Colorado-Real-Estate-Journal_312861

Page 10 — Retail Properties Quarterly — November 2022 www.crej.com Investors C olorado was the seventh- fastest-growing state from 2018 to 2019 and then moved up to the sixth-fastest- growing state from 2019 to 2020, according to the U.S Census Bureau. However, walking through downtown Denver gives the false impression that retail is plagued with vacancy. One year before the pandemic hit in March 2020, down- town Denver was at an all-time low in terms of multitenant retail vacancies, according to CoStar Ana- lytics. It is now the highest that it has been in the past 10 years. Why would anyone want to invest in an asset type that won’t have ten- ants? Where are all these retailers going? Is everything being shifted to e-commerce? The answer: Retailers are going to the suburbs. Suburban retail has shown signs of growth, profitability, and a strong comeback in this seemingly post-pandemic world that has shifted the way we do things in our daily lives. (For this article, “suburban retail,” or the “suburbs,” refers to all sur- rounding counties of Denver Coun- ty, which are Adams, Arapahoe, Douglas and Jefferson. “Downtown Denver” refers to CoStar’s submar- ket area of Denver’s downtown neighborhood.) A large amount of retail is being shifted to e-commerce and online shopping. According to a 2019 study conducted by Amazon, small and medium-size businesses sell over 4,000 items per minute on its site. Anything can be ordered and deliv- ered to a customer’s door through a couple of taps on a phone, which leaves private capital investors cau- tious of investing in local neigh- borhood retail strips or any retail, for that matter. The prevalent vacancy of retail in downtown Denver doesn’t help that cautious attitude either. The retail market is shifting, but it is not going entirely online. While many may think that retail only consists of buying goods, people have forgotten about its eco- nomic counterpart: services. Ever since the pandemic and the distribution of stimulus checks, consumer spending is at an all-time high due to an increase in Ameri- cans’ average disposable income. According to the U.S. Bureau of Economic Analysis, the average dis- posable income of Americans rose 67% during the first quarter of 2021. That large increase coupled with employees staying indoors for long hours at a time due to remote work has had home-dwellers champ- ing at the bit to get out of the house and spend this new stash of income. That begs the question of what people are spending their money on. The answer: goods and services. In the past year, just over 60% of all of the leases signed in suburban Denver were service-based com- panies, versus 30% that were retail trade-based companies. Between October 2017 and 2018, service- based companies made up only 40% of all leases signed, while retail trade held the majority at roughly 50%. Is service-based retail a fad? The graphs show the top leases by amount of square footage leased from October 2017 to 2018 versus October 2021 to 2022. Judging from the top companies signing leases in 2017 to 2018 ver- sus 2021 to 2022, the answer is no, it is not a fad. Chuze Fitness, a family owned chain of fitness clubs, was the second-largest lessee between 2017 and 2018 and has since moved up to the top of the list of last year’s largest leases by amount of square feet. This category of service-based retail has recently outperformed all others and cannot be bought online. It needs a brick-and-mortar footprint to house its business. The majority of the companies on the list of largest lessees from last year are service-based companies. The need for space to house their busi- nesses shows no signs of slowing. Where does the demand for this space lie? The suburbs. It is cheaper to rent, easier to have large parking lots and generally safer in terms of crime. Below are two graphs that show the current vacancy rates of suburban multitenant retail vs. downtown Denver multitenant retail. Vacancy in downtown Denver is on a sharp rise, while vacancy in suburban Denver is on a steady decline. Two main components of a lucra- tive real estate investment are low vacancy and a high cap rate. Suburban retail has a proven track record for industry growth and low vacancy, but how does its cap rates compare to other popular invest- ment types such as multifamily? In the past year, multitenant suburban retail investment sales have had an average cap rate of 6.2%, per CoStar (multitenant retail between 7,500 sf and 50,000 sf). Multifamily invest- ment sales in the same area have had an average cap rate of 5% (five to 200 units). That 1.2% difference means $36,000 more in net operat- ing income on a building that has a $3 million purchase price. What’s not to love about low vacancy and higher cap rates? The exploding rent growth in Denver regarding apartments, the lack of supply coupled with a high demand for industrial space, and the decimation of the office mar- ket have dominated the real estate landscape as of late, but suburban retail has been largely ignored. Looking at the data, suburban retail is a trend that needs to be on the top of every commercial real estate investor’s mind when considering new investments in Colorado. s KLenz@PinnacleREA.com Suburban retail is the next investment frontier Keith Lenz Associate adviser, Pinnacle Real Estate Advisors Five years ago Past Year Suburban Denver multitenant retail current vacancy Vacancy Rate Downtown Denver multi-tenant retail current vacancy Vacancy Rate

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