Elitch Lanes: Natural Grocers, not apartments

Highlights:

  • Elitch Lanes closing this week.
  • Elitch Lanes has been in Berkeley for more than 60 years.
  • Elitch Lanes is being replaced by a Natural Grocers.

(Editor’s Note: Elitch Lanes last day as a bowling alley is scheduled for this Sunday. To put the sale into perspective in today’s real estate market, I am reprinting an article I wrote for the March 1 edition of the Colorado Real Estate Journal).

 

By John Rebchook

Elitch Lanes has been a Denver icon for 63 years.

Elitch Lanes has been a Denver icon for 63 years.

Littleton Capital Partners recently sold the Elitch Lanes bowling alley site in an increasingly popular northwest Denver neighborhood to a developer that will build a Natural Grocers on the 1.2-acre site at West 38th Avenue and Tennyson Street.

While many residents in the Berkeley neighborhood and the nearby West Highland neighborhood are sorry to see one of the last family-operated bowling alleys in Denver leave, a Natural Grocers did not usher in the protests and objections that are now commonplace for apartment developments.

In fact, some real estate observers were surprised that the relatively large site infill site was sold to a Realtor, and not a multifamily developer.

Some even believe that this may be one of the first signs that the frenzied apartment construction pace will begin to slow in Denver.

Others, including Jonathan Bush, the founder and managing partner of Littleton Capital, cautions not to read too much into one transaction as far as signaling a bigger trend.

Still, no one disagrees that the site is one of the largest in the area.

Although there are smaller sites available in the market, there are few opportunities to acquire a development greater than one acre,” according to Littleton Capital’s website on the land that it purchased in March 2009.

The site is not only relatively large, but it is zoned U-MS-5, which would have allowed a five-story building to be constructed on it.

The buyer, Equity Ventures Commercial Development, paid $87.22 per square foot for the land. Equity Ventures will build the Natural Grocers store on the parcel.
By contrast, Allied Residential paid about $156 per sf for three, nearby sites near West 32nd Avenue and Lowell Boulevard, where it is constructing three luxury apartment buildings.

Also, last year, Richman Ascension Hilo LLC, paid almost $149 per sf for a parcel at West 28th Avenue and Wyandot and Vallejo streets, for a new apartment community, which is just a few minutes drive from West 38th Avenue and Tennyson Street.

Given those comparables, and others, John Winslow, owner of Winslow Property Consultants, was surprised that Littleton Capital did not sell to a multifamily developer, as apartment developers typically pay more for land than retail users.

The sale to a retail developer instead of a multifamily developer, could be one of the first signs in Denver that the “apartment construction is nearing the tail end of the apartment building frenzy,” according to Winslow.

There is no denying that Denver is in the midst of an apartment building boom.

At the end of last year, there were 20,477 apartment units under construction in the Denver area, and 20,060 apartment units in the pipeline, reported appraiser Cary Bruteig, principal of Apartment Appraisal Consultants.

Of those units under construction, 3,592, o4 17.5 percent of them were in and around downtown (including Berkeley and West Highland neighborhoods), according to Bruteig’s research.

And of those on the drawing board, 5,059, or 25.2 percent of them, are in downtown and surrounding neighborhoods.

Winslow said a Natural Grocers, and not an apartment building, is being built on that highly-visible parcel is the first sign of a multifamily slowdown in Denver’s urban neighborhoods.

“We will not see as many new urban type high density apartments constructed in the next two years as we did in 2013 and 2014,” Winslow said.

Despite the apartment building boom, existing apartments are experiencing record-breaking rents and higher than average occupancy levels, indicating that demand is out-stripping supply.

The Denver-area has one of the lowest unemployment rates in the country and is of the most attractive areas in the country for millennials, noted several apartment developers at the Multifamily Development & Industrial Conference & Expo, which was sponsored by the Colorado Real Estate Journal.

Also, many young professionals are burdened with onerous student debt, making it difficult for them to buy a home, so instead they rent.

Millennials also are getting married and having children later, making them more likely to rent than buy.

Finally, a lot of millennials, who saw their parents suffer through the collapse of housing prices during the Great Recession, are in no hurry to buy a house, especially if they think they might have to relocate in the near future for a job.

Despite the strong local economy, Winslow said that apartment developers and lenders are starting to worry about where future renters will be coming from, at least in the short term.

The 50 percent drop in the price of oil, for example, will eliminate some high-paying jobs in Colorado, he said, although many of those may be more in Weld County than in the Denver area.

Jordan Robbins, of the Denver office of HFF, while not speaking directly about the West 38th Avenue and Tennyson Street site, said that one thing that could slow the construction bus in Denver is raising equity.

Investors only want new apartments at Main and Main

“We raise a ton of equity from our office and it is getting harder,” Robbins said.

Investors, he said, “only want to invest equity if it is at Main and Main. The good sites are still being sold to apartment developers. Right now, we have a site in Riverfront Park and there is a huge amount of interest in it.”

Meanwhile, the supply of new apartments is growing at a time when land prices and construction costs are rising, which means that developers will need to get higher rent prices to justify new construction, David Potarf, of CBRE pointed out.

In other words, rental rates would need to continue to soar to justify new construction.

“I think we might see less come of the ground in the next year two than we have seen in the past two years,” Potarf said.

While not addressing Tennyson and 38th site specifically, he said when apartment developers start to pass on sites that might have been seen as ideal for new development a year or two ago, “at a micro level that might signal a little bit of a pullback,” on construction.

“It really all is site specific,” he said.

However, Bush, founder and senior partner of Littleton Capital Real Estate, cautioned not to read too much into selling the site for a Natural Grocers instead of to an apartment developer.

Market strength catalyst for sale

When his group first bought the site, their intention was to ultimately develop the parcel itself, but decided to sell it, given the strength of the local market, he said.

“I’m not sure it is given that we have received a better return if we sold it to a multifamily developer or developed it ourselves,” said Bush.

Steve O’Dell, a land broker expert at ARA Newmark, said Bush’s assessment has a lot of merit.

The Natural Grocer developer paid cash and closed the deal much more quickly than a typical apartment developer would have, O’Dell said.

Typically, an apartment developer won’t close on the land until the site plan is place, he said.

“And that is when they usually start to raise the capital,” O’Dell said, so the process is much longer for an apartment developer than for a retail developer.

Also, the bowling alley site is irregularly shaped and “I don’t think it includes the hard corner,” O’Dell said.

“That would make it difficult to maximize the density,” he said.

O’Dell anticipates given the shape of the property, an apartment developer could only build about 100 units on the site.

“That would mean the cost would be about $42,000 or $43,000 per unit, which is a high price,” O’Dell said.

“It is worth it, because it is such a great area,” he said. “But I don’t think Jonathan left much on the table by selling it for a Natural Grocers instead of an apartment developer.”

Being a good neighbor

And, Bush wanted to be a good neighbor.

He has developed other retail developments along that 38th corridor and is developing the retail town center at the former St. Anthony’s hospital campus at Sloan’s Lake, which is only a few minutes drive from the bowling alley site.

“We were trying to be thoughtful,” Bush said. “We liked how the building will be re-used and repurposed by Natural Grocers. We think Natural Grocers is going to be an excellent addition to Tennyson and that entire neighborhood.”

Potarf agreed that a Natural Grocers would be a wonderful addition to the neighborhood.

“Neighborhoods do need grocery stores and retailers; you can’t have just new apartments,” he said.

Terrance Hunt, a broker with ARA Newmark, said even if strictly from a financial viewpoint, “retail was not the highest and best use for that site,” there can be other factors in play.

Despite the perception of some, developers do not always seek to maximize their profits at the expense of a neighborhood, Hunt said.

While he did not discuss the sale with Bush, he said by selling the site for a Natural Grocers instead of an apartment development, “he avoided the type of protests that RedPeak received when it was going to develop the site at 32nd and Lowell,” Hunt said.

Creating good will with neighbors can pay future dividends for developers when having to deal with the city, he said.

Although it was not a factor in this case, sometimes a developer will voluntarily build less density on a portion of a site, to get smooth sailing on the rest of the development, he said.

That said, if an apartment developer wanted that site, he would have had no problems getting it off the ground, Hunt said.

“If an apartment developer came to us, I guarantee you we would have had no problem raising equity for that property,” Hunt said.

Interested in buying a home in Berkeley? Please visit COhomefinder.com.

Have a story idea or real estate tip? Contact John Rebchook at JRCHOOK@gmail.com. InsideRealEstateNews.com is sponsored by 8z Real Estate. To read more articles by John Rebchook, subscribe to the Colorado Real Estate Journal.

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John Rebchook

John Rebchook has more than 30 years of experience in writing and communications. As the Real Estate Editor for the Rocky Mountain News, he wrote about residential and commercial real estate for 26 years. He has won numerous awards for business stories and columns that he wrote, both as an individual and part of teams. In addition to real estate, he also covered economic development, banking and financing, the airlines, and cable TV for the Rocky. In addition, he was one of the original freelance writers for GlobeSt.com, covering commercial real estate for the Internet publication.

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