Cautious Optimism Reigns in NoCo Retail Market

NAI Affinity
• 
February 22, 2023
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CREJ - Retail Properties Quarterly - February 2023

Nationwide, we continue to see increasing headwinds for the macro economy and U.S. commercial real estate, such as inflation, rising interest rates, and concerns about the severity of a potential recession, which leave us cautious to begin 2023. However, the retail sector, on average, throughout the United States has remained strong as consumers continue to spend at a healthy rate.

Throughout the nation, development activity in large speculative retail spaces has decreased, and we are seeing mostly smaller-scale, end-user-driven development. There are examples of plans for malls to be redeveloped for a mix of uses such as apartments, warehouses, and self-storage. A reason for the growing vacancy rates in traditional malls is the continued growth of e-commerce, which is causing tenants to deploy new strategies with an eye to decreasing operating costs by having smaller footprints. In some instances, we are even seeing larger chains (such as Macy’s) allow smaller specialty retailers (such as Claire’s) to have a branded area within their stores. However, in small to midsize retail centers and freestanding spaces, vacancies have reached pre-pandemic levels due to increasing demand for discount stores, “medtail,” quick-serve restaurants, and fitness concepts.

On average across the U.S., the vacancy rate for the retail market is 4.2%, with rent growth at 3.9% year over year. The average triple net asking price is currently $24 per square foot in the United States, which is a record high, according to CoStar. Many are cautiously optimistic about the retail market heading into 2023. Due to continued demand and limited new supply anticipated to be delivered in the next year, vacancies should remain at a healthy rate.

In taking a more in-depth look at the retail market in Northern Colorado (Larimer and Weld counties), these markets tended to, in large part, fare in line with or slightly better than the national average. As seen nationwide, Larimer County also has encountered a robust increase in consumer spending post-pandemic. This increase in spending is likely due to the increase in savings people built up from staying home because of restrictions, additional funds provided by the government throughout the pandemic, median incomes rapidly increasing above past levels, and pent-up consumer demand due to COVID-19 quarantines in Larimer County. Vacancies in the Larimer County retail market have dropped below the national average and are sitting at 3.8%, according to CoStar. Within Larimer County, Johnstown is seeing one of the fastest rates of population growth in the state. With this increasing population comes the demand for more retail services.

We currently list two master-planned communities, The Ridge and Encore, in Johnstown. Both projects will bring a mix of residential, retail, and industrial uses to the area. In the last year, there have been about 54,000 sf of new retail space delivered in Larimer County. There is continued sales activity in the market to private investors, but we have also seen institutional investors enter the market over the past year. The average retail cap rate in Larimer County was 5.5%, and the average sale price per square foot was $216. With very limited new supply under construction, and assuming tenant demand remains relatively strong, we anticipate the overall retail market will also remain relatively strong in Larimer County.

Weld County’s retail market has encountered struggles, as with most retail markets,  with the changing consumer habits and the increase in the importance of convenience, but a handful of long-vacant spaces have been occupied, which has contributed to the betterment of the retail market. The southwestern areas of Weld County have seen an uptick in growth in the last few years. Areas like Erie,  Firestone, Fredrick, Dacono, etc., are craving retail to support their new residents. NAI Affinity currently has a 9.28-acre mixed-use site available in Firestone and fronting Firestone Boulevard which is a great opportunity for retail development as the number of rooftops and residents in the area continues to rise.

Weld County is facing a huge pipeline of approximately 830,000 sf, according to CoStar. The vast majority of this new space will be delivered at Carson Development’s grocery-anchored Ledge Rock Center, which is under construction at the southeast corner of Interstate 25 and Highway 60 in Johnstown. There was just under 80,000 sf of new retail space delivered in the last year. During that same time period, there was an impressive approximately 110,000 sf of absorption. Due to this strong demand outpacing new supply,  rent growth has surpassed the national average and is sitting at 4.2% year over year, and Weld County is seeing a retail vacancy rate of just 3.3%. Even with the headwinds, Weld County continues to see sales  transact with an average sale price of $260 per square foot and an average cap rate of 5.4%

Though 2023  is kicking off with continued economic uncertainty, we are cautiously optimistic that the retail market in  Larimer and Weld counties will remain steady due to the increased population growth, demand for convenience retail, and limited supply in the pipeline (at least in Larimer County).

"Cautious Optimism Reigns in NoCo Retail Market", written by: Ryan Schaefer, CEO, Lauren Larsen, Advisor, and Jake Hallauer, CCIM, President, NAI Affinity

Source: CREJ - Retail Property Quarterly - February 2023

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