Lots of 2018 retail development, but economy may begin to cool

The Denver metro area is still adding — and filling — shopping centers, warehouses and office buildings. But observers say the local economy showed some signs of cooling in 2017, and the commercial real estate market is showing signs of moderation to match.

In a surprise to anyone reading national news stories about the grim future of their local shopping center amid the rise of e-commerce, the retail vacancy rate for metro Denver shrank in the waning months of 2017, landing at 6.4 percent after closing the third quarter of the year at 6.8 percent. That tightening came in a year during which asking lease rates rose, hitting $18.55 per square foot as of Dec. 31 after closing out 2016 at $17.77.

The higher trend in Denver market rents follows a 2016 that ended with vacancy rates at a record low at 5.3 percent, according to international real estate brokerage CBRE. The relatively small amount of fluctuation was part of a trend toward moderation in Denver’s commercial real estate market following years of explosive expansion in the city and its suburbs, CBRE analysts said. That moderation was likely driven by a competitive local labor market that added 31,882 jobs on an average yearto-date basis through November — a 2 percent growth rate — and a gentle decline in the state’s net population growth in 2017, CBRE economists said. CBRE tracked all-industry job growth of 46,950 positions through November 2016, a 3 percent growth rate, year over year.

“Retail is always changing,” Jim Lee, vice president with CBRE Retail Services, said this week. “Especially outside the mall world, the retail sector is strong. There is still demand. Users want to open stores and grocers are trying to expand.”

In total, CBRE said 339,012 more square feet of retail space was occupied at the end of 2017 than at the end of 2016. The year closed with 1.6 million square feet of new space under construction — highlighted by the 330,000square-foot Denver Premium Outlets

project in Thornton. That is the highest total for active retail construction in the Denver metro market since 2009.

While analysts expect the wave of gyms and fitness centers snapping up big box spaces to cool off a bit in the coming year, entertainment concepts, specialty grocers and largeformat discount apparel stores are expected to step in.

“There are a bunch of trampoline concepts that are expanding,” Lee said of the entertainment segment. “Punch Bowl (Social) has opened another store.”

Vacancy rates — and average asking rent — increased among the metro area’s office spaces in 2017, but CBRE analysts say they view those trends as the market striking a balance between supply and demand. Vacancy hit 12.8 percent in the last quarter of the year, up a hair over the 12.1 percent at the end of 2016.

CBRE analysts expect vacancy to continue to rise as 2.1 million square feet of new space hits the market in early 2018, but they also report seeing strong preleasing trends. There is currently 4.5 million square feet of office projects under development in the metro area — including the eye-catching 1144 Fifteenth tower in downtown Denver — and 51.6 percent of it is preleased.

Jenny Knowlton, vice president of CBRE Capital Markets, Institutional Properties, said that strong investment trends in metro-area office space — $2 billion in sales in 2017, a 7.1 percent increase over 2016 — show buyers aren’t concerned about the vacancy rate.

“I think most investors are comfortable with the fact that Denver’s historical vacancy rate is doubledigit,” Knowlton said. “I think (it’s) healthy for the market. I think people expect to see it.”

Completion of some major projects, like the 1 million-square-foot Amazon distribution center in Aurora, contributed to the 5.4 million square feet in new industrial space added to the market in 2017, the highest since 5.5 million square feet opened in 2001, according to CBRE. Industrial growth is being driven by population growth and the rise of ecommerce.

“Denver, from an industrial standpoint, has always been kind of an end point. We’re a really big population with very little population around us,” said Jeremy Ballenger, senior vice president with CBRE Industrial & Logistics. “With the growth of ecommerce, where you’re trying to serve everyone immediately, what that has caused is everyone now has to be here. If you’re going to service Denver quickly, you can’t do it from Dallas or L.A. or Chicago.”