Demand for retail space has pulled back in recent months across the Denver market. Retailers have a multitude of headwinds to contend with, including persistent high inflation, rising consumer debt, and a high interest rate environment that continues to weigh on consumer purchasing power. Store closings that were announced earlier in the year drove negative net absorption in the second quarter for the first time in two years.
Still, today’s retail market remains in a position of strength. While the vacancy rate ticked up slightly from the previous quarter, it is still trending near its lowest level in a decade at 4.0%. New leasing activity has remained in line with the long-term average for the past eight quarters, indicating that retail space remains in demand despite a handful of recent move-outs.
At the same time, Denver’s construction pipeline remains subdued, and the projects that do move forward overwhelmingly consist of freestanding build-to-suits. Only 6% of the current construction pipeline is
speculative. Denver’s multifamily construction boom is driving the demolition of obsolete retail product across the metro, particularly in dense areas where high land prices justify redevelopment. Retail inventory has grown at the slowest pace of all major asset types in Denver, helping to restore balance in the market.
Annual rents are up by just0.9%, under performing the national benchmark of 3.5% growth. While this runs counter to the tight fundamentals that should support robust rent growth, a large concentration of the space that is available is either obsolete or stale space, limiting landlord’s potential to push rates. Downtown continues to struggle with vacant storefronts and rents have contracted in the submarket, dragging down market level performance. Suburban areas, particularly in North and East Denver, continue to outperform. However, even these areas fall short of the national annual rent average.
Investment activity has slowed since the beginning of 2022. With interest rates projected to remain high, this trend is expected to continue through 2023 as the challenging investment market continues to sideline a growing number of investors.
VIEW FULL REPORT – Retail Market Report