand 3.3 percent this year as employers are expected to add 45,000 total workers to payrolls. Metro Denver has also attracted high-wage earners. For instance, Lockheed unveiled plans to add 850 high-paying jobs at its Jefferson County facility over the next few years. Meanwhile, rising housing demand has lifted the median price of an existing home nearly 60 percent over the past six years. This has caused Denver to become one of the most expensive non-coastal housing markets in the nation. High home values will positively affect how homeowners feel about their financial situation, encouraging retail spending.

Retail construction will slow this year as many developers focus on redevelopment projects like the Southwest Plaza Mall, which will be completed later this year. The largest project underway is the Promenade at Castle Rock, an outer-belt, suburban, mixed-use development. Retailers in the first phase are expected to open this year, with construction wrapping up in 2018. After opening 510,000 square feet of retail space this past year, deliveries will ebb as developers slow the pace of completions in 2015, to 300,000 square feet.

Subdued construction and expanding retailers will drop vacancy to its lowest point in more than nine years, pushing rents higher. Strong tenant demand and limited construction will facilitate a 90-basis-point decline in vacancy by year’s end, to 5.2 percent. Denver’s vacancy rate retreated 60 basis points in 2014. As vacancies continue to drop, average asking rents will rise. By year’s end, rents are forecast to grow 3.2 percent to $16.38 per square foot, following a 2.7 percent increase last year.

A diverse, growing economy and strengthening operations will attract significant investor interest to the metro this year. Listings will remain limited, creating intense competition for adequately priced assets in the market. Low cap rates and heightened investor demand will draw many sellers off the fence, increasing transaction velocity. Grocery-anchored centers and properties containing necessity-based retailers will garner the strongest interest from investors. Single-tenant properties are also sought-after, with cap rates for these assets often dipping below 6 percent for national brands with long-term leases. For higher first-year returns, buyers will look to smaller, less-management-intensive strip centers with a handful of tenants. Higher prices in the core will motivate local buyers to trade into more affordable assets in the cities and suburban locations surrounding Denver.

By Richard Bird, Vice President and Regional Manager, Marcus & Millichap’s Denver office. This article originally appeared in the May 2015 issue of Western Real Estate Business magazine.

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