Can Colo. retail withstand market slowdown? INSIDE While retail real estate transactions have slowed, they are not gone Market update Value engineering can help new restaurant projects succeed Stay on trend PAGE 16 Designing to ensure your block is the one people want to visit Public realm PAGE 12 November 2022 PAGE 4-8 T he retail market has enjoyed a revival in the wake of the coronavirus pandemic, espe- cially in states like Colorado, which continue to attract an influx of young residents. Colora- do’s net asking rent for retail space was reported at an all-time high of $18.82 per square foot as of the third quarter, up from $18.06 per sf in 2021, according to CBRE Econo- metric Advisors. The delinquency rate for U.S. retail properties secu- ritized in commercial mortgage- backed securities transactions fell to 6.6% as of September from 9.5% the year prior and nearly 15% in September 2020. However, this period of growth may be nearing an end as the economy slows. Cap rates are inch- ing up. After fall- ing to a low in the first quarter, Green Street is project- ing cap rates will rise across all Denver retail types in the fourth quar- ter. This mirrors a national real estate slowdown, caused by rising interest rates, inflation and market uncertainty. Overall, we believe Colorado retail, especially small-format stores and shopping centers, are well posi- tioned to withstand a slowdown. After years of retail bankruptcies, store closures and dying malls, retail investment has shifted to new property types and locations, which has largely been a winning strategy. Still, underperforming retail contin- ues to falter, and clear winners and losers are emerging. Below we dis- cuss which real estate investments are likely to withstand a slowdown and the properties that could face heightened challenges. n CMBS slowdown. The CMBS market has slowed substantially in 2022, largely due to market turbu- lence. So far in 2022, $66.6 billion of U.S. private label CMBS has been issued year to date, a steep decrease from $87.8 billion the year prior, per Commercial Mortgage Alert. Retail exposure in CMBS has also dipped in 2022, with retail now represent- ing only 17.5% of the property type exposure in 2022 conduit transac- tions, the lowest it’s been in 10 years, apart from 2020. No Colorado retail property has been securitized to date in a CMBS transaction in 2022, compared with four loans totaling $67.8 million in Please see Market Update, Page 22 Sarah Helwig Vice president, Morningstar Credit Information & Analytics Scott Van Daalen on Unsplash The rise of direct-to-consumer brands like eyeglass store Warby Parker has also led to increased demand for smaller spaces.