Northern Colorado Retail Study: A shift-share analysis 2000 to 2010

Northern Colorado Retail Study: A shift-share analysis 2000 to 2010 Everitt Real Estate Center Steven P Laposa, PhD Christopher Hannum, PhD Economics Candidate Austin Carter, Senior (Real Estate Major) April 2010

Why this study? Step back and look at the regional retail picture City government officials have a fiduciary responsibility to the citizens of their respective local governments and need to maximize natural assets such as land use, through efficient planning and economic development policies. Over 10.5 million square feet of retail has been developed in Boulder, Larimer, and Weld counties since 2000 providing expanded opportunities to geographically-blinded consumers and retail tenants. As consumers spend, so too goes the retail sales taxes to the local government. Thus, it is rational for cities to approve retail development in order to not only meet local demand, but also to collect retail sales taxes. But how much is too much, and is it possible to over saturate a region when cities compete for retail sales tax dollars? The primary research objective of this study is to provide a fresh analysis of NoCo s retail markets for the region s stakeholders. The current economic recession has significantly impacted consumers and retailers over the last two years, and we ve experienced a number of retailers closing their doors due to a host of reasons. The big question is not so much when the recession will be over, but how will we behave, act, and lead based on what we ve learned through this recession. Research objectives and questions This study reviews and analyses the recent history of Northern Colorado s (NoCo) retail market from a regional perspective by applying industry standard shift-share analysis methods Shift-share methods identify significant changes in patterns such as retail sales across time and markets by calculating a geographic entity s share as a percent of a total market. For example, the City of Loveland s retail sales share of NoCo net retail sales has increased from 7.85% in 2 nd quarter 1999 to approximately 10% in 2 nd quarter 2009. But what does it mean if the share is increasing or decreasing, and what are the applications for commercial real estate brokers, developers, investors, and retail tenants? We seek to discover if NoCo s evolving retail markets are a zero-sum game as cities compete for sales tax dollars with new retail development. Are we experiencing a typical economic recession in 2010 and hoping for a typical economic recovery over the next two years, or is it possible that real estate markets are undergoing a structural change that leads to more efficient retail markets? Does the supply of new retail developments change the fair share of submarket, city, or county? If not, what are the unintended consequences such as oversupply leading to lower rents and lower property values? 2

Do we have common ground? When will the top market need more retail? If the top market is in equilibrium with one retail center, what does it take for the same market to eventually evolve into the bottom market with additional retail centers and a variety of retail property types? The standard textbook answer is a combination of increased population, household composition, disposable income, employment, and population density Is it possible to add retail centers to the top market without negatively impacting the single retail center? Does the increase size of the bottom market justify all the new retail centers? If not, what are the consequences? Market today Market in the future Retail center 3

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Retail more inline with forecast GDP growth rates 10 8 6 4 2 0-2 -4-6 Macro history and forecasts Annual growth rates (%) GDP Retail Sales ex Autos Source: Moody s Economy.com (April 2010) Employment Forecasted retail sales are aligning with GDP; the gap between retail and GDP growth rates are less in the forecast period than the high retail sales growth rates leading up to the recession. Employment lagging economic growth in the five-year forecast dampening retail demand; a reminder that retail needs employed people with income U.S. household debt levels are declining and savings rates are likely to hold steady in the 3.5% to 4.5% range. Will consumers in the future change behavior from debt-driven consumption in the past? 4

Billions ($) Capital flows minimal, cap rates undetermined U.S. Non-mall retail closed transactions ($Billions) $16 10.5% $14 $12 $10 $8 $6 $4 $2 Closed Cap rate 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% Cap rates (%) $- 6.0% Q1 01 Q3 01 Q1 02 Q3 02 Q1 03 Q3 03 Q1 04 Q3 04 Q1 05 Q3 05 Q1 06 Q3 06 Q1 07 Q3 07 Q1 Q3 '08 08 Q1 Q3 '09 09 Q1 '10 Source: Real Capital Analytics 5

Are we back to equilibrium, or wishful thinking? Component March 2009 (%) March 2010 (%) YoY Change (bp) SCE barometer 37.3 52.6 15.3 Sales 39.1 57.4 18.3 Occupancy rates 29.7 46.0 16.3 Capitalization rates 32.2 52.9 20.7 Expectations 39.1 54.0 14.9 Source: ICSC, Shopping Center Executive Survey, (note: a reading of 50% means industry conditions were relatively unchanged from the prior period. A reading below 50% means deterioration, while above 50% means an improvement in industry conditions). 6

Methodology, data, and reporting Quarterly retail sales tax receipts Counties and cities (State of Colorado) Monthly retail sales tax receipts Individual cities Recognize bias and limitations in data But, bias is consistent across time, cities, and submarkets City of Loveland changed submarkets in 2009 All data nonseasonally adjusted 7

Reporting results, what s the structure? Regional Boulder, Larimer, and Weld comparisons Individual county levels Cities within each county Cities and submarkets Loveland and Fort Collins Forget boundaries Who s winning or losing share in the region 8

How have we grown since 2000? Population by Counties (U.S. Census, 000s) Boulder Larimer Weld Totals 2000 271.7 253.2 183.0 707.9 2010 306.4 301.7 256.9 865.1 Difference 34.8 48.5 73.9 157.2 Existing Retail Stock (sq ft) by Counties (CoStar) Boulder Larimer Weld Totals 2000 12,973,987 13,367,326 5,968,576 32,309,889 2010 16,650,016 17,372,391 8,871,132 42,893,539 Difference 3,676,029 4,005,065 2,902,556 10,583,650 New stock per capita 106 83 39 67 9

1999.2 1999.4 2000.2 2000.4 2001.2 2001.4 2002.2 2002.4 2003.2 2003.4 2004.2 2004.4 2005.2 2005.4 2006.2 2006.4 2007.2 2007.4 2008.2 2008.4 2009.2 Billions From peak, decline of $576m, rebound of $326m $3.00 $2.50 Quarterly Net Taxable Sales by Counties, 1999Q2 to 2009Q2 WELD LARIMER BOULDER $2.00 $1.50 $1.00 $0.50 $0.00 Source: State of Colorado Department of Revenue, Everitt Real Estate Center 10

1999.2 1999.4 2000.2 2000.4 2001.2 2001.4 2002.2 2002.4 2003.2 2003.4 2004.2 2004.4 2005.2 2005.4 2006.2 2006.4 2007.2 2007.4 2008.2 2008.4 2009.2 % Share of Northern Colorado Counties Weld slight gains while other two sparring 45% 40% Quarterly Share of Regional Net Taxable Sales by Counties, 1999Q2 to 2009Q2 Boulder 35% 30% 25% 20% 15% Larimer Weld Early indications on impact of new retail stock for Larimer County Source: State of Colorado, Everitt Real Estate Center 11

1999.2 1999.4 2000.2 2000.4 2001.2 2001.4 2002.2 2002.4 2003.2 2003.4 2004.2 2004.4 2005.2 2005.4 2006.2 2006.4 2007.2 2007.4 2008.2 2008.4 2009.2 % Share of Northern Colorado Counties Clear shift in retail share in NoCo cities 25% Quarterly Share of Regional Net Taxable Sales in Northern Colorado by Select Cities, 1999Q2 to 2009Q2 Fort Collins 20% Boulder 15% 10% 5% Longmont Loveland Greeley Source: State of Colorado, Everitt Real Estate Center 12

1999 4Q 2000 2Q 2000 4Q 2001 2Q 2001 4Q 2002 2Q 2002 4Q 2003 2Q 2003 4Q 2004 2Q 2004 4Q 2005 2Q 2005 4Q 2006 2Q 2006 4Q 2007 2Q 2007 4Q 2008 2Q 2008 4Q 2009 2Q 2009 4Q QTD Sq Ft (millions) Rising steps of new retail stock post 1999 2.5 2.0 Cumulative net additions to retail stock by city 1999Q4 to 2010YTD Lagging steps, then gradual increases, and then more lagging steps 1.5 1.0 Greeley Fort Collins 0.5 Loveland 0.0 Source: CoStar, Everitt Real Estate Center 13

1999 4Q 2000 2Q 2000 4Q 2001 2Q 2001 4Q 2002 2Q 2002 4Q 2003 2Q 2003 4Q 2004 2Q 2004 4Q 2005 2Q 2005 4Q 2006 2Q 2006 4Q 2007 2Q 2007 4Q 2008 2Q 2008 4Q 2009 2Q 2009 4Q QTD % Share of Total Retail Stock (3 markets) Leading to increasing total stock share for Loveland 55.0% 50.0% Quarterly Share of Retail Total Stock by Select Cities, 1999Q4 to 2010YTD Fort Collins 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% Greeley Loveland Source: CoStar, Everitt Real Estate Center 14

1999.2 1999.4 2000.2 2000.4 2001.2 2001.4 2002.2 2002.4 2003.2 2003.4 2004.2 2004.4 2005.2 2005.4 2006.2 2006.4 2007.2 2007.4 2008.2 2008.4 2009.2 % Share of Boulder County Boulder County Share by City 60% 50% 40% 30% 20% 10% 0% -10% Quarterly Share of Regional Net Taxable Sales by Select Cities, 1999Q2 to 2009Q2 City of Boulder losing share, while emerging markets gain Boulder Longmont Louisville Superior Source: State of Colorado, Everitt Real Estate Center 15

1999.2 1999.4 2000.2 2000.4 2001.2 2001.4 2002.2 2002.4 2003.2 2003.4 2004.2 2004.4 2005.2 2005.4 2006.2 2006.4 2007.2 2007.4 2008.2 2008.4 2009.2 % Share of Larimer County Larimer County Share by City 70% 60% 50% 40% 30% 20% 10% 0% Quarterly Share of Regional Net Taxable Sales by Select Cities, 1999Q2 to 2009Q2 Clear seasonality, Loveland gaining share post-2005 FortCollins Loveland Remainder EstesPark Source: State of Colorado, Everitt Real Estate Center 16

1999.2 1999.4 2000.2 2000.4 2001.2 2001.4 2002.2 2002.4 2003.2 2003.4 2004.2 2004.4 2005.2 2005.4 2006.2 2006.4 2007.2 2007.4 2008.2 2008.4 2009.2 % Share of Weld County Weld County Share by City 70% 60% 50% 40% 30% 20% 10% 0% Quarterly Share of Regional Net Taxable Sales by Select Cities, 1999Q2 to 2009Q2 Similar to Boulder County, large city (Greeley ) slight declines while smaller markets gaining share Greeley Remainder Frederick Evans Source: State of Colorado, Everitt Real Estate Center 17

Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 % Share of Loveland Clear to see impacts of new centers on share 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Monthly Share of Retail Sales Tax Receipts by Select Submarkets Jan 2001 to Feb 2010 North Loveland Orchards Shopping Center Centerra Promenade Shops East Loveland Source: City of Loveland, Everitt Real Estate Center (prior to change in submarket boundaries) 18

Loveland submarket average share 2009 North East Loveland 6.1% Orchards Shopping Center 6.6% Promenade Shops 7.2% Thompson Valley Shopping Center 4.7% Downtown 3.6% South East Loveland 25.9% Centerra 9.0% North West Loveland 13.0% All Other Areas 23.9% Source: City of Loveland, Everitt Real Estate Center (note: change of geographic boundaries) 19

Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 % Share of Fort Collins Harmony corridor gains as Midtown loses 70% 60% 50% 40% 30% 20% 10% 0% Monthly Share of Retail Sales Tax Receipts by Select Submarkets Jan 2001 to Feb 2010 Midtown Corridor CSU Old town & N. College Harmony Source: City of Fort Collins, Everitt Real Estate Center 20

Summary findings New stock in Larimer County past decade Although retail stock increased in Larimer County during the last 10 years, Larimer County s share of retail sales did not significantly increase in the NoCo region Thus, it appears new retail development in Larimer County simply kept up with the increases in Boulder and Weld County over the last 10 years The City of Loveland, however, has increased its retail sales share of Larimer County and the NoCo region, especially post- 2005 Specific developments The opening of the Promenade center at I-25 and Hwy 34 has negatively impacted Fort Collins retail sales share As Harmony corridor increased share in Fort Collins, the Midtown corridor decreased share Although data is limited due to small time series, models estimate that Front Range Village has shifted sales within Fort Collins and has not significantly increased Fort Collins NoCo regional retail sales share 21

Generally, plan on a zero-sum game for now Are we shuffling the deck chairs? For the time being, yes. Our empirical analysis indicates that selective NoCo cities and submarkets are gaining share as others lose share, even accounting for increases in NoCo population and employment since 2000 As consumers strengthen loyalties between existing and newly constructed NoCo retail centers, negatively impacted cities and submarkets may require alternative uses for functionally obsolete retail centers and find a new equilibrium or share during periods of abnormal transitions Keep an eye out for subtle, and maybe not so subtle areas of creative destruction where redevelopment brings new life and creativity to a trade area or submarket We are not on the Titanic! Although retail vacancy rates have recently increased in the region and retail net absorption will likely be slow to moderate over the next few years, the region offers a variety of shopping experiences that support improving economic recovery forecasts Can we learn and implement sound policies? Of course, but will we? Can we find common ground on regional impacts of local government development policies and long-range planning strategies? NoCo is approaching a zero-sum game in 2010 and may remain in this condition until new wedges of economic growth spatially take shape Until then, if one city or submarket wants to gain share, another area will lose share (the essence of a zero-sum game) The unintended consequences of continual zerosum game strategies is increasing vacancy rates, declining rents, increasing cap rates due to higher risk perceptions, and falling property values Back to the basics vs. back to the future Retail most importantly requires people with jobs and disposable income; future health of NoCo retail is highly dependent on those demographic and economic factors; hoping for the good old days is not a strategy! Regardless of size, a retail center is a portfolio of trade area risks and opportunities; diversified tenant mixes within a center gains prominence 22

Appendix material

Impact of Promenade Shops on NoCo share City/Region Trend Starting Share Centerra Significant Fort Collins Negative 24.10% -1.58% Yes Loveland Positive 8.02% 1.02% Yes Windsor Negative 1.35% 0.20% No Greeley Positive 11.70% -1.27% Yes Longmont Positive 9.80% -0.40% Yes Lafayette Positive 1.41% -0.03% No Estes Park None 0.90% 0.02% No Fort Lupton None 0.94% 0.01% No Berthoud Negative 0.33% 0.00% No Larimer Remainder Positive 4.17% -0.19% No Weld Remainder Positive 3.98% -0.31% No Source: Everitt Real Estate Center 24

Impact of Front Range Village on Fort Collins City/Region Trend Starting Centerra Front Range Foothills Fashion Mall Negative 6.16% -1.20% -0.47% Midtown (including Foothills) Negative 45.43% -1.30% -2.09% CSU None 9.79% -0.18% 1.29% Old Town N College Positive 15.74% -2.08% -2.25% East Mulberry Positive 1.64% (-0.14%) -0.59% East Fort Collins Positive 0.59% (+0.19%) 0.39% South Fort Collins Positive 6.87% (+0.08%) -1.11% Southwest Fort Collins (not including FRV) Negative 9.91% 0.51% -0.82% West Fort Collins Positive 0.92% (+0.02%) -0.49% Source: Everitt Real Estate Center 25

Larimer County Regression Source SS df MS Number of obs = 42 -------------+------------------------------ F( 5, 36) = 20.13 Model.002642029 5.000528406 Prob > F = 0.0000 Residual.000944803 36.000026245 R-squared = 0.7366 -------------+------------------------------ Adj R-squared = 0.7000 Total.003586832 41.000087484 Root MSE =.00512 --------------------------------------------------------------------------------------------- Larimer Coef. Std. Err. t P> t [95% Conf. Interval] -------------+------------------------------------------------------------------------------- Time -.0001037.0001212-0.86 0.398 -.0003496.0001422 Q2.0098418.0022393 4.39 0.000.0053002.0143834 Q3.0198274.0022411 8.85 0.000.0152822.0243725 Q4.0085363.0022943 3.72 0.001.0038833.0131893 Centerra -.0049481.0030253-1.64 0.111 -.0110836.0011875 _cons.374977.002319 161.70 0.000.3702738.3796801 ---------------------------------------------------------------------------------------------- 26

Fort Collins Regression Source SS df MS Number of obs = 42 -------------+------------------------------ F( 6, 35) = 67.67 Model.008417518 6.00140292 Prob > F = 0.0000 Residual.000725642 35.000020733 R-squared = 0.9206 -------------+------------------------------ Adj R-squared = 0.9070 Total.00914316 41.000223004 Root MSE =.00455 --------------------------------------------------------------------------------------------------- FortCollins Coef. Std. Err. t P> t [95% Conf. Interval] -------------+------------------------------------------------------------------------------------- Time -.0005975.0001159-5.16 0.000 -.0008328 -.0003622 Q2 -.0054025.0019903-2.71 0.010 -.0094431 -.0013618 Q3 -.0062777.0019923-3.15 0.003 -.0103221 -.0022332 Q4.0049326.0020496 2.41 0.022.0007717.0090934 Centerra -.0150361.0026961-5.58 0.000 -.0205094 -.0095629 FrontRange.0020011.002492 0.80 0.427 -.0030578.00706 _cons.2413025.0021157 114.05 0.000.2370074.2455975 ---------------------------------------------------------------------------------------------------- 27

Loveland Regression Source SS df MS Number of obs = 42 -------------+------------------------------ F( 5, 36) = 51.33 Model.002744184 5.000548837 Prob > F = 0.0000 Residual.00038494 36.000010693 R-squared = 0.8770 -------------+------------------------------ Adj R-squared = 0.8599 Total.003129124 41.00007632 Root MSE =.00327 ---------------------------------------------------------------------------------------------- Loveland Coef. Std. Err. t P> t [95% Conf. Interval] -------------+-------------------------------------------------------------------------------- Time.0002722.0000774 3.52 0.001.0001153.0004292 Q2.0008472.0014294 0.59 0.557 -.0020517.0037461 Q3 -.0019341.0014305-1.35 0.185 -.0048353.000967 Q4.0021022.0014644 1.44 0.160 -.0008678.0050722 Centerra.0102365.001931 5.30 0.000.0063202.0141528 _cons.0802583.0014802 54.22 0.000.0772563.0832603 ----------------------------------------------------------------------------------------------- 28

Sample City of Loveland retail submarkets 29

Sample City of Fort Collins retail submarkets 30

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