After rough year, energy markets position for comeback in Metro Denver

Thanks to a decline in oil prices from 2008 highs, the energy sector was arguably one of those most battered by recession. While energy trends should strengthen in 2010, the sector still has some distance to go to recover, according to data compiled by the Metro Denver Economic Development Corporation (Metro Denver EDC) in its Monthly Economic Summary for February 2010.

Energy demand should rebound relatively quickly in industrializing countries like India and China, but demand in the U.S. and other developed nations will remain sluggish as consumers and businesses slowly return to normalcy. Energy markets are also struggling to manage oversupply due to weak demand in 2009, a reality somewhat hidden by recent speculation and price increases.

"Despite these challenges, energy markets are already positioning for a comeback," stated Tom Clark, executive vice president for the Metro Denver EDC.

In January, several fossil energy companies with Colorado ties announced strategic changes aimed at developing oil sands, oil shale, and other unconventional resources. Evidence of an improving market also emerged for Colorado renewable energy companies, several of which announced large turbine orders as 2010 began. While energy markets still face challenges this year, changes in the marketplace thus far suggest many energy companies expect better conditions soon.

While regulatory reforms have recently dominated the government’s recovery efforts, funds from the 2009 economic stimulus continue to flow. In early January, the administration approved $2.3 billion in stimulus-funded tax credits that officials hope will spur green jobs creation. Six Colorado companies – Abound Solar, Advanced Energy Industries, Coolerado Corp., ReflecTech, Hexcel Corp., and Vestas – received awards totaling $75.2 million.

In addition to tax credits for some renewable energy companies, Colorado will also receive roughly $6 billion in stimulus dollars from the U.S. Department of Labor for job training in renewable energy and other emerging industries. Two consortiums with Colorado members are scheduled to receive $78 million in stimulus grants for the development of biofuels. Solix Biofuels and Colorado State University are part of a group that will explore algae-to-oil technology, and the National Renewable Energy Laboratory is part of a group that will research infrastructure compatible with biofuels.

Furthermore, the Colorado Department of Transportation (CDOT) will receive $1.4 million in federal stimulus grants to examine the feasibility of a high-speed rail line. The Department will use the funding to study ways an inter-city, high-speed line could connect to Metro Denver’s FasTracks network. CDOT officials will also develop a State Rail Plan, which is required of states designated by the federal government as high-speed rail corridors. These corridors can be eligible for federal funding.

"The hope is that these stimulus dollars will create jobs locally," said Clark.

Metro Denver’s unemployment rate rose from 6.7 percent in November to 7.3 percent in December as the number of unemployed rose considerably. While year-end layoffs and weak holiday hiring trends were factors behind December’s higher unemployment rate, the notion of an improving economy and slightly better job prospects may also be drawing more job seekers back into the labor force. The nationwide unemployment rate rose from 9.4 percent to 9.7 percent.

Economic indicators for Metro Denver suggest the region’s economy lost some momentum in late 2009. While not encouraging, this shift was partly expected due to changes in stimulus-related incentive programs. Seven indicators moved in a positive direction for the month, down from 11 in the prior month’s report. Just one indicator moved in a positive annual direction this month, compared to two indicators in the prior report.

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

Labor and Employment

• Metro Denver employers cut more than 4,000 jobs in December, a month in which the region’s employers typically add several thousand jobs. Data for 2009 are subject to a benchmark revision, but preliminary figures suggest Metro Denver employment for all twelve months of the year fell 3.8 percent from employment in 2008.
  
  
• The average weekly count of unemployment insurance claims in Metro Denver fell between November and December. The decline – which also occurred statewide – was roughly consistent with seasonal norms, although higher claim levels throughout 2009 left the annual average weekly count of claims more than 46 percent above the average for 2008.

Consumer Sector

• A better assessment of present economic conditions by consumers helped the overall Consumer Confidence Index increase in January. The Mountain Region index also rose in January and suggested that local consumer sentiment – while low by historical standards – has improved greatly from consumer confidence measured at the same time last year.
  
  
• The decline in Metro Denver retail sales between September and October was roughly consistent with seasonal norms, although October sales fell 13.5 percent from the level one year ago.
  
  
• A decline in hotel occupancy in December was consistent with seasonal norms for Metro Denver, although the region’s December occupancy rate was slightly below the occupancy one year ago. Due to lower occupancy levels, the twelve-month average room rate for 2009 fell 9.7 percent from the 2008 average.
  
  
• A decrease in passenger traffic at Denver International Airport between October and November was consistent with seasonal trends, but November’s total traffic rose 1.3 percent from the previous year’s level.

Residential Real Estate

• Data from the National Association of Realtors show nationwide home sales fell 16.7 percent between November and December, but December sales were still 15 percent higher than sales reported in December 2008. Total 2009 home sales rose nearly five percent from 2008 sales in the first annual gain reported since 2005, and analysts expect the extended and expanded homebuyers’ credit to boost sales again in late spring.
  
  
• Like home sales in other regions nationwide, existing home sales in Metro Denver slowed as 2009 ended. The region’s December sales fell 17.8 percent from November, and December sales also fell below the year-ago sales total. Metro Denver’s total 2009 home sales fell 12.1 percent from 2008 and reached the lowest level reported since 1997.
  
  
• November data show annual declines in the S&P/Case-Shiller Home Price Indices are generally improving, and declines in the indices for several areas – including Denver – have given way to slight over-the-year gains. November data for Denver’s index rose 0.5 percent over-the-year, and the indices for Dallas, San Diego, and San Francisco also showed a positive annual return.
  
  
• Seasonal trends tend to drive Metro Denver’s average apartment vacancy rate higher at the end of the year, so a fourth quarter increase in Metro Denver vacancy was partly expected. At the same time, though, the region’s comparatively high vacancy level in the fourth quarter (7.7 percent) still reflects a market with significant slack. Because vacancy was considerably above the equilibrium rate of five percent in 2009, Metro Denver rental rates declined. The region’s average rental rate in 2009 ($877) was slightly below the $882 monthly average reported in 2008.

Commercial Real Estate

• A fourth quarter report by Frederick Ross Company predicts recovery in Metro Denver’s office market will follow a “U-shaped” pattern, or one where market fundamentals remain unchanged for some time before slowly improving. The report notes that Metro Denver’s office market has weathered the recession better than markets elsewhere, but recovery in the local market will still lag under high unemployment and underemployment, reduced real estate spending by businesses, weak consumer confidence, and widespread wealth declines.
  
  
• Metro Denver’s industrial market is in somewhat better condition than markets nationwide, according to a fourth quarter report by Frederick Ross Company. Thanks to a reasonable balance of supply and demand, the region’s 6.7 percent vacancy rate has remained far below the national level of 10 percent. While vacancy rates and several other indicators suggest Metro Denver’s industrial market has reached bottom, the Frederick Ross Company expects lease rates and overall market trends to remain generally sluggish until 2011.
  
  
• A fourth quarter report by Frederick Ross Company suggests recovery in Metro Denver’s retail market will be delayed due to the consumer impact of weak job and income growth. Delayed recovery seems particularly likely as many economists expect consumer spending habits will not quickly regain pre-recession levels. The report suggests more distressed retail assets will come to market in 2010, and lease rates will remain under pressure as property owners struggle to keep tenants.

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