Jul 9, 2019

Denver’s Population Growth’s Effect on Retail Properties and its Relation to the Multifamily Market

By Tom Ethington

While making my daily five mile commute from my house in LoHi to my office in the Baker District, there are two things that I always notice: traffic and construction.  It’s not hard to spot cranes all over town, and Denver’s population growth is evident as soon as you get in your car. It’s no secret that Denver has bounced back quickly from the Great Recession, and population growth has been a huge factor in the recovery. While Denver’s multifamily market has been the talk of the town, retail property investors may be excited at their prospects when evaluating the growth in multifamily.

We believe that the multifamily market may be a good leading indicator for where the retail market is headed for several reasons, but we’ll focus on two here. The most important is population growth because retailers need to have customers in order to pay rent to landlords. Since a lot of people moving to Denver are initially renters, we expect the rental market to be a better indicator for growth trends than the residential sale market. The other factor is multifamily rental rates because, to a certain extent, they are a reflection of the health of the job market since new residents need to be employed to pay rent. While Denver’s multifamily rental growth has been astounding, it may be slowing down. Retailers (and retail landlords) should welcome that because, absent a market correction, retailers and retail landlords can be the beneficiaries of a slowing multifamily market. Consumer confidence is crucial to the health of the retail market. If multifamily renters believe that rents will only continue to go up, they will be afraid to spend money since they will want to save money to ensure that they can continue to live in Denver. While Denver’s job growth has been strong, wages have certainly not kept up with multifamily rents (which is likely a renter’s largest expense). Along the same lines, a consumer’s disposable income is crucial to retailers. If a renter is committed to living in Denver at all costs, then they may forego other expenditures (e.g. dining out, retail purchases, etc.) to stay in Denver. When multifamily renters can more accurately predict their expenses (i.e. they don’t have to assume that their rent is going up 10% every year), they are more likely to go out and shop without worrying if what was disposable today should’ve really been saved for tomorrow.

Multifamily landlords have the luxury of being able to quickly adjust lease rates to the market because leases are usually 12 months or fewer and don’t involve complicated tenant improvement allowances, leasing commissions, lengthy marketing times, and other factors that are a part of life as a retail landlord. Retail landlords, on the other hand, typically sign long-term (sometimes 20+ years) leases with a lot of moving parts, which helps to explain some of the disparity between rental growth between retail and multifamily properties. Further, it is much harder to lease a retail property in a bad market because retailers may completely halt their expansion plans, even if rental rates plummet. A multifamily developer is much better-equipped to make a deal work in a bad market than a retail developer, particularly when rents need to be at a certain (possibly unattainable) rate for the deal to pencil and/or satisfy a lender requirement. Right before the Great Recession, a lot of retail developers became overly aggressive and forgot the adage “retail follows rooftops” when they built large developments in areas that were sparsely populated. Retail developers (and retailers) are a lot more picky about site selection now and are focused on infill areas that are already dense and are either stabilized or undergoing changes (e.g. gentrification). Sprouts Farmers Market is a good example because all of their new locations have been in urban infill areas. In addition, Denver is seeing a flood of retailers from outside of Colorado plant flags here. We believe they are attracted to our growing population and, in some cases, following loyal customers who have moved here from other states. For example, if you moved here from Texas (like many transplants), you’ve probably known about Torchy’s Tacos for years. The daily lines out the door are a testament to their loyal customers, many of whom probably enjoyed Torchy’s for years before they opened in Denver.

A lot of retail tenants took advantage of the Great Recession to negotiate concessions that they’re still benefiting from. We believe that those remaining concessions will provide upside to retail landlords in the future as those leases burn off. In those situations, landlords will have the upper hand in lease negotiations and will be able to substantially increase rents, which is a situation that appears to be occurring now. Further, new projects are commanding rents as high as $50/SF, which raises the bar for everyone. Just as many thought that multifamily rents couldn’t get any higher in 2014 (and were wrong), we believe that there is a long runway for retail rent growth for the next three years. Investors who are able to acquire retail properties with low rents will be in a good position to capitalize on the coming retail growth cycle.

Close

Enter Your Information To Request The Offering Memorandum

Industry Role
Close

We are ready to assist you.

Please fill out the form and we will be in touch shortly.

By providing a telephone number and submitting the form you are consenting to be contacted by SMS text message. If you wish to initiate inbound SMS text messages, please contact your individual broker for their direct number. Message and data rates may apply. Reply STOP to opt out of further messaging. Blue West Capital, LLC may use text messaging for client communications only and does not use text messaging for marketing or promotional matters. Please see Privacy Policy for further information.

Contact Information

400 S. Colorado Blvd | Suite 590
Denver, CO 80246

info@BlueWestCapital.com

720-989-1031