2016 starts with lowest retail vacancy in 18 years

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1 MARKETVIEW Denver Retail, Q starts with lowest retail vacancy in 18 years Vacancy Rate 5.8% Lease Rate $17.32 NNN Net Absorption 353,386 sq. ft. Under Construction 684,971 sq. ft. Completions 322,853 sq. ft. *Arrows indicate change from previous quarter. Figure 1: Vacancy Rate vs Lease Rate Direct Vacancy Rate 10% 9% 8% 7% 6% 5% Direct Asking Lease Rate $19 $17 $15 4% Direct Vacancy 10 year Total Direct Vacancy Direct Asking Lease Rate $13 Average direct vacancy dropped to 5.8% its lowest level since More than 353,000 sq. ft. of positive net absorption occurred in Q1 2016, the highest quarterly total since Q Over 684,000 sq. ft. of new retail space was under construction, concentrated mainly in the Central and Northwest submarkets. The average asking lease rate increased 3.5% year-over-year to $17.32 sq. ft. NNN. Denver s retail market experienced growth in Q with positive net absorption of 353,386 sq. ft. and a 32 basis point (bps) decline in direct vacancy to 5.8% the lowest vacancy rate since The average direct asking lease rate increased for the third straight quarter to $17.32 per sq. ft. triple net (NNN), up 3.5% year-over-year. The Southwest, Aurora and Boulder submarkets were the only submarkets to experience increased vacancy, moving to 5.8%, 6.9% and 3.0%, respectively. Construction activity remained strong with nearly 323,000 sq. ft. delivering in the quarter and almost 685,000 sq. ft. of leasable retail still Q CBRE Research 2016 CBRE, Inc. 1

2 in development at the end of Q Demand persisted for quality inline and mixed-use space among tenants under 10,000 sq. ft. and is expected to be quickly absorbed upon delivery throughout the remainder of the year, as was the case in Q Investment activity was strong at the beginning of 2016, with more than $674.6 million transacting in the quarter. Figure 2: Market Statistics Market Rentable Area Direct Vacancy Net Absorption SF Under Construction SF Avg. Lease Rate-$ SF/YR (Triple Net) Availability Total Vacancy Aurora 6,800, ,051 43,422 $ Boulder 5,263, ,014 12,500 $ Central Denver 7,747, , ,193 $ CO Blvd/Midtown 2,464, ,031 6,000 $ Northeast 9,196, ,252 9, Northwest 13,614, , , South 10,998, ,102 8,500 $ Southeast 9,374, ,641 87, Southwest 6,859, ,463 5,000 $ West Denver 7,874, ,506 63, Denver 80,194, , ,971 $ ECONOMIC/UNEMPLOYMENT 2015 employment growth for the metro region was revised upward to 3.5% with 53,100 jobs added in the year. Job growth in 2015 was therefore only slightly lower than in the previous two years, showing an economy that is still on an upward path, unlike earlier predictions that it had reached its tipping point. Employment growth continued into 2016 with 2.5% more jobs year-to-date in February 2016 than the previous year. Unemployment in Colorado and Denver continues its descent well-below the national average to 3.3% and 3.1%, respectively. The region s retail sector benefits from low interest rates and a strong residential market, which has supported an increase in consumer spending. Existing homes sales increased 2.7% between 2014 and 2015 with the average sales price for single-family homes increasing 11.6% year-overyear. The Mountain Region s Consumer Confidence Index has outperformed the U.S. Consumer Confidence Index since Q4 2014, ending at 97.9 in February Figure 3: Consumer Confidence Feb 2014 May 2014 Aug 2014 Nov 2014 Feb 2015 May 2015 Aug 2015 Nov 2015 Feb 2016 Mountain Region Consumer Confidence Index U.S. Consumer Confidence Index Source: Development Research Partners, Q CBRE Research 2016 CBRE, Inc. 2

3 CONSTRUCTION High demand for quality space across the metro area and vacancy below 6.0% encouraged construction activity. In Q1 2016, nearly 323,000 sq. ft. of retail space delivered, the greatest amount in five quarters. Nearly 685,000 sq. ft. was under construction at the end of Q The majority of development has occurred in neighborhood and community center formats. Mixed-use retail has also experienced increased activity as developers focus on in-fill projects that maximize density. The 88,000 sq. ft. King Soopers in the Northwest submarket was the largest retail project underway in Q Mixed-use construction activity continues to progress in the Central submarket at 1777 Wewatta, Dairy Block, 2800 Walnut and 2450 S. University Blvd. all of which include major ground floor retail components. Q deliveries included the 123,000 sq. ft. King Soopers at Cottonwood Plaza and the 25,000 sq. ft. Specialty Wood Products building in Aurora. Fitness/wellness, grocery and restaurant continue to be the primary drivers for new retail construction market-wide. Figure 4: Construction and Absorption vs Vacancy Million sq. ft. 1.5 Direct Vacancy Rate 10% 1.3 9% 1.0 8% 0.8 7% 0.5 6% 0.3 5% 0.0 4% Under Construction YTD Net Absorption Direct Vacancy VACANCY/AVAILABILITY/ABSORPTION The Denver retail market recorded positive net absorption of 353,386 sq. ft. in Q Fitness, quick serve restaurants, grocery and health/medical centers were the primary drivers of leasing activity. Notable transactions of the quarter included a 14,000-sq. ft. lease by Rite Aid in the Colorado Blvd/Cherry Creek submarket, a 5,800-sq. ft. lease by Blue Agave Grill in the Downtown submarket and Orange Theory Fitness s 3,300-sq. ft. deal in the West submarket which is their 18th store in the metro area. The Aurora submarket contributed over 22% of quarterly activity for the metro area. Direct vacancy decreased to 5.8%, dropping 32 bps quarter-over-quarter and 40 bps year-overyear. The largest vacancy shift occurred in the Northeast submarket, which decreased 100 bps to 5.7% quarter-over-quarter. The Colorado Blvd/Midtown and Southeast submarkets recorded the lowest overall vacancy of 1.8%. Overall availability declined 45 bps quarter-overquarter to 9.2%. Strip/Inline centers had the lowest vacancy by property type metro-wide at 2.3%, 63 bps lower quarter-over-quarter. Figure 5: Absorption vs Lease Rate Million sq. ft Avg. Lease Rate $13 Q1 Q2 Q3 Q4 YTD Net Absorption Direct Asking Lease Rate $17 $15 Q CBRE Research 2016 CBRE, Inc. 3

4 AVERAGE ASKING LEASE RATES The average direct asking lease rate increased to $17.32 per sq. ft. NNN in Q1 2016, up $0.13 per sq. ft. NNN quarter-over-quarter and $0.59 per sq. ft. NNN year-over-year. The 3.5% year-over-year increase in the average asking lease rate represents the scarcity of available quality space amidst ongoing healthy demand. In Q the most notable lease rate change occurred in the South submarket, which had an increase of $1.67 per sq. ft. NNN. The Northeast recorded a decrease of $0.92 per sq. ft. NNN as limited availability of premium space drove down the average lease rate. Both power centers and neighborhood centers observed quarter-overquarter growth in rates, increasing $0.55 per sq. ft. NNN and $0.35 per sq. ft. NNN, respectively. Strip centers experienced a decrease of $0.95 per sq. ft. NNN. Figure 6: Average Asking Leasing Rates $22 $20 $12 Power Center Strip/In-Line Center Neighborhood/Community Center Average Direct Asking Lease Rate INVESTMENT TRENDS Robust investment conditions continued in Q with the sale of 22 properties for a total transaction volume of $674.6 million. The recapitalization of Flatiron Crossing, 29th Street in Boulder and Clayton Lane account for 77% of quarterly transaction volume. Strong demand indicators from retail tenants, increasing rents and sustained liquidity in the capital markets should continue to drive year-over-year growth in the retail investment sector, and at the current pace, investment volume is on track to surpass 2015 levels. Trends to watch for in the coming quarters include deliveries of small scale speculative developments, which add to an influx of for-sale inventory. Buyers and sellers are beginning to gauge the maturing cycle in combination with the wave of looming debt expirations. Figure 7: Investment Trends Sale s Volume (billions) $1.2 $1.0 $0.8 $0.6 $0.4 $0.2 $0.0 Avg Price Per Sq. Ft. $ Sales Volume Billions Avg Price Per Sq. Ft. $250 $200 $150 $100 $50 $0 Q CBRE Research 2016 CBRE, Inc. 4

5 MARKET OUTLOOK Denver s retail sector remains strong, primarily driven by relatively high levels of construction activity, sustained demand for quality product and low vacancy rates. As Q displayed, newly developed leasable space will be quickly absorbed due to the market s supply and demand imbalance. Current retail activity leaders boutique grocers, restaurants, fitness users and medical retailers are expected to continue driving demand throughout 2016 as they seek areas with high levels of density and strong demographic trends. With retail development closely tied to residential housing and population growth trends, areas in ancillary submarkets should experience growth throughout 2016 as deliveries and increased density become more attractive to retailers and investors. Denver s retail fundamentals are expected to continue on a path of steady improvement in U.S. RESEARCH CBRE OFFICES Jessica Ostermick Director of Research and Analysis jessica.ostermick@cbre.com Michael Kane Retail Researcher michael.kane@cbre.com Denver Tech Office 8390 E. Crescent Parkway, Suite 300 Greenwood Village, CO Downtown Denver th Street, Suite 2950 Denver, CO Colorado Springs Office 121 S. Tejon, Suite 201 Colorado Springs, CO Fort Collins Office 3500 JFK Parkway, Suite 310 Fort Collins, CO To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.