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'Retail's Pain is Industrial's Gain': Insights from a Commercial Real Estate Economist

September 25, 2017

 

 

'Retail's Pain is Industrial's Gain': Insights from a Commercial Real Estate Economist

Shifts in the national retail landscape are changing more than one aspect of commercial real estate, according to a presentation by Kevin Thorpe, chief economist for Chicago-based commercial real estate firm Cushman & Wakefield. Thorpe gave a wide-ranging presentation to an annual gathering of Cushman brokers and associates gathered at the Denver Performing Arts Complex, touching on several larger themes impacting commercial real estate, including the way that a continuing string of retail bankruptcies impacts markets. Turmoil in retail has created a different connection between retail and industrial space, Thorpe said. Rather than being used to temporarily store products before shipping them to retailers, industrial buildings are benefitting from increased demand that results from more consumers relying on e-commerce to buy everything from shoes to groceries. "Retail's pain is industrial's gain," Thorpe said. This is reflected in Denver in the industrial market's 95 percent occupancy rate and continued demand for new space, both speculative and built-to-suit for companies such as Amazon, which is under construction on its newest building, a 2.4 million-square-foot behemoth in Thornton. The completion of that facility, along with other industrial properties in metro Denver, will make about 4 million square feet of industrial space occupied by Amazon. That's not to say, however, that retail real estate in Denver is becoming obsolete. Grocery stores, restaurants, service businesses and fitness centers are all thriving, Thorpe said. Experience-based urban retail is still experiencing strong absorption and bringing in high rents. Suburban retail real estate, on the other hand, is suffering a bit as young people flock toward urban cores, Thorpe said. But, as these younger populations age and start families, they may shift back to the suburbs, bringing business back to the retail there. But, Thorpe said, suburban retail needs to have an urban feel to appeal to those potential consumers. The current national economic cycle was another theme of Thorpe's presentation. He posited that the expansion will become the longest in post-World War II history. Right now, the expansion is the third-longest, but if it lasts until June 2019, it will become the longest. "Expansions don't just die of old age," Thorpe said. Rather, market imbalances and economic triggers can put a stop to growth, and while there are some areas of concern such as the stock market, a spike in oil prices, or a radical change in Federal Reserve policy, Thorpe expects that none of them will touch off a recession before June 2019. Denver's economy strongly correlates to the national economy, he said and he calculates that there is a 90 percent chance the nationwide expansion will continue. One potential stumbling block for Denver, however, is its continued growth. The metro area is at risk of becoming a victim of its own success, Thorpe said. The near-record low unemployment rate of 2.4 percent in metro Denver has already started to create hiring issues, which in turn could slow office demand, and the office market worldwide is already being over-built relative to demand with 700 million square feet under construction around the world, Thorpe said. That unemployment rate indicates that the area is essentially at full employment, so the new jobs being filled are mainly taken by new residents to the area. In 2017, the metro area is projected to create 29,000 net new jobs, compared with 51,000 net new jobs in 2015, according to Thorpe's presentation. Rising home prices are also a problem, as Denver is losing its reputation as a city with opportunities and a good quality of life that is also affordable. Denver has moved up the list of most expensive cities from 38th in 2007 to 10th in 2017, according to the presentation. The metro area can address this by building more homes and apartments, but on the affordable end, rather than luxury product which has become more common here in recent years. But because of increased materials, land and labor prices, even trying to build mid-range homes leads to a more expensive house than 10 years ago. (Denver Business Journal)

 

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Google Pays $138M for New Campus Property in Boulder

Google Inc. has paid nearly $138 million in two transactions toward its new campus in Boulder. The Mountain View, Calif.-based company earlier this month paid $130,944,000 for a 3-acre lot and two buildings at the southwest corner of Pearl and 30th streets, and in January had paid $7,014,000 for an adjacent 1.3-acre lot still to be developed. Google bought the property from Glendale-based Forum Real Estate Group that used the entity Pearl Place Phase I Vertical LLC, which recently was merged with Pearl Place Associates LLC, to make the transaction, according to Boulder County public records. The campus, called Pearl Place, is being built on a 4.3-acre site near the southwest corner of 30th and Pearl streets. It will consist of three, approximately 100,000-square-foot, four-story buildings. The first phase — two buildings — is nearing completion. Cost to develop the second phase — one building on the 1.3-acre site — has yet to be announced. The project enables Google to expand from its present 300 employees in Boulder to as many as 1,500 over the next decade. In 2015, Darren Fisk, founder and chief executive of the Forum Real Estate Group, said the group would lease the buildings to Google. Fisk on Wednesday did not respond to a request for comment, nor did Google Inc. (BizWest)

 

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432-Acre Phillips 66 Property in Louisville is Under Contract; Site Touted for Amazon HQ2

Nearly five years after Phillips 66 Co. pulled the plug on its plans to develop a 432-acre parcel in Louisville into an alternative-energy research center, a California-based company that operates exclusively in Colorado has placed the land under contract. Bancroft Capital agreed to buy the property in June, Doug McDonald, the company's founder, told me. And — referring to Amazon.com Inc.'s hunt for a location for a sprawling second headquarters campus — he said the parcel is "one of a few really dynamic sites in Colorado" suitable for the Amazon complex. A Securities and Exchange Commission filing by Phillips 66 indicates that the sale is expected to close in the first quarter of 2018 at a price of $50 million. The land, along U.S. 36, was prepared for development by Phillips 66, which demolished the buildings that had been on the site in 2009. Storage Technologies, then Sun Microsystems, maintained large facilities there before Phillips 66 bought the land. Bancroft developed the Peloton residential development in Boulder and owns several properties around metro Denver. It has been after the Louisville land since the first round of bidding in 2008 that placed the land under the control of Phillips 66, which spun out of ConocoPhillips in 2011. "I think we were the runner-up to ConocoPhillips," McDonald said. After Phillips 66's plans fell through, Bancroft again picked up its own development plans for the land, beginning in 2013. With the site having been a longtime home of regional headquarters for large companies, the company thought that the parcel's future lay in attracting one or more large corporate tenants, McDonald said. The fact that Amazon's hunt for a site for "Amazon HQ2" was announced three months after the land went under contract is coincidence. But that doesn't mean Bancroft isn't trying to capitalize on the opportunity. "We're working closely with the city of Louisville to prepare materials requested by the Metro Denver Economic Development [Corp.]," McDonald said, referring to the eco-devo agency that will have a key role in bidding on the Amazon complex. "We think this is one of a few really dynamic sites in Colorado that could work for Amazon." According to Amazon's request for proposals, it is looking for a site of at least 100 acres in a North American metro of at least 1 million people with an international airport within 45 miles and a strong university system. "This site meets all the criteria," McDonald said. Amazon wants all bids by Oct. 19, well before the Phillips 66 sale to Bancroft is expected to be complete, but Bancroft is working with a team it had already assembled to work on the site's development to be a part of the bid submitted by the Metro Denver EDC. The years the company has spent planning for the have given it a bit of a head start, but there is still a lot of work to do, McDonald said. And the years of planning can still apply, even if Amazon ends up somewhere else. The land is still well-situated, ready for development and has natural elements that are likely to be attractive to a major corporation, McDonald said. Bancroft was founded in 1992 but has done business in Colorado since 1994. Although it is headquartered in Manhattan Beach, California, all of its properties are located in Colorado. (Denver Business Journal)

 

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CURRENT

1 MONTH PRIOR

1 YEAR PRIOR

FED TARGET RATE

1.25

1.25

.50

3 MONTH LIBOR

1.33

1.32

.87

PRIME RATE

4.25

4.25

3.50

10 YEAR TREASURY

2.26

2.17

1.62

30 YEAR TREASURY

2.80

2.75

2.35