August 2011
Metro Denver and national economy still stabilizing as growth remains slow but steady
The Metro Denver economy, mirroring the national economy, is continuing to stabilize through the post-recession. While economic growth remains slow, positive movement is evident in consumer confidence, tourism, home sales, and building permits, according to data compiled by the Metro Denver Economic Development Corporation (Metro Denver EDC) in its Monthly Economic Summary for August 2011.
Due to numerous destabilizing events in the first half of 2011 - including a spike in oil and food prices, a major earthquake in Japan, and sovereign debt crises both here and abroad - the nation's economy grew at a much slower pace in the first and second quarters than many had anticipated. With unimpressive economic performance now behind us, economic experts wonder if the recovery will maintain momentum through the second half of the year.
Many indicators currently suggest growth, albeit slow, will continue. Metro Denver's housing market is still struggling for stability, but June contract activity was solid and prices are weathering the weak sales trend reasonably well. Recent job growth has not been robust enough to make much progress against high unemployment, but several industries including professional and business services and education and health services are adding healthy numbers of jobs.
"The reality is that the economy is still stabilizing and we are waiting for increased demand in all sectors of the market before significant economic growth is possible," notes Patty Silverstein, president of Development Research Partners and chief economist for the Metro Denver EDC. "But progress is still being made. There are major office projects underway in Metro Denver - including the new headquarters building for DaVita, Inc., the Denver Police Crime Lab, and office buildings from the new St. Anthony Central campus - residential building permits are up, and our industrial market continues to outperform that of the nation."
Ultimately, some pressures still weighing on the economy - a U.S. debt crisis in many ways still unresolved, remnants of the housing crisis, and a lack of consumer and business confidence - mean growth through the second half of the year will likely remain status quo. Ideally, though, stabilization in the post-recession economy will pave the way for sustained growth.
Despite these economic pressures, employment, consumer confidence in the Mountain region, and tourism (airport passengers and hotel occupancy) were among 11 economic indicators that moved in a positive direction this month. Fifteen indicators moved in a positive annual direction. This month trended slightly more positive than last month's report, which listed eight positive monthly indicators and 14 annual indicators.
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
Average Metro Denver employment across all industries through the first six months of the year was 0.5 percent higher than the comparable average for 2010. Employment statewide was also up 0.5 percent year-to-date in June, while employment nationwide was stronger at 0.9 percent.
The increase in Metro Denver's unemployment rate between May (8.3 percent) and June (8.5 percent) was largely consistent with seasonal trends. Because the region's job growth has been subdued, though, the June rate was only slightly below the rate reported in June 2010 (8.7 percent). Likewise, June unemployment rates in each of the seven counties were either unchanged from last year's rate or several tenths of a percentage point below it.
Data on unemployment insurance claims show the labor market - while improved relative to market conditions in 2010 - is still weaker than usual. The average weekly number of new Metro Denver claims filed in June was 20 percent below the number reported in June 2010, but was more than 60 percent above the average for June in the three years before the recession. Statewide data show a similar trend; the June average weekly number of new claims was about 20 percent below last year's average but was almost 64 percent higher than the pre-recession average for the month.
Consumer Sector
The Conference Board's U.S. Consumer Confidence Index rose slightly between June and July as a modest improvement in households' short-term expectations outweighed their weakening assessment of current conditions.
July consumer confidence readings varied by region. Households in the Mountain Region reported slightly improved assessments of the current economy and the near-term outlook, and the Confidence Index for the region rose to 59.6 in July from 50.4 in June.
Over-the-year growth in Metro Denver and Colorado retail sales slowed between January and February. Slower February growth notwithstanding, total Metro Denver retail sales through the first two months of the year were four percent higher than sales in the same months of 2010. Statewide retail sales were up 6.4 percent year-to-date in February.
Stocks fell sharply in late July as investors worried about the prospects for a default on U.S. debt. Weak readings on GDP and job growth challenge expansion in markets, and the major national indexes lost a noticeable portion of gains from the year. The Dow Jones Industrial Average had the largest year-to-date gain (+4.9 percent) as of late July, followed by the NASDQ (+3.9 percent), and the S&P 500 (+2.8 percent). The year-to-date return on the Bloomberg Colorado Index in July was two percent.
Hotel statistics suggest consumers are still traveling despite higher fuel costs and economic uncertainty. The average hotel occupancy rate throughout Metro Denver in June (79.8 percent) was more than one percentage-point higher than last year's average, and the June average room rate ($114.98) was up 3.2 percent over-the-year.
Residential Real Estate
Metro Denver existing home sales in June were 0.8 percent higher than sales reported in June 2010. While the sales number was unremarkable - June sales were almost 22 percent lower than the average for June between 2007 and 2009 - an increase in the number of homes placed under contract was positive. Specifically, the June number of homes placed under contract (4,761) was more than 22 percent higher than the number placed under contract one year prior. Not all of the gain reflects a healthier market, because June 2010 contract activity was somewhat depressed by the expiration of the homebuyers' tax credits. Even so, the increase in contract activity between June 2010 and June 2011 suggests the market is at least maintaining momentum.
Public trustees throughout Metro Denver filed 32.4 percent fewer foreclosures in the first half of 2011 than they filed during the same period in 2010, and filings in each of the seven counties were down at least 24 percent year-to-date in June.
Metro Denver officials issued 39 percent more residential building permits in June than they did in June 2010. Almost all of the gain came from more permits issued for detached single-family homes and apartments, as issuance of condominium permits was nearly flat from an over-the year perspective. On a year-to-date basis, total building permits issued in Metro Denver was up 3.3 percent with a marked increase (+69.4 percent) in permits for multifamily projects.
Metro Denver's already strong apartment market tightened further in the second quarter. Data from the Denver Metro Apartment Vacancy and Rent Survey show the region-wide vacancy rate fell to 4.8 percent in the second quarter from 5.5 percent in the first quarter and 6.1 percent in the second quarter of 2010. While housing experts consider vacancy rates below five percent indicative of a tight market, some say fallout from the housing crisis, an uncertain job outlook, and continued population growth will make for even lower vacancy rates later this year.
With vacancy falling quickly, average rents are poised to rise. The second quarter average monthly apartment rent for all of Metro Denver ($915) was just 1.7 percent higher than last year's average ($900), but housing experts say the pace of rent growth will accelerate given the spike in apartment demand. Even increased apartment construction, they say, will not happen quickly enough to ease the growing pressure on the region's rental housing supply.
Commercial Real Estate
Cassidy Turley Commercial Real Estate Services' second quarter Office Market Snapshot report for Metro Denver suggests the region's office market remains relatively stable. While leasing activity slowed in the second quarter, investment sales - including the top-dollar sale of 1515 Wynkoop - continued at a healthy pace. A risk for Metro Denver's office market, though, is the potential for more vacant property following CenturyLink's acquisition of Qwest. CenturyLink officials have not yet unveiled their plans for 1801 California, all of which is under a Qwest lease until June of next year.
The second quarter Denver Office Market report by Newmark Knight Frank Frederick Ross (NKFFR) suggests the market remains in a "slow and steady" recovery. More of the same is likely, the report suggests, for at least the remainder of this year. Rental rates have broadly stabilized, but widespread rent increases are unlikely until demand - in the form of job growth - returns. Stable rents will encourage yet more tenants to move up to affordable Class A properties, but these transactions will have a negligible effect on overall absorption.
The NKFFR Denver Industrial Market report for the second quarter shows the Metro Denver market continues to outperform the industrial market nationwide despite recently higher vacancy. The market has benefitted, analysts say, from a combination of rent reductions and limited property supply. In fact, supply of some large industrial space - space sought after by renewable energy and technology companies - is increasingly "constricted," the report says. Still, demand must increase further before rents rise enough to support more industrial development.
The NKFFR Denver Retail Market report for the second quarter suggests fundamentals in the region's retail sector are slowly improving, although closures of several national retailers are undermining some of the market's success. New locations by major retailers H&M and IKEA, for example, will be at least partly offset by the closures of Ultimate Electronics and all stores under the Borders brand. The retail market will not truly stabilize, the report says, until job and income growth are more consistent. Speculative retail development, in turn, is unlikely until the market stabilizes, although several major infill projects - including the redevelopment of Westminster Mall, the Tamarac Square shopping center, and the former University of Colorado Hospital Campus - are scheduled to proceed.