Metro Denver economy remains strong despite nationwide downturn

While commercial real estate in Metro Denver is not immune to nationwide financial woes, the region's markets remain highly competitive, according to data compiled by the Metro Denver Economic Development Corporation (Metro Denver EDC) in its Monthly Economic Summary for August 2008.

Many companies in energy, bioscience, and other rapidly-expanding industries are relocating to or expanding in Metro Denver. The region's housing downturn has proven comparatively mild, and relatively high levels of personal income and consumer confidence continue to support retail spending. Overall, local commercial real estate brokerages view Metro Denver’s markets as poised for a strong recovery when the national markets turn.

"The effects of a protracted housing downturn, declining consumer and business confidence, and tight credit have clearly reached the nation's commercial real estate markets," stated Patty Silverstein, chief economist for the Metro Denver EDC. "However, strong job growth is helping our region weather the national economic downturn."

Metro Denver's strong job market helped the region advance six spots in the Midyear 2008 National Industrial Index by Marcus & Millichap. The index ranks 24 U.S. markets based on supply and demand indicators including construction, vacancy, and job growth. Above-average job growth – particularly in technology-related industries – helped Metro Denver move from a 19th-place spot in the 2007 index to a 13th place ranking in the 2008 edition.

A second quarter report by CB Richard Ellis describes Metro Denver's office market as one of the most competitive in the nation, even as uncertainty delays expansions and relocations. The company's analysis shows that Metro Denver’s office market absorption remained positive in the second quarter despite an increase in sublease space, and strong pre-leasing activity continued for many development projects. While Metro Denver will not escape national turmoil, the report suggests the local market is well positioned to weather a downturn.

Additionally, much of the industrial market slowdown reflects a tension between national challenges and local opportunities, says a second quarter report by Grubb & Ellis. As oil and transportation costs continue to rise nationwide, many distribution companies are reconsidering the location and nature of their industrial space. At the same time, a changing energy environment is driving rapid growth both for traditional and renewable energy companies, many of which are hoping to locate or expand in Metro Denver. Overall, the report expects Metro Denver's favorable geographic location and strong employment base to support solid market activity.

CNBC named Colorado the fifth-best state for business in its annual America's Top States for Business ranking. The state placed among the nation’s top 10 for quality of life and business friendliness, and among the top 15 for workforce quality, access to capital, technology, and the overall economy. Colorado's 2008 ranking bettered last year’s seventh-place standing, and CNBC attributed much of the improvement to Colorado’s advancements in a New Energy Economy.

A report by the Washington, D.C.-based Brookings Institution named Colorado's Front Range among five "Mountain Megas," or regions that are becoming the new economic and political centers of the central U.S. Rapid population growth, a well-educated workforce, and strong infrastructure give the Front Range and several neighboring regions a larger national influence, policymakers say. They note, however, that Colorado and other states in the Intermountain West could need federal help with the infrastructure development and resource preservation needed to support growth.

In total, nine of 18 economic indicators showed positive monthly trends and four moved in a positive annual direction. Recent trends are steady, as this month's number of positive indicators match last month's number.

The Monthly Economic Summary provides a snapshot of metro area economic activity, as well as its relationship to national and regional economic trends.

Key points from this month's report include:

Labor and Employment

• Employment in Metro Denver increased by 8,400 jobs between May and June, and the region’s year-to-date employment growth measured 1.6 percent. On an over-the-year basis, Metro Denver employment growth slowed to 0.8 percent from 1.2 percent in May, and seasonal hiring trends weakened slightly from prior years.
  
  
• Metro Denver’s unemployment rate rose from 4.7 percent in May to 5.4 percent in June, and the average unemployment rate through the first six months of the year was 4.7 percent. Unemployment rates typically increase at this point in the summer season, although the recent shift for Metro Denver was slightly higher than normal.
  
  
• Unemployment insurance claims in Metro Denver and Colorado followed a typical seasonal trend and declined between May and June. The number of claims were elevated, however, with Metro Denver’s numbers up 19.7 percent through the first six months of the year and Colorado’s rate up 18 percent.
  
  

Consumer Sector

• Over-the-year growth in Metro Denver’s retail sales has been steady over the past several months, but higher inflation is eroding some of the net gains. Sales through the first five months of the year rose 3.6 percent over the same months in 2007, which amounts to an essentially stagnant sales trend after adjustment for inflation. Not all Metro Denver counties, however, have reported the same trends. Retail sales gains through May ranged from -7.6 percent in the City and County of Broomfield to 13.8 percent in Adams County.
  
  
• The Mountain Region Consumer Confidence Index declined between May and June and reached its lowest level since March 2003. Still, the index ranked third-highest among the nine regional indexes in June. Consumer confidence at the national level remained extremely weak, and the June Consumer Confidence Index reached its fifth-lowest level on record.
  
  
• Metro Denver’s hotel occupancy rate increased as the summer travel season progressed, but the June occupancy rate of 76.5 percent fell below the June 2007 level of 80.1 percent. Thanks to a widespread pullback in consumer spending, average occupancy through the first six months of 2008 reached 64.8 percent in a two percent decline over the same months of 2007. Despite slower lodging activity, Metro Denver’s average room rates through June increased 5.1 percent over the same period last year.
  
  
• Passenger traffic at Denver International Airport (DIA) increased between April and May, and the gain pushed traffic through the first five months of 2008 four percent ahead of traffic counts for the same months of 2007. While passenger traffic at DIA continues to increase, growth has moderated over the past several months as consumers and businesses limit travel.
  
  
• The Dow Jones Industrial Average (DJIA) and NASDAQ stock indexes rose slightly between June and July, but the S&P 500 and Bloomberg Colorado Index declined. Weaker-than-expected readings on employment and GDP growth have heightened uncertainty on Wall Street, and falling oil prices have increased concern about slumping U.S. spending and demand. Each of the indexes now shows a negative year-to-date return in excess of 10 percent.
  
  

Residential Real Estate

• The pace of U.S. existing home sales reversed an improvement last month, declining by 2.6 percent between May and June, according to the National Association of Realtors (NAR). The current annual sales pace of 4.86 million units is 15.5 percent lower than the sales pace from June 2007, and unsold inventory rose to an 11.1-month supply from a 10.8-month supply in May.
  
  
• The number of closed home sales in Metro Denver increased for the fifth consecutive month in June, and unsold inventory declined slightly. Total home sales through the first six months of the year fell eight percent below sales from the same months of 2007, although the number of homes under contract increased slightly (+1.4 percent) through June. While average selling prices for Metro Denver homes and condominiums remain below last year’s levels, recent data suggest the decline in local home prices has slowed somewhat.
  
  
• The most recent readings of the S&P/Case-Shiller Home Price Indices generally confirm regional price trends from the NAR data. Price indices for seven of the 20 metropolitan areas – including Denver – rose between April and May, but annual returns remained negative for all of the indices. The annual return for the Denver index measured -4.8 percent in May and fell behind annual returns for just two metro areas, Dallas (-3.1 percent) and Charlotte (-0.2 percent). Among the remaining metro area indices, May annual returns ranged from -5.2 percent in Portland, Oregon to -28.4 percent in Las Vegas.
  
  
• Foreclosures in Metro Denver may be nearing a peak. Foreclosure filings across all seven Metro Denver counties declined for the third consecutive month in June, which – given several more months of consistent declines – could indicate a reversal of the region’s foreclosure trend. In the meantime, total Metro Denver foreclosure filings through the first six months of 2008 rose 7.4 percent over filings from the first half of 2007.
  
  
• The pace of building activity at the local level remains solidly behind that of prior years. Metro Denver jurisdictions issued roughly 1,100 building permits in May, and the year-to-date permit count fell 35 percent behind the count for the first five months of 2007.
  
  
• Metro Denver’s apartment vacancy rate rose unexpectedly between the first and second quarters of 2008, and analysts say the increase could reflect the tendency for families and friends to share housing in difficult economic times. Vacancy rates generally decline in the second quarter as students graduate and find their own housing, but the Metro Denver average vacancy rate rose to 6.2 percent from 5.9 percent in the first quarter.
  
  
• Metro Denver’s monthly average apartment lease rate rose from $861 in the first quarter to $886 in the second quarter, and Adams and Denver Counties reported the largest rent increases between quarters. Higher rents and higher vacancy could suggest that some landlords exchanged more empty units for higher prices, analysts say.
  
  

Commercial Real Estate

Office

• Frederick Ross Company describes a Metro Denver office market that remains strong despite growing weakness at the national level. The company’s second quarter report suggests that Metro Denver’s office market continues to expand, even as leasing velocity and vacancy rates slow from the record pace of prior quarters. Organic growth from many of the region’s energy and bioscience companies is supporting demand for space, and the tighter credit conditions of recent months have limited speculative development.
  
  
• A second quarter report by Grubb & Ellis gives a mixed assessment of Metro Denver’s office market. While an increased volume of sublease space continues to affect market psychology, the report describes sublease volume as manageable and consistent with long-term averages. A diverse industry base is also dulling the impacts of a weak national economy, with several headquarters companies recently relocating to Metro Denver. Looking ahead, the report views increasing construction and utilities costs as some of the greatest near-term challenges for tenants and landlords.
  
  

Industrial

• A CB Richard Ellis report says Metro Denver’s industrial market has weathered the national downturn well. Occupancy and construction costs continue to rise, however, and credit availability remains tight. While these and other economic challenges could limit demand for industrial property in the second half of 2008, the report suggests that patience on the part of lessors, landlords, and developers will help stabilize the market.
  
  
• The mid-year industrial market report by Frederick Ross Company cautions that market activity could remain slow for the next nine to 12 months. Even in a slower market, however, Metro Denver’s industrial vacancy rates remained steady with balanced move-ins and move-outs. Industrial investment slowed as financing conditions continue to be difficult, but limited development helped the market remain at a reasonable – albeit slower – pace.
  
  

Retail

• Metro Denver’s retail market has not escaped the woes of the housing sector but has outperformed markets in many other regions, according to a second quarter report by CB Richard Ellis. Economic uncertainty continues to limit local retail development, but work continues on The Landmark in Greenwood Village and redevelopment projects at the former Southglenn and Buckingham Square Malls.Looking ahead, the report expects an improved economic outlook and better retail conditions once the nation’s political future is more certain.
  
  
• A second quarter report by Frederick Ross Company reports that Metro Denver’s retail market is in a better position than many markets nationwide. Retail closures and bankruptcies continue both nationally and locally, and the report cautions that store closures could threaten some retail strip space. Still, Colorado retail spending remains comparatively strong, and many new developments are based in increasingly popular transit-oriented or mixed-used developments.
  
  
• Grubb & Ellis describes strong consumer spending as an asset for the Metro Denver retail market. The company’s second quarter report emphasizes the comparatively mild local housing correction and suggests that retailers at the highest and lowest ends of the price spectrum continue to thrive. Fringe retail developments, however, may stall until the housing market revives.
  
  

*A full report is available to Metro Denver EDC investors.