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Moving Up The Food Chain: Denver's Retail Market Durable In Downturn

Denver's retail real estate landscape faces challenges, much like retail markets across the country, but Denver benefits from some stable fundamentals that give property owners and developers hope as they look ahead, according to panelists at a recent Bisnow event.

Overall, the city’s market is much healthier than the national average because of low supply and high demand for space, primarily driven by population expansion. This is being compounded by high construction prices and interest rates, which are depressing construction activity for new hotels and retail shops. But even though Denver seems to be in a strong position fundamentally, some professionals wonder how long the good days will last.

Langan's Luis Berroteran, Wasatch Peaks Ranch's Vance Bostock, Kroenke Sports & Entertainment's Matt Bell, Hensel Phelps' Derek Hoffine, LS Group's Sarah Erickson and OZ Architecture's Becky Stone

“This may be the first time in my career that retail and hospitality aren’t on the bottom of the food chain,” Sage Hospitality CEO Walter Isenberg said during Bisnow’s Future of Denver Retail, Hospitality and Mixed-Use event at Cherry Creek Shopping Center May 11.

Denver’s retail market showed resilience during the pandemic despite a nationwide boom in e-commerce sales, panelists said. Part of that success was driven by a conscious decision to slow the pace of construction prior to 2020. Data from JLL shows Denver delivered an average of about 3.6M SF of retail space per year between 1976 and 2011. Since 2012, developers in the city have delivered an average of about 1M SF of retail per year. 

That reduction in construction activity correlated with an increase in net absorption. During the first quarter of 2023, Denver retail businesses absorbed more than 342K SF, marking the eighth consecutive quarter of positive net absorption, according to CBRE. 

Denver’s market stands in contrast to the nationwide average, where retail investors have started to pull back because of persistent inflation and other economic challenges, according to JLL’s 2023 retail outlook. Overall, the U.S. retail market recorded 9.1M SF of net absorption during Q1, much less than the 23.4M SF that was recorded in Q1 2022, according to Lee & Associates. 

Navin Dimond, founder and CEO of Stonebridge Cos., said Denver’s market is still in “correction territory” despite its strong fundamentals. However, he added that may soon change as more projects are delivered. 

CBRE found nine projects that delivered more than 197K SF of retail space during Q1, more than double what was delivered during Q4 2022. There is also more than 662K SF of retail space in Denver’s construction pipeline. 

“More supply is certainly on the horizon, but there are still constraints in the capital markets and construction costs,” Dimond said. 

On May 3, the Federal Reserve approved its 10th interest rate hike over the last 14 months. The move brought the central bank’s target range up to 5%-5.25%, the highest since August 2007. 

In announcing the latest increase, Fed Chairman Jerome Powell signaled that the bank may slow its rate hikes, or pause them altogether, going forward. Powell cautioned by saying the bank would need to see weakening consumer demand and labor market conditions before cutting the interest rate hikes would be “appropriate.” 

While higher interest rates make it more costly to borrow money, persistent supply chain pressures have also kept construction material prices elevated. Data from the Federal Reserve Bank of St. Louis shows that construction prices have increased about 6% since December 2022. 

The rising costs are already impacting procurement for projects that are underway, Hensel Phelps Regional Vice President Derrek Hoffine said. For example, Hoffine said it can take up to 100 weeks to receive a switchgear for a building’s electrical system. This can also complicate efforts to make buildings more adaptable for future uses, Hoffine added. 

“We’re trying to make buildings that can evolve, but that’s difficult to do since they’re mostly made of concrete and steel,” Hoffine said. 

The challenges posed by high interest rates and construction prices have forced developers and builders to focus more on collaboration to enhance the end user experience of their buildings. Some examples include adding contactless experiences, sustainable features like carbon offset technology, and focusing on creating a sense of community.

Matt Bell, senior vice president of venue operations at Kroenke Sports & Entertainment, said the company has added more frictionless options like grab-and-go concessions and ticketless check-ins at Ball Arena to accommodate consumer demand for a greater contactless experience. The move also allowed Ball Arena to repurpose an old ticketing booth with more retail options and add a new branded restaurant inside the venue, Bell said. 

Going forward, Denver’s multifamily market could help buoy the retail and hospitality sector as more projects are delivered. During Q1, Denver saw a positive net absorption of more than 1,800 units, according to CBRE. CBRE said that figure represents a “promising indicator” for future market movement given that there was a negative absorption of 252 units in Q4 2022.

Tobias Strohe, partner at JNS Architecture, said Denver’s hot multifamily market gives developers a chance to be creative with their mixed-use projects. For example, Strohe said mixed-use and hospitality projects can capitalize on curating unique and hyperlocal experiences for both residents and guests. 

One example of this philosophy is The Source Hotel and Market Hall in Denver’s River North district. The hotel has mountain views and more than 100 rooms. It also has a retail shop that features local breweries like New Belgium Brewing and restaurants such as the Belotta and The Woods. 

Strohe said having local vendors in the building can make all the difference because hoteliers can create different types of voucher programs to encourage guests to spend more at the property. They can also be used to attract workers to coworking spaces inside hotels as well, he added. 

“If we don’t get the ground floor right, all of our efforts will be for nothing,” Strohe said.