1st Qtr. 2021 Retail Report

The retail market is arguably the hardest-hit asset class of the pandemic-induced downturn. Denver has historically relied on tourists, commuters, and business travelers to drive brick-and-mortar retail demand in the downtown area. These drivers have all but disappeared as the ongoing pandemic necessitates social distancing and store closures, while e-commerce continues to cut
into a larger share of total retail sales.

Leasing activity slowed in the last 12 months. At the same time, dozens of national retailers have filed for bankruptcy, and stable retailers have even announced store closures. Denver’s retail market recorded three consecutive quarters of negative net absorption in 2020, the longest stretch on record, and absorption remains in negative territory at the start of 2021. Smaller
businesses, including restaurants and bars, are driving most of the negative absorption.

Vacancy has risen steadily in the past two years as retailers struggle to compete with e-commerce and new supply has outpaced demand. The pandemic has accelerated this trend with an even greater share of the population relying on online shopping, and vacancy is expected to continue rising in the near term, as many retailers will likely be forced to close their doors or hold
back on leasing additional space.

Going forward, supply will likely become less of an issue than it was in the past decade. With so much weakness in retail at this stage of the cycle, construction starts are at their lowest point since the Great Recession, and deliveries are projected to be minimal in the coming years.

The combination of negative absorption and rising vacancies led to stagnant rent growth in the last 12 months. Gains were slowing before the pandemic, but many local and national tenants are now struggling to meet their obligations. Lease concessions have become popular as landlords attempt to hold the line on asking rents.

Investors and lenders are taking a more cautious approach in what has become one of the riskiest asset classes in commercial real estate. Sales in 2020 totaled nearly $1 billion, a 25% decrease from 2019.

Source: CoStar

2021-03-16 Retail