COVER STORY, MARCH 2008

ROCKY PATH TO OPPORTUNITY
Activity still abounds in the Rocky Mountain states.
Brian A. Lee

Both Colorado and Utah feature some rugged, difficult terrain, but judging by the development and investment activity in and around Denver and Salt Lake City, real estate players are enjoying the views. Western Real Estate Business recently checked on trail conditions in the Rocky Mountain states.

Colorado

• Retail

Despite the challenges related to the current housing market downturn, Colorado’s retail market remains relatively strong, says Joe David, partner at Greenwood Village, Colorado-based David, Hicks & Lampert Brokerage (DHLB).

“We continue to see new retailers entering the market as well as existing retailers expanding,” he says. “Although new development has somewhat slowed in the outlying growth areas, we are seeing a good deal of development/redevelopment activity in infill locations.”

For instance, Miller Weingarten Realty has multiple redevelopment projects going on in the Denver metro area. When it opens this spring, River Point at Sheridan will include major tenants such as SuperTarget, Costco, JC Penney and Regal Cinema. The result of a dynamic brownfield urban-renewal project adjacent to the South Platte River in the Mile High City’s south metro area, the 135-acre property will consist of an outdoor collection of major retailers, shops, dining and entertainment. Started in September 2006, the redevelopment efforts are a collaboration by Miller Weingarten and the Sheridan Redevelopment Agency.

Miller Weingarten is also redeveloping the old Buckingham Square Mall to create a mixed-use, pedestrian-oriented outdoor retail center called The Gardens on Havana. The result will be a unique integration of uses with an urban garden theme that will foster increased interaction in the Havana District.

Alberta Development Partners’ $132 million Cornerstar will open in fall 2008.

Also in Aurora, Alberta Development Partners is working toward a fall 2008 opening of its $132 million Cornerstar, which will offer 682,118 square feet of retail space.

“Many of today’s leading retailers, including Target, Best Buy, Dick’s Sporting Goods, DSW, Office Depot, Sunflower Market and 24 Hour Fitness, will call this dominant, high-traffic corner in southeast Denver home,” says Alberta Development’s Megan Campbell.

Once complete next year, The Streets at SouthGlenn will be Alberta Development’s flagship project. The $310 million mixed-use property in Centennial, Colorado, will consist of nearly 1 million square feet of retail space, 140,000 square feet of Class A office space and 202 luxury, for-rent apartment homes. Best Buy, Dick’s Sporting Goods, Macy’s Furniture Gallery and Staples will open in the fall, with the remainder of the project — including Whole Foods Market, Barnes & Noble and a 16-screen, high-definition cinema — opening in spring 2009.

“Unlike any other shopping district in Denver, The Streets at SouthGlenn, which is the redevelopment of the former Southglenn Mall, will be centered by a one-city-block-long park called The Commons,” says Campbell.

Elsewhere, 39 new tenants, including American Eagle Outfitters, Rock Bottom and Victoria’s Secret, were announced as part of the formidable retail lineup coming to Forest City Commercial Group’s The Orchard Town Center in Westminster, Colorado. The 983,000-square-foot, pedestrian-friendly lifestyle village being built at the intersection of Interstate 25 and 144th Avenue will have its grand opening in early April.

• Transit-Oriented Developments

David of DHLB points out another burgeoning development trend borne out of Denver’s new transportation system.

“With the completion of our light-rail transit system along the south I-25 corridor, we are also seeing a number of mixed-use, transit-oriented developments (TODs) being built or proposed.”

Joseph Freed & Associates is redeveloping the old Gates Rubber Plant property, located just 2.5 miles south of downtown, into Metropolitan Gardens, which will offer more than 1 million square feet of retail space, 850 apartments, 1,300 for-sale condominiums, two hotels with 150 guest rooms each and approximately 610,000 square feet of office space. Teaming up with Cherokee Denver LLC, Freed & Associates is scheduled to have the first phase of the massive mixed-use project complete by fall 2010.

Scheduled to break ground this year just a half mile north, near Alameda Station, another TOD will feature a five-story residential tower, 15,000 square feet of retail space and four restaurants, according to David. This summer, Westfield Development Company and Bradbury Properties will open the first phase of their 35-acre mixed-use project at Lincoln Station, the most southerly point of Denver’s light-rail corridor. The first phase will feature 27,000 square feet of retail space, 190,000 square feet of office space and 352 residential units, David reports.

• Industrial

NAI Fuller reports that the Denver industrial market continued to outperform national averages in 2007, with nearly 4.5 million square feet of positive net absorption and a vacancy rate that fell from 7.9 to 7.2 percent during the year.

“I think the strong numbers shown by the Denver industrial market in comparison to other national averages is attributed to low vacancy rates, stable rental rates and responsible speculative construction that has resisted over‐supplying the market,” says Alec Rhodes, senior vice president at NAI Fuller.

Last year, the Denver industrial market realized an additional 1.8 million square feet in construction in 42 new buildings, and 2008 looks to continue this strong construction trend with a projected 2.27 million square feet of industrial space expected to hit the market by the year’s end.

“Several large industrial developers are well positioned to break ground on new developments when the time is right,” says Rhodes. “With this being said, it is looking like speculative work will be spilling over to the I‐76 corridor and continue along I‐70.”

In mid-February, ProLogis announced the completion of a 625,000-square-foot distribution center at ProLogis Park 70 in Denver for Furniture Row Companies. The large home-furnishing tenant will use the site as a national distribution center for its Oak Express and Bedroom Expressions stores. Located at the intersection of I-70 and the E-470 toll road, close to Denver International Airport, ProLogis’ park can accommodate up to 2.7 million square feet at full build-out. ProLogis is Denver’s largest developer and operator of distribution facilities, with approximately 7 million square feet of industrial space owned or managed.

• Office

According to NAI Fuller, the Denver office market ended fourth quarter 2007 with a vacancy rate of 13 percent, down 70 basis points from end of first quarter. While down from the rest of the year, the fourth quarter experienced positive office absorption of 240,816 square feet.

“Office fundamentals in Denver remain strong, and it continues to be an attractive market for investors around the country,” says Keith Burden, senior broker associate for NAI Fuller. “In fact, according to PriceWaterhouseCoopers/ULI’s 2008 Emerging Trends in Real Estate Report, Denver is the only non-coastal investment market to watch.”

Denver’s fourth quarter office completions — 22 buildings totaling 411,415 square feet — were up compared to the prior quarter. NAI Fuller reports that there were nearly 3.8 million square feet of office space under construction at the end of fourth quarter 2007.

“With a significant amount of construction in the Denver market and flat, if not decreasing, absorption trends, vacancy rates are poised to increase in 2008,” says Burden, who adds that end-of-year investment sales appear to have sagged significantly. “The capital markets finally appear to be stabilizing and my prediction is that currently low sales volume will begin to rebound in the second quarter of 2008 and through the remainder of the year. However, sales volume will be far off the levels seen in 2006 and 2007 due to stricter underwriting in the capital markets and misaligned property valuations between buyers and sellers.”

Utah

• Retail

Despite the national economic downturn, the Salt Lake City market continues to experience positive retail growth.

“Some retailers have scaled back their expansion plans, but most retailers are continuing their development along the Wasatch Front,” says Steve Tate, retail investment specialist at NAI Utah Commercial Real Estate in Salt Lake City. “Over the next several years, the $1.5 billion downtown redevelopment will increase the Salt Lake retail inventory base by more than 800,000 square feet.” 

A number of significant retail developments are expected to commence construction this year in the market, according to Tate. For example, Station Park, a new lifestyle center breaking ground in Farmington, Utah (a northern suburb of Salt Lake), will boast a dynamic tenant mix of retailers including Cinemark Theatre, Abercrombie & Fitch, Barnes & Noble, NY & Company, Sephora, Victoria’s Secret, Coldwater Creek, Sport Chalet, Best Buy and JC Penney.

Territory Incorporated will break ground this quarter on a more than $40 million, 150,000-square-foot lifestyle retail project in Park City, 20 miles east of Salt Lake City. To be anchored by a 30,000-square-foot Best Buy, the upscale retail development will be part of Newpark, a $350 million, 820,000-square-foot mixed-use development located in Utah’s fastest-growing and highest-earning market. The project is a joint venture between Las Vegas-based Territory Inc. and Newpark Corporation.

“The key impetus for the project was the lack of entitled developable land in the submarket,” says Nick Hannon, vice president of Territory Inc. “It took many years to create this. The project contains several integrated uses, including urban chic bowling, a nature museum, a boutique hotel, townhomes, bike trails integrated throughout the entire valley, restaurants, nightclubs, and a variety of high-end fashion and home-goods stores.”

Scheduled to open in summer 2009, the retail component of Newpark will have a strong mix of entertainment and restaurants in a high-end specialty retail setting with suites ranging from 1,000 to 20,000 square feet. It will feature a pedestrian-friendly Main Street and multiple plazas including a human-scale sun calendar.

• Multifamily

The condo-conversion craze has hit the Wasatch Front, particularly in downtown Salt Lake City and surrounding neighborhoods, according to Greg Ratliff, a senior multifamily investment specialist for NAI Utah Commercial Real Estate in Salt Lake City. The conversions are reducing the apartment inventory in these areas, and new multifamily construction is not keeping pace with demand as developers must contend with both high construction costs and diminishing land availability.

“Currently there are literally no available B and C paper mortgages, thus homebuyers lured to the Wasatch Front for jobs will now find themselves in the rental market,” says Ratliff, who calls it the strongest apartment market in more than 10 years for multifamily owners and managers. “The fundamentally sound economy, robust job growth and low unemployment levels have placed Salt Lake City on many institutional multifamily investors’ radar this year.”

The City Creek Center project downtown, which will feature at least 300 residential units, is one to watch. Potential future development there could boost the number of apartments and condominiums to around 800.

• Office

Class A vacancy in Salt Lake’s central business district (CBD) hit an all -time low, according to Chris Kirk, office specialist for Commerce CRG. “With virtually no new construction completed in the CBD, tenants looking for space had very few options,” he says. “We expect this situation to continue for at least another 2 years when Hamilton Partners’ 222 Main Tower opens downtown.”

More than 1.5 million square feet of new office space came on line last year, more than 70 percent of which has already been absorbed by current tenants expanding their businesses and in-migration of companies new to the state. New construction and healthy absorption is expected to continue through 2008.

“Most new projects, such as Daybreak Office Park in South Jordan and The View at 72 in Midvale City, are located in the suburban market,” says Kirk. “Altogether, the 16 buildings currently under construction will add 1.1 million square feet to the market.”

Kirk adds that green development practices are gaining momentum in the Salt Lake office market, citing the 222 South Main building, the Daybreak Corporate Center and A View at 72 as examples of projects that are anticipating either a silver or gold LEED certification.

• Industrial

Craig Kaminski, industrial specialist for Commerce CRG, reports that the 107 million-square-foot Salt Lake City industrial market had an overall vacancy of 5.73 percent in 2007, with more than 1.8 million square feet of construction currently under way, primarily in big box product divisible into 50,000-square-foot increments.

“Developers with significant product under construction include Freeport West (686,000 square feet), First Industrial (400,000), Buzz Oats (400,000), LNR (250,000) and Hamilton Partners (244,000),” he says. “Salt Lake has traditionally absorbed 4.5 million to 5.5 million square feet (sale and lease) per year, and with continued job growth and in-migration, we anticipate continued steady absorption, with higher yields due to the aforementioned lease and sale price escalations.”

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