January 2008

As 2008 begins, the national and local economies are maintaining a slightly more tenuous balance. Job creation has slowed, but Colorado and the metro area labor markets remain tight, according to data compiled by the Metro Denver Economic Development Corporation (Metro Denver EDC) in its Monthly Economic Summary for January 2008.

Metro Denver's November employment figures followed a flattening trend that began earlier last year. Metro Denver added 4,000 jobs in November as seasonal hiring accelerated. Year-to-date job growth for 2007 remained stable at 1.8 percent. Natural resources and construction and manufacturing were the only two of Metro Denver's 11 industry supersectors to report year-to-date job losses (-1.8 percent and -2.4 percent, respectively). Among the remaining industries, year-to-date employment growth ranged from less than one percent in transportation, warehousing, and utilities to 4.2 percent in professional and business services.

Regionally, the Boulder-Longmont MSA continues to lead job growth with employment up 2.6 percent year-to-date. The Denver-Aurora MSA reported 1.6 percent job growth through November, ahead of the nation's 1.3 percent gain but behind Colorado's two percent growth through the first 11 months of 2007.

Colorado's job growth through 2007 was largely driven by gains in natural resources and mining. As the year ended, news from the state's mining sector suggested the growth could continue. Freeport-McMoRan Copper and Gold, Inc. will re-open the Climax molybdenum mine in Leadville. Company officials say daily operations will employ 350 workers when pit-mining resumes in 2010. Additionally, Golden's National Renewable Energy Laboratory (NREL) will hire 100 scientists and administrative staff, thanks to the lab's largest-ever budget increase. NREL also secured funds to build a $55 million new facility on the existing campus.

Metro Denver employers improved their hiring outlook for 2008, although hiring expectations remain noticeably below prior years. According to the most recent Manpower Employment Outlook Survey, 27 percent of Denver area employers planned to hire in first quarter, up from 23 percent in fourth quarter 2007. Denver area job prospects will be best in non-durable goods manufacturing, transportation and utilities, and financial services. Job prospects in Boulder's non-durable goods manufacturing sector also look bright, contrary to a weaker outlook for non-durable manufacturing jobs at the national level.

Unlike its employers, Mountain region consumers are not as confident as they were in the past according to the Conference Board’s Consumer Confidence Index. The region's index followed an inconsistent course in November declining to 113.9 after hitting 140.1 in October, the third-highest reading for the year. The national Consumer Confidence Index posted its fourth consecutive decline in November as consumers' short-term outlooks deteriorated considerably.

A look back to September – the most recent month for which local retail data are available – reveals subtle signs of slowing in Metro Denver's retail market. Retail sales across all industries totaled almost $7.4 billion in September, up about six percent from September 2006. While sales gains are still healthy, over-the-year growth tapered considerably in all but one of the seven Metro Denver counties. Boulder County reported September retail sales up 15 percent over September 2006, but growth in the remaining counties ranged from -0.6 percent in Broomfield County to 4.9 percent in Denver County. Several Metro Denver retailers reported slower-than-expected foot traffic on the typically busy day-after-Christmas.

The slumping residential real estate sector continues to challenge economic growth, but the commercial real estate sector has maintained momentum. Consumers weathered these economic challenges reasonably well, but high food and energy prices could keep pressure on household budgets throughout the year.

"Overall, though, Metro Denver's economy has experienced relatively mild corrections, and the area's reputation as a top spot for work and play will help keep the economy growing this year," stated Tom Clark, executive vice president of the Metro Denver EDC.

Recent economic data for Metro Denver show that eight of 18 indicators moved in a positive direction for the month, up from seven positive changes recorded last month. The mortgage crisis continues to test consumer confidence and the stock market, but commercial real estate trends are stable and hiring expectations have improved. Thirteen of the 18 indicators had positive annual trend changes, up from twelve recorded 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

• According to the most recent Manpower Employment Outlook Survey, The first quarter hiring outlook for Boulder County is largely flat. The percent of employers planning to hire was unchanged from fourth quarter at 13 percent, and the share of employers planning to reduce payrolls declined slightly to three percent.
  
  
• Metro Denver’s unemployment rate typically rises in late fall, but November’s rate rose slightly more than it has in previous years. The area’s unemployment rate rose from 3.5 percent in October to 3.9 percent in November as unemployment increased in each of the region’s seven counties.
  
  
• Typical seasonal trends brought Metro Denver’s count of first-time unemployment insurance claims higher between October and November. On a year-to-date basis, Metro Denver unemployment claims are roughly on par with last year’s count, a somewhat unexpected trend given the area’s slower job growth. Statewide, unemployment insurance claims filed through November was down two percent from the same period last year.

Consumer Sector

• Metro Denver hotels had slightly weaker traffic in November. A November drop in occupancy is consistent with seasonal patterns, but the decline to 56.3 percent from October’s 74.6 percent was slightly larger than the shift recorded in previous years. In 2006, for example, occupancy rates declined from 71.3 percent in October to 58.6 percent in November. Still, the shifts from 2006 to 2007 were subtle, and unseasonably warm weather and high gas costs may have contributed to slightly less Thanksgiving travel. Overall, Metro Denver hotel occupancy was up 1.6 percent through the first 11 months of the year, and average room rates posted a robust 10 percent increase.
  
  
• Passenger traffic at Denver International Airport was swift in October, bringing year-to-date passenger traffic to almost 42.1 million. That represents a 4.6 percent increase in travelers over the same period in 2006. According to the U.S. Bureau of Transportation Statistics, DIA was the nation’s fourth-busiest airport in the first half of 2007. With just two months of travel data yet to be released, DIA remains on-track for its busiest year ever.
  
  
• Wall Street ended 2007 in positive territory, but widespread financial turmoil pushed annual gains well below last year’s levels for several major indexes. The S&P 500 finished 2007 with the smallest annual gain of 3.5 percent, down noticeably from last year’s 13.6 percent return. The Dow Jones Industrial Average followed with a 6.4 percent gain for the year, also running behind its 2006 return of 16.3 percent. The NASDAQ finished just ahead of 2006 with a 9.8 percent gain in 2007, but the Bloomberg Colorado Index recorded a slightly better margin. Far ahead of the national indexes in terms of overall return, the Bloomberg Colorado Index finished 2007 with a 17.7 percent gain.

Residential Real Estate

• In Metro Denver, existing home sales followed a typical seasonal pattern downward, and sales through the first 11 months of the year were down slightly from 2006. Slightly less than 3,500 home sales closed in November, bringing the year-to-date total of closed sales to 46,600. That puts home sales through November 1.2 percent below sales from the same period last year, and the forward-looking measure of homes under contract was essentially flat on a year-to-date basis. On a more positive note, Metro Denver’s unsold inventory is down 1.5 percent year-to-date.
  
  
• According to the National Association of Realtors, the national median price for all existing homes was $210,200 in November, down three percent from the median reported in November 2006. The NAR continues to emphasize that the mortgage and home sales contractions have been particularly hard on high-priced markets, and it says the declining median home price reflects a market shift towards less-expensive homes.
  
  
• The S&P/Case-Shiller Home Price Indexes apply a different methodology, suggesting that even the nation’s strongest metro markets are struggling. The number of metro areas showing positive annual returns declined from five in September to three in October – Seattle, Portland, and Charlotte are now the only metro areas to have home price indexes higher than last year. The Denver index posted a 1.7 percent loss between September and October, and the index recorded a -1.8 percent annual return.
  
  
• New data from Metrolist essentially validates the long-term trend of Denver’s S&P/Case-Shiller Home Price Index. The average sold price of a single-family home in Metro Denver rose between October and November, but the year-to-date average fell 1.5 percent below the same period last year.
  
  
• In November, Metro Denver foreclosures declined from the prior month but posted a 38 percent year-to-date increase over the first 11 months of last year. Denver, Douglas, and Adams Counties continue to report the sharpest gains in defaults, but public trustees say foreclosure is affecting properties across many locations and price ranges.
  
  
• Some types of residential construction are already having increased permit activity, specifically multi-unit and apartment projects. Local construction data show residential building permits rising sharply between September and October, a gain due entirely to large increases in permits for condominiums, townhomes, and apartment buildings.
  
  
• Fourth-quarter data for Metro Denver’s apartment rental market are not yet available, but third quarter figures still point to rapidly tightening conditions. The third quarter vacancy rate of 5.3 percent was down from the prior quarter’s 6.2 percent and noticeably below the 6.7 percent vacancy rate recorded in third quarter 2006. The overall vacancy rate in Metro Denver’s apartment rental market is now at its lowest level since 2001.

Commercial Real Estate

• Financial market instability made both residential and commercial real estate deals harder to close in the second half of 2007, and rising uncertainties kept investors cautious. As a result, Metro Denver’s office market flattened between the third and fourth quarters. According to the latest data from CoStar Realty Information, Inc., Metro Denver’s office market vacancy rate was roughly 12 percent in both the third and fourth quarter, and average lease rates ticked up to end the year just over $20 per square foot.
  
  
• Similar to Metro Denver’s office market, the industrial market flattened at the end of 2007. According to CoStar, vacancy rates were stable between the third and fourth quarter and ended the year at 5.6 percent. Average, triple-net lease rates rose to just over $5 per square foot in fourth quarter, marking a gain from early 2007 that was nonetheless slower than lease rate increases over the past two years.
  
  
• Metro Denver’s flex market showed similar trends as the office and industrial markets in fourth quarter. CoStar data show vacancy rates unchanged at 12.9 percent in both the third and fourth quarters, but average lease rates made an impressive move forward to end the year at $9.32 per square foot.
  
  
• Flex projects in Boulder accounted for the largest portion of Metro Denver construction as the year ended, but projects in Arapahoe County including the Ridge at SouthPark also made measurable contributions. Overall, slightly less than 200,000 square feet of Metro Denver flex space was in the pipeline in fourth quarter, and nearly 300,000 square feet of space had been added to the market throughout the year.
  
  
• The retail market has so far been the hardest hit by the credit crunch, partly because cash-strapped consumers are spending less and partly because tighter credit standards mean fewer people are able to access new credit. According to CoStar, Metro Denver’s retail vacancy rates ticked up from 6.9 percent in third quarter to 7.3 percent in fourth quarter, the highest vacancy reported since third quarter 2006. With vacancy on the rise, average lease rates declined from $16.81 in third quarter to $16.55 in fourth quarter.
  
  

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

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