MARKET HIGHLIGHT, APRIL 2009

DENVER
Toby Roth, Gannon Roth, Jason Koch and Tom Myers

According to the state-by-state breakdown of the president’s recently approved stimulus bill, Colorado ranks 49th in the amount of federal aid and tax relief that will reach its residents. One can frame this in either of two ways: the state’s citizens will perhaps have less to spend on goods and services or they didn’t need as much as other states because the Colorado economy is in relatively better health than the rest of the nation. While Colorado and particularly the Denver metro area have suffered as a result of national and international financial woes, the impact has been less severe than those cities that have experienced such dramatic highs and lows. The foreclosure rate is falling, home values declining at a more modest rate and job loses are fewer than most.

Retail

Denver’s retail vacancy rates are higher — currently exceeding 10 percent — with all product types impacted. Mall owners at Cherry Creek, Park Meadows and Flatiron Crossing are becoming much more attentive to their tenant’s needs. Lifestyle centers like Orchard Town Center in Westminster and Southlands in Aurora are substantially occupied, however, like others, they may face the challenge of filling empty boxes and promoting more aggressive rates and terms for their Main Street space.

New, unanchored retail strips geared towards quick-service restaurants, wireless providers and financial branch offices are holding their own, but replacing a failed store or filling the last vacancy will be below previously quoted rates of $30 to $40 per square foot. Neighborhood and convenience retail center owners are focused on retaining their best Tenants. Offers to renew are coming early with incentives to stay, including flat or even lower rates, rent abatement and retrofitting allowances. The downside is that those tenants are often shopping proposals and may relocate to smaller space, lower rent and occupancy costs while still staying in their trade area.

Expansion by regional and national tenants has slowed dramatically. Pads suited to banks, sit-down restaurants and fast-food outlets compete with neighboring developments for fewer users. However, unlike the 1980s when speculative retail development was rampant, most of Denver’s newer projects were substantially pre-leased and pads pre-sold. Major developers like Forest City, Regency Centers, Panatonni, Alberta Development Partners and Miller Weingarten continue to maintain a strong presence in Colorado.

No one submarket appears either better or worse than another. In the north, Forest City is nearing completion of the Orchard Town Center in Westminster. A 140,000-square-foot Lifetime Fitness, along with REI, have been added to the 1 million-square-foot retail center located off 144th Ave and Interstate 25. To the south, Miller Weingarten Realty continues adding to the massive River Point at Sheridan in Englewood. Super Target, Regal Cinemas and Costco are open. The 138-acre site will contain more than 750,000 square feet when completed. To the east, The Gardens on Havana is full steam ahead with Target, Kohl’s, Dick’s Sporting Goods and Sprouts Market all part of the 940,000-square-foot redevelopment of the outdated Buckingham Mall in Aurora. In the west, more than $30 million has been spent on infrastructure to accommodate Cabela’s in Wheat Ridge near 32nd Avenue and Interstate 70; the surrounding area should benefit greatly by its regional/national draw.

Financing is available for quality acquisitions with 60 to 65 percent leverage typical. Cap rates are rising to 9 to 10 percent for anchored retail centers. Credit single-tenant properties trade in the 7 to 8 percent range. Out-of-state developers seeking opportunity in Colorado face serious challenges. Many centers purchased for redevelopment remain under tenanted, rates have fallen and pro-formas are shot. Expect an increase of neighborhood/convenience retail to be on the market in late 2009 and 2010.

The forecast here: more boxes will go dark, vacancy rates will stay north of 10 percent, lease rates will be stable or declining across the board, more non-credit tenants will be in the mix, and, developers, if you haven’t broken ground, don’t. The strategy for 2009 for everyone in the retail industry should be to approach every day with a sense of urgency rather than panic.

— Toby Roth and Gannon Roth are senior broker and broker associate, respectively, in the Retail Leasing and Investments division of Unique Properties LLC/TCN Worldwide.

Multifamily

The Denver apartment market is truly one of the shining stars in the metro area. While both vacancy and cap rates are on the rise, the demand from both tenants and investors for apartments is outpacing other real estate types in the area.

Metropolitan Denver’s average vacancy rate increased to 7.9 percent for fourth quarter 2008. Recently constructed complexes with unit mixes composed of two- and three-bedroom units generally operate at the lowest vacancy levels as shrinking budgets now require roommates for many young renters. For the fourth quarter, the average rent per foot in the Denver metro area was $1.02 or $870 per month. This amount is $5 below the third quarter average, but still $13 higher than a year ago. Urban locations enjoyed increases in rental rates while many of the suburban complexes experienced rent decreases.

New deliveries are estimated at 4,000 units for 2009 and only 2,000 units in 2010. This is well below historical averages and should lead to decreasing vacancy rates in the next several years. Well below the pace of 2006 and 2007, transactional volume is not expected to rebound until well into 2010. Cap rate expectations have increased 100 to 200 basis points, and average price per unit has decreased approximately 17 percent year over year.

Demand for historical urban properties remains strong. Investors are renovating this older stock, often times generating 30 to 40 cent increases in rental rates.

Steady investment activity has been experienced during the first 2 months of 2009; contrary to popular belief, a number of viable capital sources has been identified to fund and close transactions. Given the above, Denver metro apartment communities provide a wonderful opportunity for astute investors.

— Jason Koch is a broker associate at Unique Properties LLC/TCN Worldwide.

Industrial

Not surprisingly, the overall trend in the Denver industrial market has been downward, mirroring the U.S. economy as a whole. However, the local numbers so far this year show modest declines. Denver generally outperforms the national market due to its diversified economy, high quality of life, and affordable costs of living and doing business.

The industrial vacancy rate at the beginning of 2009 is 8.2 percent, up from 7.5 percent a year ago. Lease rates have held steady, averaging $6.39 per square foot across the market, with warehouse and flex space averaging $5.50 and $9.90 per square foot, respectively. Cap rates have risen as much as 2 points since mid-year 2008, though user sales prices have seen a smaller drop of 10 to 15 percent. Net absorption for 2008 totaled nearly 600,000 square feet, though it was negative 43,000 square feet in the fourth quarter. And while new leasing activity is off, absorption for 2009 should hold steady and may well be positive, with several large leases offsetting contractions by other users. New construction and deliveries are also down in the first quarter and projected to be so for the balance of the year, with just more than 500,000 square feet scheduled for delivery in ’09. This restriction of new supply should help to keep rental rates stable.

The average user size in Denver has increased significantly in the last decade; examples are two recent lease deals exceeding 400,000 square feet by Whirlpool and Subaru. While construction has slowed, there is still available capacity to accommodate a number of large deals currently in the market. The Colorado Trade Center, at interstates 25 and 70 near downtown, has more than 400,000 square feet of contiguous space coming available this year and is entertaining interest from several tenants. As those spaces are leased and the economy rebounds, new development is poised to take off, with several large developers banking finished sites in key transportation corridors. Notable among these groups are ProLogis, Lauth and Panatonni, each with projects in the northeast I-70 submarket.

The national economy will certainly impact the Denver industrial market, with most economists predicting improvement by year’s end. The economic staples of energy — both old (oil and gas) and new (green, wind, solar) — and technology will continue to drive the local industrial market. As a result, the industrial sector should see a milder downturn and faster recover than other market segments.

— Tom Myers is a senior broker at Unique Properties LLC/TCN Worldwide.

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