Kimco Realty Market Profile: Denver

Welcome to our first acquisitions strategy discussion. Over the course of this blog series, we will give insight into a number of factors that influence an investor’s thinking when evaluating a shopping center acquisition. In addition, we are going to look at the 31 major metro areas Kimco invests in, and give a snapshot of the economic and social factors of each.

In our Market Profiles, we’ll be providing a combination of data and analysis to help you understand what trends and characteristics are driving retail and retail investment in each market, and whether the market makes sense for you to locate or invest in.

Today’s market: Denver.

First off, you might be wondering why we aren’t starting our series with one of what I call “the Big Six,” or the six most popular markets today (New York metro area, the Washington, D.C.-Baltimore corridor, Boston, San Francisco, Chicago, and Los Angeles). I’ll explain.

If you are going to own retail real estate, you need to be near a lot of people. Investors know the Big Six areas are densely populated, so the real estate tends to be very resilient, even through a recession. There is also a lot of spending power in these markets, so consumption and retail sales are very consistent.

Many investors are willing to pay a little more in the Big Six markets under the theory that they have little or no downside risk. Unfortunately, it’s now created a situation where pricing has gotten so aggressive that the biggest risk is your initial cost. In many instances, pricing is just too high.

We are investing in these areas; however, there are many just-as-competitive suburban markets across the country that offer excellent returns. These markets offer a special opportunity because investors don’t have to compete as much with foreign buyers and larger institutions.

For example, it’s common for foreign investors to market themselves to their clients by telling them that their money is going towards a building in New York City or Washington, D.C. These markets are a little easier to understand when compared to a market like Denver, Phoenix, or Dallas. In our top 25 MSAs, we are more or less free from the foreign dollar driving up prices.

Denver is an excellent example of our acquisition strategy, and that’s why we’re tackling it first in our Market Profile series. For starters, the metro area is well populated, with a total population in the Denver-Aurora-Broomfield Metropolitan Statistical Area (MSA) of 2,554,810, making it the 21st largest MSA in the United States, according to data obtained through SitesUSA.

The Denver MSA has a projected annual population growth of 1.3 percent from 2011 to 2016, higher than the U.S. projected annual population growth of 0.8 percent for the same time period. More people residing in an area results in more shoppers, which drives up demand for quality retail.

The pricing for retail real estate is also more consistent with expectations of the properties’ performances. In major cities like New York and Washington, D.C., buyers from all over the world are fighting over a small amount of available properties. This radically increases the price of an asset, whether it is worth the price or not. We prefer to purchase properties that are correctly priced and will continue to provide strong returns over time.

Demographics in Denver are equally strong. Total household expenditure is approximately $61 billion in the Denver MSA, or approximately $61,000 per household, according to 2011 estimates from data obtained through SitesUSA. U.S. average expenditure per household is approximately $56,000. There are 99,038 businesses in the Denver MSA, employing 1,197,352 people.

The Denver area’s unemployment rate is 7.8 percent, below the national unemployment rate of 9.0 percent for the second quarter in a row. Industry growth — especially in the energy sector — is driving job creation.

Denver is rich in energy resources, including coal, natural gas, and oil. Most of Colorado’s oil production takes place in the Denver and Piceance Basins, according to the U.S. Energy Information Administration. Denver’s energy industry is only growing, evidenced by developments such as the recent formation of the Colorado Cleantech Industry Association.

Village on the Park, Aurora, Colo.

Leasing is also strong in Denver. According to CB Richard Ellis, it has a direct vacancy rate of 7.8 percent, 20 basis points lower than previous quarters. CoStar reports net absorption of 919,101 square feet for third quarter 2011. The Denver retail market area has an average asking rent of $16.20 per square foot.

The recent opening of a 415,000-square-foot, build-to-suit IKEA in the area shows there is confidence in new construction. CB Richard Ellis states that leasing rates have yet to reach a plateau and stabilize in the area.

All these factors combine to make Denver one of our top 25 investment markets. Kimco owns 10 retail properties in the Denver area:

• Village on the Park in Aurora
• Englewood Plaza in Englewood
• West 38th Street Shopping Center in Denver
• Quincy Place Shopping Center in Aurora
• East Bank Shopping Center in Aurora
• Greenwood Village in Greenwood Village
• Heritage West Shopping Center in Lakewood
• Village Center West in Highlands Ranch
• Highlands Ranch Village Center in Highlands Ranch
• Market @ Southpark in Littleton

Village Center West, Highlands Ranch Village Center, and Market @ Southpark were acquired in the last two months.

Major national tenants — such as Whole Foods, Wal-Mart, Dollar General, and Sports Authority — have chosen to expand their presence in the Denver marketplace. Solid, credit-worthy retailers located in a strong market like Denver are well-positioned to provide a stable source of cash flow.

There’s some better pricing when purchasing properties in Denver, whereas in the Big Six markets, everyone is bidding up their pricing to a level that isn’t sustainable. Fortunately, there is a sizeable inventory of 1,392 retail centers (excluding regional malls) to choose from, according to CoStar.

We’re confident our Denver properties will provide excellent returns in the long run, and we’re continuing to seek high-quality neighborhood shopping centers in the area.