R E T A I L

DENVER INVESTMENT SALES TEAM2018 UPDATE RETAIL REPORT

PRODUCED BY:

AARON D. JOHNSONManaging DirectorInvestment Sales & Acquisitions303 813 6434aaron.johnson@cushwake.com

JON D. HENDRICKSONManaging DirectorInvestment Sales & Acquisitions303 813 6430jon.hendrickson@cushwake.com

The US economy continues to flourish as we hit the midway point of 2018. In May 2018, the economy added 223,000 jobs and the unemployment rate fell to 3.8%, an 18-year low. 31,000 of those jobs were within the retail sector. Job growth and low unemployment are pushing up wages and income. The healthy job market is boosting confidence and spending. The Conference Board’s Consumer Confidence Index increased 2.4 points in May to 128.0, its highest level since 2000. Confident consumers who are also seeing their paychecks increase are spending more. In April 2018, personal income rose 0.3%, in line with economists’ expectations which resulted in increased consumer spending. Consumer spending increased 0.6%, the largest increase in five months. Total retail sales for Q1 came in at $1.5 trillion, 8.4% of which was online. These strong economic fundamentals and consumer metrics bode well for the retail sector.

US UNEMPLOYMENT 3.8% (LOWEST SINCE APRIL, 2000)

CONSUMER SPENDING

0.6%

JOBS ADDED

223,000

CONSUMER CONFIDENCE

2.4 POINTS

PERSONAL INCOME

0.3% Economy

Denver MetroThe Denver economy has continued its strong run as well. US News ranked Colorado as the best economy in the nation, taking into account the state’s growth, employment figures, and business environment. Consumer spending across Denver has continued to grow at one of the fastest paces in the country. This is exemplified by the retail sales tax chart to the left. On average, retail sales tax has grown by about 7% annually, since 2009.

Retail Vacancy (excluding malls and outlet centers) is down to 6.8% across the Denver metro area. Flat quarter-over-quarter, down 20 basis points (bps) year-over-year. Average rental rates have been increasing steadily, up to $16.97 (NNN). This is a 1.2% increase over the 4th quarter of 2017 and a 7.7% increase over the 1st quarter of 2017.

SEVEN COUNTY METRO RETAIL SALES TAX COLLECTION

VACANCY & AVERAGE ASKING RATE (NNN) TREND

$100,000,000

$200,000,000

$300,000,000

$400,000,000

$500,000,000

$600,000,000

$700,000,000

$800,000,000

$900,000,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

$14

$14

$15

$15

$16

$16

$17

$17

$18

6.2%

6.4%

6.6%

6.8%

7.0%

7.2%

7.4%

7.6%

7.8%

8.0%

8.2%

2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1

Total Vacancy Average Asking Rent (NNN)

*FORECASTED

Investment Overview

Hendrickson Johnson Recent Transactions:

Overall, Denver’s investment sales volume across all sectors was up in the first quarter of the year: totaling $2.7 billion in Q1 2018 (compared to $2.2 billion in Q1 2017). We anticipate the capital markets business will remain strong throughout Denver and across all sectors. Multi-tenant retail investment sales accounted for $304,000,000 of the total. The most notable sale was the Southlands, Colorado’s largest retail center. The nearly 1-million square-foot mixed-use property sold for $141.99 million.

Multi-tenant retail cap rates in the first quarter ranged from 5.5% to 8.1%. Single-tenant transactions ranged from 4.6% to 8.7%, further demonstrating the vast disparity in cap rates we’ve seen during this market cycle. We believe investors are more disciplined in the assessment of risk

than in any prior market cycle. We are experiencing buyers scrutinize every aspect of the shopping centers brought to market. Characteristics including location, creditworthiness, demographics, access, visibility, market rental rates, occupancy cost, profitability, retail sector risks, debt implications, and residual value of the land or improvements. Prior to the recession (2004-2007), the generic cap rate range was tighter and closer to 6%-8%. The lessons learned from 2008-2011 included the reality that the best centers, with the most fundamental strengths, will prevail. So while there are a select few record breaking transactions, the market is in balance and the valuations properly reflect the risk profile of the investment.

Shopping Center owners are finding liquidity in the debt

markets.

Centers in secondary and tertiary markets are gaining attention

and pricing strength.

Grocery-anchored centers remain the most in-demand retail property type, amongst

lenders and investors.

People crave the communality of urban environments. In Denver, market and food halls continue to pop up around downtown and the trend has begun to

make it’s way to the suburbs.

Many investors are still pursuing value-add opportunities,

and favor such deals, but the inventory of attractive value-add properties continues to shrink.

There is an abundance of “dry powder” equity and investors see

opportunity in retail. Investors are turning away from soft goods

tenants and are focusing more on restaurants, services,

medical and experiential uses.

REConRecap

L A S V E G A S 2 0 1 8

SALE PRICE: $6,250,000APRIL, 2018

SALE PRICE: $19,700,000MARCH, 2018

SALE PRICE: $12,200,000APRIL, 2018

South Dakota vs. Wayfair RulingOn June 21, 2018, the United States Supreme Court issued a ruling in the case of South Dakota v. Wayfair. The Court ruled in favor of overturning the outdated standard set back in 1992 that prevented states from collecting sales tax for online purchases, if the internet company didn’t have a “physical presence” in the state. The definition of “physical presence” has been controversial for years as Amazon grew its fulfillment network across dozens of states using subsidiaries that did not meet the definition of “physical presence.” The old law created a huge tax loophole for consumers when it came to purchases online and states were losing out on uncollected sales tax revenues. Accounting Today referred to this case as “the tax case of the millennium, and is a critical step in leveling the playing field between brick-and-mortar retailers and online-only sellers.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2015 2016 2017 2018* 2019* 2020*

ONLINE GROCERY MARKET SHARE IN THE U.S.

Although they continue to evolve, grocery-anchored retail centers remain the most in-demand retail property type. Grocery stores must evolve amongst the growing ecommerce movement. Online grocery sales made up 3.8% of all U.S. grocery sales in 2017. The chart below shows anticipated growth over the next few years, projected to grow to 20% of the market, or $100 billion, by 2025. Grocers are beginning to offer a variety of ways to purchase their products, including online with home delivery, curb-side pickup, or in-store pickup. Chains such as Target, Walmart and King Soopers have either partnered or acquired third-party delivery services to achieve same-day delivery service in major markets. We will continue to track the growth of online grocery, but believe that consumers still desire to scour the grocery aisles and see their produce and meats before purchasing, leading to slow growth.

Grocer Corner

*FORECASTED

Governor Hickenlooper signed Senate Bill 243 into law, allowing for the sale of full-strength beer in grocery and convenience stores. The bill is a successor to Senate Bill 197 from 2016, which allowed grocers to add as many as 19 additional locations that were permitted to full-alcohol-sales by 2037. Senate Bill 243 permits full-strength beer sales in all existing grocery and convenience stores no matter how close to a school or liquor store they are, and requires new convenience and grocery stores wishing to sell full-strength beer be at least 500 feet from an existing liquor store. The law will go into effect January 1, 2019.

° Walmart, which had originally been left out of Senate Bill 197 permitting expanded grocery-store alcohol sales will now get the same extra 19 licenses over the next 19 years.

Denver’s Green Roof Initiative, which passed last November, has yet to result in any new green roofs. The city has been confronted with unexpected consequences of the ordinance and is scrambling to build a workable plan to implement the idea approved by voters. The charts below show the required green roof coverage for new buildings under the current requirement, and a newly proposed coverage requirement. The original coverage requirements were disproportionately burdensome to large single-story buildings, such as big-box retail.

Politics In Real Estate

The aforementioned strength of the U.S. economy has also lead to an increase in interest rates over the last six months. The current economic expansion began in June 2009. Nine years later, it is the second-longest on record. All signs point to the expansion continuing on its track, and if we make it to ten years, it will be the longest expansion in U.S. history. As a result of the expansion, the Fed recently increased the federal funds rate to 2.0% in June, 2018. As the economy continues to strengthen, the Fed expects to increase rates two more times this year, and three times in 2019.

The 10-year treasury has been quite volatile since the beginning of the year. The 10-year interest rate begun the year at 2.40%. Thus far, it peaked in May at 3.12%, and has recently hovered around 2.90%. Strong global growth has started pushing interest rates higher. As interest rates begin to rise, some borrowers are taking on less debt to avoid negative leverage on low cap rate deals which is enabled by years of spectacular fundraising and resulting abundance of equity for commercial real estate. Overall, rising interest rates do create some skepticism amongst investors. As exemplified below, we are still in a very low interest rate environment by any historical standard.

Debt

1.00%

3.00%

5.00%

7.00%

9.00%

11.00%

13.00%

15.00%

17.00%

1.25%

1.45%

1.65%

1.85%

2.05%

2.25%

2.45%

2.65%

2.85%

3.05%

3.25%

2018 10-YEAR TREASURY YIELD (THROUGH JUNE 15, 2018)

10-YEAR TREASURY YIELD (1980-CURRENT)

Size of Building(Gross Floor Area)

Required Area.Percent Of Roof SpaceRequired To Be Covered Under Ordinance That Was On The Ballot

25,000 - 49,000 SF 20%

50,000 - 99,000 SF 30%

100,000 - 149,999 SF 40%

150,000 – 199,999 SF 50%

200,000 SF or Greater 60%

New Industrial Building 10%

Size of Building(Gross Floor Area)

Required Area.Percent Of Roof SpaceRequired To Be Covered Under Ordinance That Was On The Ballot

25,000 - 49,000 SF 20%

50,000 - 99,000 SF 30%

100,000 - 149,999 SF 40%

150,000 – 199,999 SF 50%

200,000 SF or Greater 60%

New Industrial Building 10%

R E T A I L

DENVER INVESTMENT SALES TEAM2018 UPDATE RETAIL REPORT

PRODUCED BY:

AARON D. JOHNSONManaging DirectorInvestment Sales & Acquisitions303 813 6434aaron.johnson@cushwake.com

JON D. HENDRICKSONManaging DirectorInvestment Sales & Acquisitions303 813 6430jon.hendrickson@cushwake.com