Metro Denver housing market and hiring expectations improving

Several indicators for Metro Denver's housing market have improved, but commercial real estate statistics have weakened from the first quarter of 2008. Business hiring expectations have improved and local job growth still exceeds the national average, according to data compiled by the Metro Denver Economic Development Corporation (Metro Denver EDC) in its Monthly Economic Summary for July 2008.

Over-the-year growth in Metro Denver nonfarm employment measured 1.3 percent in May, compared to 1.6 percent in April and 1.7 percent in March. Recent growth rates across Metro Denver have been relatively equal, and both the Denver-Aurora and Boulder MSAs reported year-to-date employment gains of 1.7 percent. Denver MSA job growth through the first five months of 2008 was strongest in education and health services (+3.9 percent), while Boulder MSA job growth was strongest in natural resources and construction (+3.9 percent).

"While Metro Denver companies are adding jobs, the impact of weak national trends is increasingly evident," stated Tom Clark, executive vice president of the Metro Denver EDC.

Nationwide over-the-year employment gains slowed to 0.1 percent in May, which brought year-to-date job growth to 0.4 percent. Also consistent with national trends, Colorado job growth has slowed and measured 1.9 percent through the first five months of 2008.

Third quarter hiring outlooks for Metro Denver employers improved from the second quarter. According to the most recent Manpower Employment Outlook Survey, the share of Denver area employers planning to add workers in the third quarter rose to 32 percent from 22 percent who planned to add jobs in the second quarter.

The impact of fuel costs on workers is a growing concern for Metro Denver employers, according to a survey by the Mountain States Employers Council. Forty-six percent of respondents said they offer employees fuel-related accommodations, including flexible scheduling, telecommuting, reduced-price transit passes, and gasoline gift cards. Many respondents were also considering increased accommodations, particularly for traveling sales agents, maintenance workers, and other employees who drive a large number of miles for work.

Local foreclosure counts are beginning to trend in a more positive direction. Foreclosure filings in Metro Denver declined 13 percent between April and May, and the May total fell 17 percent below filings from the same month last year. May filings in each of the seven Metro Denver counties except Douglas County declined from April, although total filings remained higher than 2007 levels in all but two counties.

Home sales conditions have also improved in the local market. The number of closed home sales in Metro Denver rose for the fourth consecutive month in May, although year-to-date sales remain 8.6 percent below sales from the first five months of 2007.

"While overall improvement in Metro Denver foreclosure activity could indicate a turning point, several more months of positive trends will determine if local foreclosure counts are truly easing," explained Patty Silverstein, chief economist for the Metro Denver EDC.

Metro Denver's office market weakened in the second quarter as ongoing economic uncertainty limited transactions. According to CoStar Realty Information, Inc., the direct vacancy rate returned to its level last year of 12.1 percent from 11.9 percent in the first quarter. Despite slightly higher vacancy, direct average lease rates rose and ended the second quarter at $21.09 per square foot.

Vacancy and lease rates in Metro Denver's industrial market were essentially flat between the first and second quarters of 2008, according to CoStar. The industrial market direct vacancy rate ended the second quarter at 6.5 percent, and direct average lease rates rose by $0.07 per square foot to $5.19.

Metro Denver's retail market direct vacancy rate rose to a recent high of 7.7 percent in the second quarter, according to CoStar. While direct average lease rates rose to $17.88 per square foot despite the difficult market conditions, retail construction activity slowed.

In total, nine of 18 economic indicators showed positive monthly trends, the same number as last month. However, only four indicators moved in a positive annual direction, down from six indicators last month.

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

• Data from the Quarterly Census of Employment and Wages (QCEW) show Metro Denver's average annual wage rose from $48,712 in 2006 to $50,669 in 2007. The region's over-the-year wage increase (+4 percent) was slightly slower than the statewide average growth rate of 4.4 percent and fell behind a 4.8 percent increase from 2006. When adjusted for inflation, over-the-year growth in Metro Denver’s average wage measured about 1.8 percent in 2007.
  
  
• According to the Manpower Employment Outlook Survey, the number of employers planning to cut jobs was essentially unchanged, and slightly more than half of the employers surveyed planned no staffing changes. Boulder County employers reported more conservative hiring plans for the third quarter. As in the second quarter of 2008, 20 percent expect to add jobs and 13 percent plan to reduce payrolls.
  
  
• Metro Denver's unemployment rate rose from 4.3 percent in April to 4.7 percent in May as labor markets in each of the region's seven counties weakened. On a year-to-date basis, unemployment rates were highest in Adams (5.2 percent) and Denver (5.1 percent) Counties, and rates in the remaining five counties ranged from 3.9 percent to 4.6 percent.
  
  
• Counts of unemployment insurance claims in Metro Denver and Colorado followed a typical seasonal trend and declined between April and May. Claims in both areas, however, remain at elevated levels. Metro Denver claims through the first five months of the year rose 17.6 percent over the same months in 2007, and Colorado claims increased 16 percent year-to-date.
  
  

Consumer Sector

• An increasingly difficult consumer environment has slowed growth in Metro Denver retail sales over the past several months. Total sales through March rose 2.7 percent over the same months of 2007, but inflation-adjusted sales growth may actually be negative. Year-to-date sales trends across the seven Metro Denver counties varied considerably in March, with sales amounts as much as 5.8 percent below and 13.3 percent above 2007 levels.
  
  
• Mountain Region consumer confidence improved between April and May, but the broad consumer outlook continues to weaken. The Mountain Region Consumer Confidence Index rose to 76.8 in May but remained considerably below last year’s level, and the nationwide reading for May represented a 16-year low.
  
  
• Metro Denver's hotel occupancy rate was essentially unchanged between April and May, but the rate fell below last year’s level. The May occupancy rate of 67.3 percent brought average occupancy for the first five months of the year to 62.5 percent, compared to 63.2 percent for the same months in 2007. With slightly weaker occupancy, Metro Denver's average room rate declined between April and May for the first decrease this year.
  
  
• According to Longwoods International, the number of overnight travelers to Colorado broke records in 2007, and Colorado remained the nation’s favorite overnight ski destination. Many industry analysts agree that 2008 travel figures will fall short of 2007 records as a struggling airline industry and tight consumer budgets limit leisure travel. The extent to which tourism will contract, however, remains in question. Some analysts call Colorado a remote destination and expect negative air travel trends to take a larger toll than they do in other areas. Others anticipate a more subtle impact, because the many Colorado residents who opt to explore destinations within the state will help offset out-of-state trends.
  
  
• Over-the-year growth in passenger traffic at Denver International Airport slowed to one percent in April from 5.3 percent in March. While passenger traffic at DIA continue to grow, airport officials expect the figures will weaken as tight budgets and a troubled airline industry take a toll on travel. Because of stronger traffic early in the year, the total passenger count at DIA rose 4.1 percent year-to-date through April.
  
  
• Each of the three national stock indexes fell in June after two consecutive months of gains. As the second quarter ended, poor reports on corporate profits, additional write-downs for financial firms, and rising oil prices drove the Dow Jones Industrial Average (DJIA) to its lowest level since September 2006.
  
  

Residential Real Estate

• The pace of U.S. existing home sales improved by two percent between April and May, according to the National Association of Realtors (NAR). Home sales reported a seasonally adjusted annual rate of 4.9 million units in May, and better sales conditions helped the nationwide inventory of unsold homes decline to a 10.8-month supply from an 11.2-month supply.
  
  
• The S&P/Case-Shiller Home Price Indices show a wide range of regional trends. Each of the 20 metropolitan area indices posted a negative annual return in April, with over-the-year price changes ranging from -0.1 percent in Charlotte to -27 percent in Miami and Las Vegas. The Denver index posted a -4.7 percent annual return in April, a slight improvement from March.
  
  
• Building activity in Metro Denver tends to fluctuate between months, but the overall pace of construction remains behind that of prior years. Metro Denver jurisdictions issued more permits in April than in March, although permit counts declined on a year-to-date basis for all types of residential buildings except apartments, or multifamily units. In total, the number of Metro Denver building permits issued through the first four months of the year fell 38 percent below permits for the same months in 2007.
  
  

Commercial Real Estate

• Direct vacancy rates in Metro Denver’s flex market rose to previous year levels in the second quarter, according to CoStar. Direct average lease rates rose from $9.33 per square foot in the first quarter to $9.76 per square foot despite slightly higher vacancy levels. Flex market construction activity continued at a steady pace.
  
  
• Metro Denver ranked 17th among 43 national retail markets in Marcus & Millichap's 2008 National Retail Index (NRI). The index measures each market's future supply and demand with factors including employment growth, vacancy rates, and construction trends.
  
  
• While retail and hotel properties are technically in separate commercial markets, they share the brunt of weak discretionary spending. According to a separate Marcus & Millichap report, hospitality markets nationwide will weaken this year as consumers limit leisure travel and businesses shorten trips to cut costs.
  
  

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