The market’s chief supports—good economic health, consumer retail sales, and residential development—greatly weakened in the recent period, are again firming up. The return to robust retailer expansion and the heated development of retail real estate (Denver was a very busy market for development pre-recession), however, are not expected for the foreseeable term. Gradual recovery, rather, is the more likely mode. Indeed, net absorption in the community-neighborhood shopping center market has been erratic; its vacancy rate remains pegged above the national level and its rent growth curve has been essentially flat since late 2010. Vacancy in the power center market, despite recent improvement, remains elevated as well. While backfilling of big-box spaces emptied earlier remains a favorable trend, downsizings and store closings have not ceased.
Developers, meanwhile, have been heavily focused on infill redevelopment projects and on transit-oriented development (TOD) along Denver’s light rail system. Paying close attention along spurs recently completed, as in the suburban southeast, as well as along the new west side line currently under construction, and at the rail hub at the massive Union Station redevelopment project in downtown Denver. Over the longer term, master planned developments in suburban areas also should draw retail attention. For the time being, however, speculative development remains subdued.
Prior to the recession, the market did well in promptly absorbing large volumes of newly built community and neighborhood center space. But even the slowdown in construction that attended (and, indeed, preceded) the economic downturn could not save the market from the effects of steep negative absorption. Thus the vacancy rate skyrocketed—and, with demand remaining weak, did not reach its peak until the first quarter of 2012, when it hit the 12.0% mark for the first time since 1992. However, Reis expects that the decline to 11.7%, that followed in second quarter, was the first step in a new downward trend. While no subsequent change followed in July, a 10-point drop currently is anticipated for the year-end count. Additional declines, albeit at a slow pace, should follow thereafter as recovery proceeds. For the sake of comparison, the second quarter national community-neighborhood sector vacancy rate was 10.8%, down 10 basis points for the quarter.
Vacancy in the local power center market, also elevated by national norms, has shown recent improvement, out-performing the community-neighborhood rate. Reis put second quarter power center vacancy at 7.2%, down 50 basis points for the period, down 70 year-over-year. The second quarter national power center rate was 6.3%, down 10 points for the quarter, down 50 year-over-year. “Vacant big-box spaces,” observes local firm Newmark Knight Frank Frederick Ross (Ross) in its second quarter report on the local market, “are being backfilled by local and regional tenants such as discounters and entertainment.” As noted by this source, additional big-box evacuations remain a possibility (see the Supply and Demand section following). Marcus & Millichap concurs: “Large shopping centers, particularly those in areas hit hardest by the housing bust, such as outlying east and northeast communities, will continue to struggle with vacant big-box space,” states this source in a second quarter report. “Within these areas, any new demand that does emerge is likely to be largely offset by additional closures.”
According to Ross, second quarter vacancy for all retail combined metro wide was 8.77%, down from 8.9% a quarter earlier. This rate includes vacancy at 6.50% in the super-regional product category, up from 6.42%, and vacancy at 12.84% in the sub-regional category.
SUPPLY AND DEMAND
A total of 1.4 million square feet of negative net absorption over the four-year span ending with 2011, including minus 145,000 that year, allowed the community-neighborhood shopping center market little opportunity for recovery, even with the eventual elimination of construction. First quarter 2012 added to the losses with a total of negative 85,000 square feet. The first signs of a turnaround, however, emerged immediately thereafter: Reis put the community-neighborhood second quarter total at positive 139,000 square feet. While a subsequent loss of 15,000 square feet in July lowered the year-to-date total to positive 39,000 square feet, additional positive activity at about 80,000 square feet is expected for the final five months as a genuine recovery trend finally gets underway. No space in this product category, meanwhile, has completed construction since 30,000 square feet delivered in the second quarter of 2010. Just one neighborhood center with 53,761 square feet was under construction per the date of this report.
Where the action is. Indeed, the focus of retail development at present, both planned and underway, is claimed almost exclusively by large-format mixed-use infill redevelopment projects in the city of Denver (or close by) and by mixed-use TOD developments along metro Denver’s expanding light rail network. Here too, though, activity is sluggish; only small volumes of space currently are under construction. Indeed, notes Ross, “[S]peculative development will be minimal in the short term.”
According to this source, “solid growth” in the grocery sector, including the opening of five Walmart Neighborhood Markets (a smaller version of the Walmart format), backfilling previously occupied spaces, is leading the way. In addition, Ross points to the backfilling of big-box spaces by local and regional tenants as “another positive trend.” All the clouds, however, may not have cleared. In the same report this observer warns of recently announced plans by Sears and Best Buy to close additional stores, adding that “the local effect remains a wild card.” To the list of retailers expected to “leave behind major vacancies,” Marcus & Millichap adds Kmart (owned by Sears) and Rancho Liborio. Thus the struggle with empty big-box spaces, particularly in outlying east and northeast areas, has not yet concluded. Elements of uncertainty, accordingly, linger in the market.
Reflecting the general anemia, community-neighborhood shopping center rents have been weak since 2008. While 2010 showed some indications of a turnaround, the negative absorption that returned in 2011 quashed any expectations of strengthening rent growth. Rather, flat growth to minimal gains has been the abiding trend for some two years. At $16.84 psf and $14.69 psf, second quarter 2012 mean asking and effective rents in this sector were up just 0.1% from the quarter before following identical rates of growth in first quarter. July passed with no additional changes. Respective gains for the year as a whole are forecast at 0.4% and 0.5%, minimal improvement from the increases of 0.2% seen by both rates all told in 2011.
Rents in the power center market have done only slightly better. The $24.23 psf mean asking rate for non-anchor power center space for the second quarter was up 1.8% for the period alone but was up only 1.0% year-over-year. “Median asking rents remained unchanged in most submarkets” during the second quarter, Ross reports. Rental concessions remain “elevated” metro wide, reports Marcus & Millichap. This source expects rents in the period ahead to remain “below pre-recession levels.” Performances, however, may vary somewhat by submarket.