May 2013
Colorado top-of-mind nationally for its quality, expanding business environment
Colorado has recently received numerous accolades for its business environment. In addition, Metro Denver’s commercial and residential real estate sectors show highly positive growth, according to data compiled by the Metro Denver Economic Development Corporation in its Monthly Economic Summary for May 2013.
For example, Colorado was ranked as a top-three state for supporting business innovation by the U.S. Chamber of Commerce, ranked 6th in the State Competitive Index published by the Beacon Hill Institute, and ranked as the 8th-best state for taxes on entrepreneurship and small businesses by the Small Business and Entrepreneurship Council.
The state’s business-friendly environment has helped numerous companies to maintain healthy activity levels, ranging from new contracts for Ball Aerospace & Technologies Corp. and Vestas Wind Systems to the recent initial public offering by Rally Software.
“The vibrant employment base is leading to increased commercial real estate development throughout Metro Denver,” said Patty Silverstein, president of Development Research Partners and chief economist for the Metro Denver EDC. “Capital investors looking to buy, build, or operate in the area are finding falling vacancy rates and generally rising lease rates for all property types.”
The first speculative industrial project in five years, the Majestic Commercenter campus, breaks ground in May and two or three additional speculative projects are expected to begin by the end of 2013. Cultural facilities in Metro Denver are also expanding, with new additions underway at both the Denver Museum of Nature and Science and the Denver Art Museum.
The residential real estate market remains particularly active. Home sales are over 21 percent higher than last year at this time. Combining increased sales activity with declining for-sale inventory levels means that median and average home prices for both single-family homes and condominiums are growing at rates that are generally faster than the national average. The apartment rental market is tight throughout Metro Denver, leading to more apartment development at various price ranges.
Employment, residential home sales and construction, and commercial real estate were a few of the 16 Metro Denver indicators that moved in a positive annual direction in this report, the same number as last month. Fourteen of the indicators moved in a positive monthly direction, compared to 12 indicators in the previous report.
The Monthly Economic Summary provides a snapshot of metro area economic activity, as well as its relationship to national and regional economic trends.
Labor and Employment
Employment growth in Metro Denver was higher in March compared with both February and last year’s data. On a monthly basis, 7,800 jobs were added, an increase of 0.6 percent. Over-the-year growth was 2.5 percent or 34,500 jobs. The only supersector to show decreasing employment since March 2012 was information, which declined 1.7 percent or 900 jobs. The highest growth in the 11 supersectors was reported in natural resources and construction, showing an expansion of 5.3 percent or 3,900 jobs. The largest supersector in Metro Denver, professional and business services, added the most jobs over-the-year (10,200) and grew by 4.1 percent. Employment in the second-largest supersector, government, was unchanged, which is not unexpected after the recent sequestration. In fact, both federal (-2 percent) and local (-0.5 percent) government jobs declined, while state government jobs grew by 2.3 percent.
Colorado employment also grew over-the-month and compared with March 2012, the state added 12,900 jobs between February and March or 0.6 percent, and 60,500 jobs during the past 12-month period or 2.7 percent. The 50 states had employment growth of 0.6 percent over-the-month and 1.5 percent compared with last year’s employment.
The annual benchmark revision to unemployment data reveals that unemployment rates were higher than originally estimated for the seven counties in Metro Denver. In 2011, each of the seven counties showed an upwardly revised rate. Five of the seven counties showed an upward revision of 0.3 percentage points and two of the county rates, Boulder County and the City and County of Denver, were revised up by 0.2 percentage points. These increases pushed the Metro Denver rate up by 0.3 percentage points to 8.4 percent. The 2012 data show smaller revisions in all counties. The rates in Arapahoe, Boulder, and Jefferson Counties increased by 0.1 percentage points, and the Douglas County unemployment rate rose by 0.2 percentage points. The Metro Denver rate was unrevised in 2012, remaining at 7.7 percent.
The upwardly revised figures represent increases in the total number of unemployed persons relative to the labor force, or a decline in the labor force, or a combination of the two effects.
Colorado’s unemployment rate was revised upward in both 2011 and 2012. The 2011 rate increased by 0.3 percentage points to 8.6 percent and the 2012 rate of 8 percent was 0.1 percentage points higher than the preliminary rate. The U.S. rate was unchanged.
The unemployment rate in Metro Denver improved in March, declining to 7 percent from 7.3 percent in February. Compared with March 2012, the rate declined 1.3 percentage points. The unemployment rate declined over-the-month in each of the Metro Denver counties with the exception of the City and County of Broomfield, which showed no change. Douglas and Boulder Counties and the City and County of Denver reported the greatest decrease of 0.3 percentage points. Compared with last year’s data, each county has shown a lower rate. The largest decline occurred in Adams County, where the rate decreased 1.5 percentage points over-the-year. The smallest decline was in the City and County of Broomfield (-0.4 percentage points). Colorado’s unemployment rate also improved during the year, dropping 1.3 percentage points since March 2012.
The first-time weekly number of unemployment insurance claims declined in March by 4 percent compared with the same time one year prior. The decline in Metro Denver claims was not enough to push down the year-to-date average, which was still 1.6 percent higher in 2013 compared with 2012. An unusually high number of claims in January continued to keep the average elevated. Colorado weekly claims also declined 7.4 percent in March over-the-year, but the year-to-date statewide average reflected a similarly high January number and showed a 4.6 percent increase in 2013.
Consumer Sector
According to spokespeople for Denver International Airport, year-to-date passenger totals were up slightly through March by 0.5 percent. Passenger numbers in March were nearly unchanged from last year’s number, declining by less than 0.1 percent.
Hotel occupancy in Metro Denver dipped slightly in March, showing a 1.9 percentage point decline compared with the same time last year. The average room rate also slipped 1.6 percent to $105.05 during the month. Despite the over-the-year decline, year-to-date averages show improvement for 2013. The average hotel occupancy through the first quarter was 2 percent higher in 2013 compared with 2012, and the average room rate was also 2 percent higher.
After hitting a record-high in March, the S&P 500 continued to rise in April by 1.8 percent. The NASDAQ and Dow Jones Industrial Average surpassed their respective peaks during April, both hitting record highs. The indexes rose 1.9 percent and 1.8 percent, respectively. The Bloomberg Colorado index declined slightly by 1.3 percent over the March number, but year-to-date returns remained positive for the index as well as for the other three indexes.
Retail sales in Metro Denver were strong in February, despite the federal payroll tax increases and some income tax increases that went into effect in January. Sales were 4.8 percent higher over-the-year, and Douglas County was the only county to report a decline during the period (-4.8 percent). Adams County reported the largest increase of 9.4 percent, followed by Jefferson County (7.4 percent). Year-to-date sales for the metro area were 2.5 percent higher in 2013 compared with the first two months of 2012. Colorado retail sales were also 3.8 percent higher than February 2012, and year-to-date sales showed a 2.1 percent increase in 2013.
Consumers were more upbeat about the current economic conditions during April, with increased confidence in business conditions and the labor market. According to the Consumer Confidence Index, U.S. consumers’ confidence rose 10 percent between March and April to the highest point since November 2012. Despite a slight decrease over-the-year (-0.9 percent,) the monthly gain points to a recovery from the uncertainty caused by the sequestration.
The Mountain Region index showed an even greater monthly improvement, rising 46.3 percent between March and April. The region, which includes Colorado, dropped to its lowest point in March since October 2011. The April boost in confidence was still lower than the last year’s rate (-13.7 percent) but emphasized the national gain as consumers recovered from tax increases and federal spending cuts.
Residential Real Estate
The Metro Denver residential real estate market continued to grow at a healthy pace in April. Home sales closed rose 14.7 percent between March and April and 20.7 percent compared to April 2012. The strong sales helped push down inventory in April, which was 32.3 percent lower than in April 2012. As sales increased and inventory declined, the average price of homes also rose for both condominiums and single-family homes. The average price of a condominium sold in April rose 0.8 percent compared with March and 10.5 percent over-the-year. Single-family homes reported slightly larger gains, as the average price increased 5.2 percent on a monthly basis and 12.5 percent over-the-year.
Residential building permits were down between January and February (-18.3 percent). The main factor behind the over-the-month decrease was a 57 percent decline in multifamily permits. Permits increased over-the-year by 22.7 percent in February. Multifamily permits declined 35.5 percent during the 12-month period, but single-family detached permits rose 60.2 percent and single-family attached permits rose 17.5 percent.
The Denver Metro Apartment Vacancy and Rent Survey showed an improved vacancy rate for Metro Denver during the first quarter of 2013. The metro-wide vacancy rate declined 0.3 percentage points compared with both the fourth quarter of 2012 and last year’s rate. Compared with the fourth quarter of 2012, rates in five of the six county submarkets declined. Rates in Adams and Douglas Counties increased over-the-quarter by 0.7 percentage points to 5.2 percent and 2.3 percentage points to 6.5 percent, respectively. The largest decline was in Arapahoe County, where the rate dropped 0.9 percentage points to 4.1 percent. Three of the six submarkets reported increased rates over-the-year (Adams and Douglas Counties, and the City and County of Denver) and the largest decline was in Arapahoe County (-2.2 percentage points).
The average rental rate in Metro Denver also improved, increasing 1.4 percent on a quarterly basis and 4.2 percent compared with last year’s rate. Rental rates in the six submarkets showed a similar pattern to vacancy rates, with Arapahoe and Douglas Counties each declining 0.1 percent over-the-quarter. However, Adams County was the only county with a rate that declined compared with the first quarter of 2012, reporting a 2.5 percent drop. Every other county rate was higher over-the-year, the largest increase being in the Boulder/Broomfield market where rates increased 7.4 percent.
Commercial Real Estate
Cassidy Turley’s first quarter Office Market Snapshot reported that stability and continued growth in Metro Denver companies has been a boon for the area’s office market, assisting in increased leasing activity and demand. Build-to-suit projects comprise the majority of the current construction activity, but new speculative development is on the horizon. The report forecasted an increase in rental rates by 3 to 5 percent during 2013, increasing office property values, and a drop in supply due to demand for well-placed investment opportunities.
The most recent edition of The View from Newmark Grubb Knight Frank reported an improved office market in Metro Denver with ongoing development activity. Speculative activity only included one building at the end of the first quarter, but build-to-suit projects are more prevalent and should pick up during the year. LoDo office space is particularly constrained, with no existing spaces greater than 50,000 square feet available. Development activity should pick up in this submarket as well as the Central Platte Valley during the year.
The CBRE Group Inc. released its first quarter report for the office market in Metro Denver, noting that broad-based expansion is going on in the markets. The southeast submarket accounted for almost half of the space leased during the quarter. Builders are beginning to show confidence and move forward with new construction projects in several areas, specifically downtown.
Cassidy Turley’s first quarter report for the industrial market in Metro Denver forecasts continued rising rent with a 5 to 10 percent increase through the first quarter of 2014 for Class A and B properties. According to the report, the industrial sector accounted for about 40 percent of jobs added in the area during 2012, and continued expansion is expected for the market. The first speculative project in five years, the Majestic Commercenter campus, breaks ground in May in Aurora near I-70 and Tower Road. Two or three additional speculative projects are expected to begin by the end of 2013.
Newmark Grubb Knight Frank’s the View showed the industrial sector in Metro Denver improved in the first quarter, with positive net absorption and rental rates expected to increase in the second half of 2013. Quality space is scarce for the sector following strong absorption during 2012, pushing companies to purchase single-tenant buildings or construct build-to-suit facilities.
The first quarter report from CBRE Group Inc. noted that the industrial market had slowed during the quarter after the fiscal cliff. Analysts for the group pointed out that demand was slightly weak as a result of the federal policymakers, but rates should pick up soon. The availability of Class A space remains tight, and demand for the space is especially high.
In the first quarter Retail Market Snapshot, Cassidy Turley reported that the Metro Denver retail market is flourishing in high-density locations, including new retailers and restaurant openings in the Downtown and Cherry Creek submarkets. Additionally, there was a spike in new development and redevelopment projects during the quarter. The report forecasts heightened leasing activity in the sector and the eighth- consecutive year of positive absorption.
According to the first quarter Newmark Grubb Knight Frank report, The View, 2012 was the strongest year for the retail market since 2008, and 2013 is expected to post similar numbers. Moderate development continued in strong urban in-fill sites and some suburban neighborhoods throughout Metro Denver. Large retailers are waiting to break ground on build-to-suit options.
CBRE Group Inc. released its first quarter report for the Metro Denver retail market, noting that lease rates were mostly flat but there were some positive signs for the sector. Denver’s strong real estate market should contribute positively to growth in retail, especially for quick-service restaurants and home goods stores. The best retail area continued to be the Colorado Boulevard/Cherry Creek submarket with a particularly low vacancy rate and higher lease rate.
*A full report is available to Metro Denver EDC investors.