Only a handful of developers are pursuing new retail projects in Denver. But those that are building are doing so on a grand scale. Two massive mixed-use projects are under way, as well as a lifestyle center, a Main Street development and a couple of mall makeovers. But the new space shouldn't harm the market's favorable occupancy and rent levels. Since the completion dates for the projects are staggered over the next three years, the market should be able to absorb the space comfortably, say local investment advisers and brokers.
This year, Marcus & Millichap expects 2.3 million square feet of retail space to be completed in Denver. That's 30 percent less than last year.
But that number doesn't tell the whole story. In addition to new construction, properties are trading hands and more tenants are moving into the area. “We have a ton of activity,” says Dean Insalaco, a vice president with CB Richard Ellis. Bass Pro Shop, Sears Grand, Lowe's and Gander Mountain are just a few of the retailers that are busy constructing their first stores in the Denver area, while other big names such as Ikea and Fry's Electronics are scouting the market for potential sites.
The Denver retail market has remained active despite a slumping economy. “We were waiting for the other shoe to drop, and it never did,” Insalaco says. Retail vacancies have fluctuated between 6.5 percent and 7 percent for the past three years, with the vacancy rate resting at 6.7 percent at the end of the first quarter, according to CB Richard Ellis. Part of that stability has been due to sustained consumer spending. “Even though people are more cautious than they were a year or two ago, they're still buying,” says Greg Moran, a vice president at Englewood, Colo.-based Miller Weingarten Realty LLC. That continued spending has fueled the demand for further retail growth.
In addition, the local economy is beginning to show signs of improvement. “We did have job losses, but we now have positive job growth,” Moran says. The Denver metro region is expected to add 25,000 to 30,000 new jobs in 2004. Colorado also had a good 2003-2004 ski season, which helped buoy tourism and, in turn, drive retail spending, he adds. Marcus & Millichap estimates retail sales will rise 3.9 percent for the year.
The retail market in Denver is likely to continue on that even keel. Although several large developments are in the works, many industry observers expect vacancies to decline in the coming year. “With the exception of a few major projects under construction, such as Belmar in Lakewood and Southlands in Aurora, there is not a whole lot currently under construction,” says Gene Pride, a senior associate in the National Retail Group for Marcus & Millichap in Denver. “This is giving the existing centers a chance to fill vacancies and move rents as demand increases.”
As for property transactions, buyers are likely to push prices above 2003's level of $140 per square foot, with the average cap rate remaining above 9 percent, according to Marcus & Millichap research. The firm says properties in the hard-to-enter neighborhoods of Highlands Ranch and Central Denver will get the highest prices. The grocery-anchored sector faces the most risk. The entrance of Wild Oats, Whole Foods, SuperTarget and Super Wal-Mart into the market recently forced Super Valu to close nine of its Cub Foods stores. King Soopers is taking over five of the stores, but a dwindling number of stalwart grocers is still a concern for buyer's considering purchasing grocery-anchored properties.
Growth Markets
Denver's newest redevelopment is Belmar, a 103 acre mixed-use project located in the city of Lakewood. Phase I of the $750 million project opened in mid-May, and includes retailers such as Galyan's, Linens ‘n Things, a 16-screen Century Theatres, DSW Shoe Warehouse, Ann Taylor Loft and Bally Total Fitness. When complete in 2007, Belmar will feature 1 million square feet of retail space, 1 million square feet of office, 1,300 residences, a hotel, four acres of public and open space and 9,700 parking spaces. Denver-based Continuum Partners LLC redeveloped the failed Villa Italia mall site to create the new mixed-use district.
“There are a lot of projects on the drawing board right now,” Moran agrees. Most of the activity is driven by power centers and lifestyle-oriented retail projects, as well as the expansion of large discounters such as Target and Wal-Mart. Miller Weingarten is currently building Glenwood Meadows in Glenwood Springs. Target and Lowe's anchor the 405,000-square-foot power center. The project is set to open in October 2005.
Denver's two hot pockets for development include the city of Aurora in the southeast metro region and the northern Front Range along the I-25 corridor. Employment is expected to grow the most in these areas as venture capital spending continues to rise in 2004.
The mixed-use project Southlands is the largest development in the quadrant. It sits on 300 acres at E-470 and Smoky Hill Road, and will feature roughly 1.5 million square feet of retail, 280,000 square feet of office space and 1,100 multifamily residential units. Alberta Development Partners based in Englewood, Colo. is building the $250 million project in three phases with 346,000 square feet of retail opening this fall, 500,000 square feet of value retail and restaurants opening in spring 2005 and a 493,000-square-foot town center with restaurants, retail, a movie theater and health-care facilities set for completion in the summer of 2006. Tenants include Super Wal-Mart, Sam's Club, Barnes & Noble and Kohl's, as well as restaurants such as Ted's Montana Grill, Smokey Bones and Red Lobster.
Another Aurora development is Saddle Rock Village, a 750,000-square-foot joint venture between Cleveland-based Forest City Enterprises Inc. and Los Angeles-based JCI Development Corp. The 85 acre retail development is located at Gartrell Road and E-470. A 176,000-square-foot Super Target will anchor Phase I along with about 30 other retailers. Grading and site construction are currently under way, and completion of Phase 1 is scheduled for March 2005.
Heading North
To the north of downtown, several projects are under way or planned along the I-25 corridor in anticipation of explosive residential growth. One new development in Loveland is The Shops at Centerra, a 670,000-square-foot lifestyle center being built by Poag & McEwen Lifestyle Centers LLC. Centerra marks the Memphis, Tenn.-based company's third lifestyle center development in the region. The firm opened Aspen Grove, near Littleton, Colo., in 2001 and Shops at Briargate in Colorado Springs in 2003. “The retailers that typically go into our centers were looking to penetrate the Northern Colorado market,” says Terry McEwen, president of Poag & McEwen.
The region is desirable because of its growing population and attractive demographics. Weld and Larimer counties are home to a population of about 500,000, with average annual household incomes of $70,000, McEwen notes. “It is one of the most underserved markets in the country for better quality retail considering the demographic profile of the market,” says McEwen. Centerra will open in October 2005 with tenants such as Foley's, Galyan's, a Metrolux theater, Barnes & Noble, Coldwater Creek, Victoria's Secret and P.F. Chang's among others.
In nearby Westminster, a 1 million-square-foot open-air retail and entertainment center is under way on a 200 acre site at I-44 and I-25. Developer Forest City recently signed Kansas City, Mo.-based AMC Theatres as an anchor with a 12-screen movie theater. The project's first phase, including the theater, is scheduled to open in 2006. Forest City also has started work on Phase II of the retail space at its Stapleton redevelopment. Northfield at Stapleton calls for 1.2 million square feet of retail with major anchors, specialty shops, restaurants, discount retailers and entertainment. Tenants will include Bass Pro Outdoor World and an 18-screen Harkins Theatre megaplex.
Forest City is converting the former Stapleton airport in Denver to a 4,700 acre residential, office and retail project with parks and other amenities over the next two decades. “Denver is a core market for us. Once we got involved [with Stapleton], we anticipated the projects would follow, and Saddle Rock Village and Westminster are those other projects,” says Colm Macken, senior vice president for Forest City.
On the east side of I-25 in Thornton, Jordan Perlmutter & Co. is planning to begin construction on its 2 million-square-foot Lark Ridge Mall by the end of the year. No anchor tenants have yet been announced, but the project will likely face tough competition from Palisades Park, a 2.5 million-square-foot hybrid shopping center being built in Broomfield on the west side of I-25.
How the opening of new retail will redistribute local shoppers' patterns remains to be seen, though the downside will likely be minimal since most of the new space is pre-leased to regional and national tenants, according to Marcus & Millichap. Owners should begin to boost asking rents soon, after the anticipated employment boom triggers higher retail sales later in the year.
Market Profile/ Denver
DEMOGRAPHIC OVERVIEW
- Population: 2.248 million
- Median Household Income: $51,191
- Unemployment Rate: 5.2%
- Median Home Price: $275,000
Source: economy.com
MARKET OVERVIEW
- Average Retail Rent: $17.40 (+1.8%)
- Vacancy Rate: 7%
- Median Price Multi-Tenant Space: $118 per sq. ft.
- Median Price Single-Tenant Space: $169 per sq. ft.
Source: Marcus & Millichap, Q1 2004
RECENT SALES HIGHLIGHTS
$156 per sq. ft.
Tenant in common group buys Arapahoe Marketplace for $30 million.
$128.47 per sq. ft.
Developers Diversified Realty buys FlatIron Marketplace for $55.5 million
$143 per sq. ft.
TGS Harvard North American REIT buys Prime Outlets at Castle Rock for $68 million.
$112 per sq. ft.
A&B Properties Inc. buys Broadlands Marketplace for $11 million.
$90 per sq. ft.
P.O'B. Montgomery & Co. buys Bear Valley Mall for $30.8 million.
Source: CoStar Group Inc.