Metro Denver economy continues signs of recovery with positive indicators in the residential and commercial real estate markets
Momentum in the Metro Denver economy continues with improving consumer confidence levels, significant company expansions and job announcements, and increased employment. Recent data from The Associated General Contractors of America show the Denver-Aurora-Broomfield area ranked first among 337 metro areas for absolute increase in construction employment between February of 2011 and 2012. Trends in the region's real estate market also indicate signs of continued economic recovery, according to data compiled by the Metro Denver Economic Development Corporation (Metro Denver EDC) in its Monthly Economic Summary for May 2012.
Reports from local real estate brokers suggest Metro Denver's commercial markets continue to recover. Vacancy rates are slowly falling, and an increasing shortage of large, high-quality office and industrial space is driving build-to-suit development. Speculative development activity remains largely on hold, but Metro Denver is still an attractive market for national tenants and infill projects.
The region's housing market is also attracting interest. March data from the National Association of Realtors show Metro Denver ranked second only behind Oakland, Calif., for lowest median age of housing inventory, a metric that indicates how long resale homes spend on the market. Total sales of existing homes in Metro Denver were 8.3 percent higher in March than they were one year ago, and the number of homes placed under contract—an indicator on future sales—was up 49.2 percent over-the-year. The region's historically low level of unsold housing inventory also points to strengthening demand and should eventually boost prices and encourage more homeowners to list their properties.
While conditions appear favorable for some long-awaited home price appreciation, prices will likely not rise as fast as they would without the influence of distressed properties and foreclosures. Data from the Colorado Division of Housing suggest new foreclosure filings are again on the rise across Metro Denver. Each county's public trustee reported a March filings total that was at least 23 percent higher than the March 2011 number. This increase—largely expected in the wake of last year's litigation—driven filings delays-could dampen price appreciation for the next several months.
"Residential and commercial real estate trends are just one aspect of economic recovery we are currently experiencing in Metro Denver," said Patty Silverstein, chief economist for the Metro Denver EDC. "Consumer confidence in the mountain region increased from 78.1 to 83.5 between March and April, and there was also an upturn in the percentage of companies expecting to hire in the second quarter. Combined with recent expansion and location announcements, such as the Trizetto Group's plan to add 550 jobs at a brand new building over the next five years and Blockbuster's headquarters move from Texas to Metro Denver, the region is well-positioned for continued economic growth."
Overall, 11 of 18 economic indicators for Metro Denver moved in a positive monthly direction in this report, while 13 moved positively in the previous report. Fourteen moved in a positive annual direction this month, while 15 moved positively last month.
Labor and Employment
Metro Denver employment followed a typical seasonal trend and increased by 9,700 jobs between February and March. Four industry supersectors—professional and business services, education and health services, wholesale and retail trade, and natural resources and construction—accounted for the vast majority of Metro Denver's total net job gain of 31,900 between March of 2011 and 2012.
The region's employment across all industries in March was up 2.4 percent over-the-year, while March employment statewide increased 2.1 percent and employment nationwide was up by 1.5 percent.
Metro Denver's March 2012 unemployment rate (8 percent) was about one-half of a percentage lower than the rate reported last year. March unemployment in Adams and Denver Counties decreased the most relative to last year's levels, although these counties remain the two with Metro Denver's highest jobless rates. Boulder reported the metro area's lowest unemployment rate (6.1 percent) in March.
The average weekly number of new unemployment insurance claims filed in Metro Denver in March (1,445) was 15 percent lower than last year's average but was still nearly 53 percent higher than the average filed in pre-recession March 2007 (945). The statewide weekly average in March (2,846) was down 8.2 percent over-the-year but was more than 70 percent higher than the March 2007 average.
Consumer Sector
Households that participated in the Conference Board's April Consumer Confidence Survey gave a slightly better assessment of current economic conditions than the March survey participants, but April participants had a weaker six-month outlook. As a result, the overall U.S. Consumer Confidence Index fell to 69.2 in April from 69.5 in the prior month. Looking ahead, households remain particularly concerned about job availability and income growth.
The Mountain Region Consumer Confidence Index-which tends to be more volatile than its national counterpart-increased from 78.1 in March to 83.5 in April. Survey respondents' six-month expectations rose noticeably over-the-month, but their assessment of current conditions weakened somewhat. The Mountain Region index has followed an up-and-down course since January.
Total Metro Denver retail sales in December 2011 fell slightly below (-1.8 percent) the total reported in December 2010. December sales activity across the seven counties was uneven. Sales increased over-the-year in Adams, Broomfield, Douglas, and Jefferson Counties but declined in Arapahoe, Boulder, and Denver Counties. The region's total sales for all 12 months of 2011 were 4.8 percent higher than sales reported in 2010 (2011 sales increased 1.1 percent after adjustment for inflation).
Turmoil in Europe-punctuated by concerns about Spanish debt and the collapse of the Dutch government-took a toll on stocks in April, as did tepid readings on the U.S. economy. The Dow Jones Industrial Average was essentially unchanged between March and April, while the NASDAQ and S&P 500 fell 1.5 percent and 0.7 percent over-the-month, respectively. The Bloomberg Colorado index fell 1.1 percent between March and April.
Metro Denver hotels reported solid travel trends in March. Average region-wide hotel occupancy for the month (65.4 percent) was nearly three percentage points higher than last year's average, and the March average room rate ($106.74) was up three percent over-the-year. A strong downtown hotel market was a major factor behind gains for the larger seven-county region.
January passenger traffic at Denver International Airport was 0.6 percent lower than traffic reported in January 2011. Airport spokespeople attribute the drop to airlines' recent capacity reductions and expect flat passenger traffic in the coming months.
Residential Real Estate
Metro Denver home sales activity strengthened in March. The total number of closed sales in March was 8.3 percent higher than last year's sales total, and the total number of homes placed under contract in March was 49.2 percent higher than the comparable 2011 figure. Contract activity is a solid indicator of future sales, so the March data suggest Metro Denver's housing market may have a strong spring and summer season. In fact, one of the larger constraints on the market going forward could be limited inventory. The total inventory of unsold Metro Denver homes in March was nearly 42 percent smaller than the inventory available at the same time in 2011.
Foreclosure activity is again on the rise in Metro Denver. Public trustees across the region reported nearly 35 percent more filings in March than they did in March 2011, and March totals were up over-the-year by at least 23 percent in each of the individual counties.
Metro Denver builders pulled 40 percent more permits for residential construction during the first quarter of 2012 than they pulled during the same months of 2011. Permit activity increased for all property types, although an uptick in permits for detached homes accounted for 72 percent of the total over-the-year gain between the first quarters of 2011 and 2012.
Results of the most recent Denver Metro Apartment Vacancy and Rent Survey show region-wide vacancy declined, as it often does, between the fourth and first quarters. Seasonal shifts notwithstanding, apartment vacancy across the region has fallen quite low. The first quarter vacancy rate (4.9 percent) was the lowest reported for a first quarter since 2001, and rates fell below four percent in the Boulder/Broomfield area and in Jefferson County.
Lower vacancy is supporting higher rents throughout the seven-county area. Average monthly rent for all of Metro Denver during the first quarter ($953) was 4.5 percent higher than the comparable 2011 average, and rents around the region rose over-the-year by anywhere from 0.9 percent in Douglas County to 6.7 percent in the Boulder/Broomfield area.
Commercial Real Estate
The Newmark Knight Frank Frederick Ross first quarter Market Trends report for Metro Denver's office market suggests momentum that began to build last year should continue through 2012. Flat rental rates in many areas are supporting continued lease activity, particularly for Class A and B+ properties. Investment sales should be solid in 2012, brokers say, and speculative developments may break ground in a select few markets.
The CB Richard Ellis MarketView report for Metro Denver's office market shows vacancy continued a gradual decline in the first quarter. Brokers say the market's reaction to higher property demand has been slow, however, and rental rates remain relatively flat. While the report gives a generally positive outlook for the market in 2012, analysts warn fundamentals cannot continue to improve without stronger job growth.
Cassidy Turley's first quarter Office Market Snapshot report for Metro Denver says the high absorption rates recorded over the past several quarters could temporarily reverse as CenturyLink vacates more space in the downtown submarket. At the same time, though, the increasing scarcity of large blocks of high-quality space could drive some potential tenants toward build-to-suit development. Cassidy Turley brokers expect rental rates will remain relatively flat throughout 2012.
The Newmark Knight Frank Frederick Ross first quarter Market Trends report for Metro Denver's industrial market suggests the market continues to improve, although fundamentals remain weaker than they were before the recession. Limited property supply—a result of very little industrial construction—is now strengthening the market, brokers say, although supply and demand remain balanced enough to discourage speculative development.
The CB Richard Ellis MarketView report for Metro Denver's industrial market says fundamentals have yet to reach an ideal level, but the market has nonetheless made clear progress. Because large blocks of high-quality industrial space are increasingly difficult to find, the Class A market has strengthened more than other property classes. This sort of "piecemeal" recovery could continue, brokers say, because economic conditions, while clearly improved, are still causing some industrial tenants to proceed cautiously.
Cassidy Turley's first quarter Industrial Market Snapshot report for Metro Denver suggests a relatively tight supply of industrial space has kept the market on a steady growth track. The northeast submarket continues to be the region's strongest, and brokers expect build-to-suit-or even speculative projects-could begin in some areas as large parcels of industrial space are in short supply.
The Newmark Knight Frank Frederick Ross first quarter Market Trends report for Metro Denver's retail market calls the market's recovery "slow but steady." Retail sales have improved, but brokers say stronger job and income growth will be necessary to support retail fundamentals. Brokers also expect more infill development throughout the region over the next several years.
The CB Richard Ellis MarketView report for Metro Denver's retail market says absorption weakened in the first quarter largely because the closure of The Great Indoors stores yielded large blocks of empty space. Even so, national tenants and investors view Metro Denver as a strong retail market, brokers say, and their growing interest will help strengthen the market going forward. They caution, however, that strong and sustained job and spending growth are the only true supports for retail fundamentals.
*A full report is available to Metro Denver EDC investors.