July 2010
Metro Denver commercial real estate market shows signs of improvement
Metro Denver's commercial real estate market - while far from recovered - is showing signs of improvement, according to data compiled by the Metro Denver Economic Development Corporation (Metro Denver EDC) in its Monthly Economic Summary for July 2010.
Vacancy rate increases have tapered significantly, and in some cases, declined. The industrial market, for example, continues to outperform other property types as the strong rebound in manufacturing drives demand for warehouse and distribution space. Leasing activity is also steadying in the retail market, where low lease rates and vacant big box space have created opportunities for large-format grocers and other retailers who are ready to repurpose and reoccupy.
"Full recovery in Metro Denver's office market is still several quarters away, but new and expanding companies are continuing to express interest in property around the region, and investors are regaining their interest in Metro Denver as they exit other more distressed metro markets," stated Tom Clark, executive vice president of the Metro Denver EDC.
A second quarter report by Grubb & Ellis suggests Metro Denver's office market is slowly improving. The report notes that office market vacancy tends to increase for four post-recession quarters before gradually improving, and vacancy rates have risen recently as many office market businesses take a less-than-aggressive stance on growth and hiring. Despite these challenges, Metro Denver's office market is showing signs of improvement.
According to CoStar Realty Information, Inc., the total square footage of Metro Denver office property under construction during the second quarter of 2010 was less than half of the total under construction one year prior. Other office market fundamentals were generally flat in the second quarter, with direct vacancy declining slightly to 13.5 percent from 13.6 percent in the first quarter and the direct average lease rate rising one cent to $20.07 per square foot.
Grubb & Ellis notes that a strong rebound in manufacturing activity has boosted demand for warehouse, distribution, and other industrial space throughout Metro Denver. As a result, the industrial market continues to show more strength than other property types. Market fundamentals have also strengthened as several renewable energy companies occupy newly completed space.
For the office market in particular, the recovery pace will ultimately reflect recovery in the labor market. Recent labor market data has been mixed, but improvement in employers' third quarter hiring expectations suggests the framework for job recovery is taking shape.
Results from the Manpower Employment Outlook Survey show that 19 percent of employers in the Denver-Aurora-Broomfield MSA plan to add jobs in the third quarter. The third quarter hiring percentage is the largest reported for the Denver area since the fourth quarter of 2008 and is slightly higher than the percentage planning to hire nationwide (18 percent). While better hiring expectations should give Metro Denver labor markets a much-needed boost, a majority (68 percent) of local employers are planning no staffing changes over the next three months.
Metro Denver employers added a higher number of jobs in May (12,800) than is typical for the month. While a positive development in general, the gain does not necessarily reflect a healthier private sector. Federal government jobs - many of which are temporary 2010 Census positions - accounted for almost one-third of the new positions added in May. Employers in leisure and hospitality added slightly fewer jobs in May than is typical for this time of year, and employers in information and manufacturing continued to cut jobs.
Twelve economic indicators for Metro Denver moved in a positive monthly direction in this report. In last month's report, 15 indicators moved in a positive monthly direction. Fifteen indicators moved in a positive annual direction in the current report, compared to 14 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. Key highlights include:
Labor and Employment
- Metro Denver’s unemployment rate declined from 7.6 percent in April to 7.5 percent in May. May unemployment rates declined from April levels in each of the seven Metro Denver counties except the City and County of Broomfield, where the unemployment rate was unchanged. The statewide unemployment rate fell to 7.7 percent in May from 7.8 percent in April, and the nationwide rate declined to 9.3 percent from 9.5 percent.
- The average weekly number of unemployment insurance claims filed in Metro Denver rose between April and May after five consecutive monthly declines. The increase, however, was slight, and the year-to-date average weekly count of claims was down 20.8 percent in May from the average for the first five months of 2009. The statewide average weekly number of claims was down a similar 20.4 percent year-to-date in May.
Consumer Sector
- Consumer’s poor income outlooks and job worries have clearly shaken consumer confidence. The Conference Board’s U.S. Consumer Confidence Index dropped sharply in June after improving three consecutive months. The Mountain Region Consumer Confidence Index also declined between May and June, but the drop was less pronounced than the decline reported nationwide.
- Metro Denver retail sales rose above last year’s level for the fourth consecutive month in March. Total retail sales for the first quarter of 2010 were 2.6 percent higher than sales in the first quarter of 2009, and first quarter 2010 sales also rose over-the-year in each of the seven Metro Denver counties except the City and County of Broomfield. Retail sales statewide have also strengthened, though not to the extent reported in Metro Denver.
- The decline in Denver International Airport passenger traffic between March and April is consistent with the shift from the spring break rush to more normal travel trends. Passenger traffic rose 3.7 percent year-to-date in April.
- In late June, stocks fell after news of weaker consumer confidence, lower expected growth in China, and ongoing troubles in the European economy. June year-to-date returns for the major national indexes were negative and ranged from -6.3 percent for the Dow Jones Industrial Average to -7.6 percent for the S&P 500. While the Bloomberg Colorado Index followed the national indexes and declined between May and June, the Bloomberg Colorado Index’s year-to-date return remained positive at 9.3 percent.
Residential Real Estate
- Metro Denver home sales increased 4.2 percent in May from the previous month, but the slight improvement concealed a major decline in pending transactions. The total number of Metro Denver homes under contract in May was 41.3 percent lower than the number for the prior month and 27.3 percent lower than the number under contract in May 2009. While much of the slowdown was expected in the post-tax credit housing market, the extent to which tax credit-driven sales “borrowed” future transactions will not be clear for several months.
- Four of the seven Metro Denver counties reported a year-to-date decline in foreclosure filings in May. Among the remaining counties, the increase in year-to-date filings in May was largest for Boulder County (6.4 percent), while Jefferson County (1 percent) and Douglas County (0.9 percent) reported smaller increases.
- Residential building permits issued in Metro Denver declined slightly between April and May, but the number of permits issued in May was still nearly 50 percent higher than one year prior. Permits for single-family detached homes increased the most (79.9 percent) year-to-date in May, followed by permits for condominiums and townhomes (52.9 percent). Apartment construction, by contrast, continues to lag. Apartment permits issued through the first five months of the year was 12.3 percent lower than the number issued during the same months of 2009.
Commercial Real Estate
- Metro Denver’s industrial market continues to perform better than other property types throughout the region. Data from CoStar show the region-wide direct industrial market vacancy rate declined in the second quarter to six percent from 6.5 percent in the first quarter. Despite declining vacancy, average lease rates remain low. Direct average lease rates declined just one cent per square foot to $4.74 in the second quarter, but the second quarter lease rate was nearly five percent below the rate reported in the second quarter of 2009 and almost nine percent lower than the second quarter 2008 rate. A scant 70,000 square feet of industrial property was under construction during the second quarter.
- Unlike the industrial market in Metro Denver, the flex market has yet to show sustained improvement. The direct flex market vacancy rate in the second quarter (14.9 percent) was higher than the 14.6 percent rate reported in the first quarter and was more than three percentage points above the pre-recession low point. The average flex market lease rate has remained fairly stable despite rising vacancy and reached $9.63 per square foot in the second quarter, up one cent per square foot from the first quarter average. Flex market construction activity, however, has stalled. Just 20,000 square feet of flex property was under construction during the second quarter, and no new properties have been completed yet this year.
- The third consecutive quarterly decline in Metro Denver’s direct retail market vacancy rate left the rate at 7.8 percent in the second quarter. Because the retail market remains highly competitive, retail lease rates continue to decline. Data from CoStar show the first quarter direct average lease rate ($15.31 per square foot) was six percent below the first quarter rate and was 12 percent lower than the peak rate reported in the third quarter of 2008. A slight 170,000 square feet of Metro Denver retail space was under construction during the second quarter, and just 320,000 square feet of space has been completed so far this year.
- Grubb & Ellis’ second quarter report states restaurants are currently the most active tenants in Metro Denver’s retail market. Large-scale retailers including Sunflower Market, SmartCo Foods, and Appliance Factory outlet are also generating market activity as they reoccupy and repurpose vacant big box space.
*A full report is available to Metro Denver EDC investors.