January 2010
Push for job growth will help commercial real estate market recover in Metro Denver
The downturn in residential real estate in many ways led the nation into recession, and commercial real estate will be one of the last sectors to recover, according to data compiled by the Metro Denver Economic Development Corporation (Metro Denver EDC) in its Monthly Economic Summary for January 2010.
Dysfunctional credit markets and reduced demand for office space drove higher vacancy rates and lower lease rates in 2009, and several major brokerages expect rates will not recover to pre-recession levels for several years. In this environment, commercial construction – which slowed in 2009 – will remain sluggish.
“Financing for construction projects is the real wild card here,” stated Patty Silverstein, chief economist for the Metro Denver EDC. “The money is out there, it’s just a matter of where and when it will be spent.”
According to CoStar Realty Information, Inc., the total square footage of Metro Denver office property completed in 2009 fell nearly 30 percent from the total finished in 2008, and the total volume of industrial property completed was less than one-tenth of the square footage completed in the prior year. The battered retail market accounted for a majority of commercial construction in Metro Denver in 2009, but the market’s total annual construction volume fell roughly 42 percent from the volume completed in 2008.
Data from CoStar also shows the direct vacancy rate in Metro Denver’s office market declined slightly between the third and fourth quarters, but the fourth quarter rate (13.8 percent) was nearly one percentage point above one year ago. Direct office market lease rates fell from $20.73 in the third quarter of 2009 to $20.10 in the fourth quarter.
While difficult for builders, brokers, and many others who depend on commercial real estate activity, the slowdown in commercial construction should help Metro Denver’s markets recover faster than metro markets with a larger inventory of new property. Recovery will still take time, particularly because demand for space depends heavily on job growth.
Metro Denver employers cut roughly 1,700 jobs in November, a month in which firms or businesses typically add between 3,000 and 5,000 positions.
“Additional layoffs are unwelcome, but November data suggest the pace of job loss in Metro Denver has slowed considerably,” said Silverstein. “I estimate we’re six months away from seeing positive job growth numbers.”
The region’s total employment was down 3.6 percent over-the-year in November, while the over-the-year drop in jobs reported just three months earlier was a substantially higher 4.8 percent.
In hopes of creating jobs, Colorado lawmakers are looking at launching several job creation programs. Governor Ritter unveiled a series of proposals that would establish tax-favored savings accounts for job training dollars and expand student loan forgiveness and repayment programs.
Additionally, the Denver Office of Economic Development’s Wage Subsidy Program will use funds from the American Recovery and Reinvestment Act plus other state and federal dollars to temporarily pay 50 percent of the wages for as many as 300 new jobs to qualifying employers.
While vacancy rates improved for all nonresidential real estate types except flex space from the third quarter to the fourth quarter, commercial real estate indicators were among a majority of Metro Denver indicators that showed negative annual trends in the current report. Only two indicators moved positively on an annual basis, as in the prior three reports. Like last month’s report, 11 indicators moved in a positive monthly direction in the current report.
The Monthly Economic Summary provides a snapshot of metro area economic activity, as well as its relationship to national and regional economic trends.