November 2011
Momentum builds in Metro Denver economy with GDP growth, recent expansions, and a drop in unemployment rate
The national and local economies received a much-needed boost in recent weeks. Metro Denver experienced employment gains between August and September and decreasing unemployment rates. Recent expansion and location activity within the state, combined with declining commercial real estate vacancy rates show promise in the Metro Denver market, according to data compiled by the Metro Denver Economic Development Corporation (Metro Denver EDC) in its Monthly Economic Summary for November 2011.
Preliminary estimates from the Bureau of Economic Analysis suggest third quarter growth in U.S. gross domestic product (2.5 percent) was better than second quarter's anemic growth pace (1.3 percent) and was driven partly by stronger household and business spending. Prospects for Metro Denver's economy also brightened as Arrow Electronics announced its headquarters relocation to Arapahoe County's Inverness Business Park, and GE unveiled plans for a $300 million solar manufacturing plant in Aurora. Combined, the companies could support more than 1,600 new Metro Denver jobs over the next several years.
Growth in gross domestic product and business expansions point to solid household and business spending, but this activity seems directly at odds with extremely low levels of consumer and business confidence. Because confidence measures have long been regarded as indicators of how retail sales, hiring, and other key economic activity will trend in the near-term, today's apparent disconnect between the moods of some businesses and consumers and their actual behavior is perplexing. Will solid retail sales endure, or will October's decreasing consumer confidence affect the holiday shopping season? Will GDP growth continue, or was third quarter's growth just a short departure from a sub-par recovery? Or, in perhaps the most likely possibility, are today's weak confidence readings an expression of frustration over political gridlock rather than a clear picture of the household and business outlook? Unfortunately, only more time and more data will tell.
"Although consumer confidence is dropping both at a local and national level, positive growth in retail spending and tourism activity in Metro Denver is still occurring," said Tom Clark, executive vice president of the Metro Denver EDC. "Additionally, our housing market, while still struggling through the recession, is relatively strong and is recognized nationally as one of the healthiest housing markets. Looking at all these indicators together, Metro Denver is slowly showing signs of recovery and positive momentum."
Ten Metro Denver indicators moved in a positive monthly direction in this report, compared to nine in the previous report. Fourteen indicators moved in a positive annual direction, while 13 moved in a positive annual direction in the October 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
Total Metro Denver employment through the first nine months of the year was 0.4 percent higher than the comparable 2010 employment total. Colorado employment was up a slightly higher 0.6 percent year-to-date in September, while employment nationwide rose one percent year-to-date.
The decline in Metro Denver's unemployment rate between August and September-from 8.3 percent to 7.6 percent-was larger than expected. While recent declines in the unemployment rate have many times occurred as discouraged jobseekers left the labor force, underlying data suggest the September drop occurred because more jobseekers actually found work.
Metro Denver's September unemployment rate was eight-tenths of a percentage point below last year's rate, and the statewide unemployment rate in September (7.6 percent) was also down eight-tenths of a point since last year. The nationwide unemployment rate in September was 8.8 percent, down from 9.2 percent in September 2010.
The Metro Denver average weekly number of new claims for unemployment insurance has followed the same trend for several months: the average for each month falls below the comparable 2010 average but is significantly above pre-recession norms. The September average weekly count of claims, for example, was 17 percent lower than the September 2010 average but was 43 percent higher than the average for September 2007.
Likewise, the statewide average weekly number of claims for September 2011 was down 16 percent over-the-year but was almost 59 percent above the September 2007 average.
Consumer Sector
The Conference Board's U.S. Consumer Confidence Index fell in October to the lowest level (39.8) reported since March 2009. Households that responded to the survey remain highly concerned over the availability of jobs and stagnant business conditions.
Like the U.S. index, the Mountain Region index fell in October to the lowest level (40.8) reported since March 2009. Mountain Region respondents' assessments of current economic conditions actually improved between September and October, but their expectations for the next six months declined noticeably.
Metro Denver counties have reported a variety of retail sales trends. In several counties - Arapahoe, Denver, and Jefferson - year-to-date sales growth in June was less than five percent or, in the case of Arapahoe County, slightly negative. Year-to-date sales growth in Douglas County (+18.5 percent) and Adams County (+36.5 percent) was significantly higher.
Retail trade sales for the seven Metro Denver counties combined rose 9.2 percent year-to-date in June.
Stock markets rose between September and October, although the major national indexes varied in their annual returns. The Dow Jones Industrial Average and the NASDAQ had positive annual returns of 3.3 percent and 1.2 percent in October, respectively, while the S&P 500 had a negative annual return (-0.3 percent). Likewise, the annual return on the Bloomberg Colorado Index was also negative (-3.2 percent) in October.
Metro Denver hotel trends continue to top last year's rates. The region-wide average occupancy rate in September (74 percent) was higher than the 72 percent rate reported in September 2010, and the average room rate in September ($112.34) was up 3.4 percent over-the-year.
August passenger traffic at Denver International Airport was 2.3 percent higher than the traffic total reported for August 2010. Notably, August 2011 was the only August in the airport's history when passenger traffic exceeded five million.
Total passenger traffic through the first eight months of the year was 2.3 percent higher than the comparable 2010 traffic total.
Residential Real Estate
Metro Denver existing home sales followed a typical seasonal pattern and declined between August and September. While September sales were 12.8 percent higher than sales reported in September 2010, the less-than-strong market clearly has many potential home sellers concerned; the unsold housing inventory reported in September (15,533) was the lowest inventory reported for September since 2000.
Total Metro Denver home sales through the first nine months of the year were down one percent from the comparable 2010 sales total. The year-to-date average sales price for detached homes in September was down 0.2 percent from the comparable 2010 average, and the year-to-date average condominium price was down 0.9 percent.
Foreclosure filings increased between August and September in four Metro Denver counties and declined in three. From a broader perspective, foreclosure activity is still declining. The total seven-county number of filings reported during the first nine months of the year (12,280) was almost 31 percent lower than the comparable number for 2010.
The number of residential building permits issued throughout Metro Denver during the first nine months of the year was 5.3 percent higher than the comparable count issued in 2010. More than three-quarters of the total increase came from apartment permits, and local housing experts say apartment activity will continue to dominate the residential construction market as demand for rental housing remains high.
Data from the Denver Metro Apartment Vacancy and Rent Survey show the region-wide vacancy rate in the third quarter (4.9 percent) was the lowest third quarter rate reported since 2000. Vacancy rates across the seven Metro Denver counties ranged from 3.8 percent in Douglas County to 5.6 percent in Arapahoe County.
With vacancy near the lowest rates reported over the past decade, average rents are increasing. The metro-wide average monthly rent for the third quarter ($936) was roughly 2.6 percent higher than last-year's average, and over-the-year rent growth for the seven metro counties ranged from 0.7 percent in Douglas County to five percent in the City and County of Denver.
Commercial Real Estate
The View - a semiannual report written by Newmark Knight Frank Frederick Ross (NKFFR) - suggests Metro Denver's office market continued to recover during the third quarter. Brokers say the region's office market recovery has been particularly impressive in the Central Business District, where the leases by major tenants including Bridgepoint Education have helped lower vacancy. Even with better fundamentals throughout the region, brokers say Metro Denver's office market remains in a "u-shaped" recovery. Because the ongoing flight-to-quality means move-ins are often offset by move-outs, they say, overall absorption this year may resemble last year's total.
The third quarter Office Market Snapshot by Cassidy Turley notes that the Metro Denver office market remains stable with a slight decrease in vacancy. The Central Business District market area will soon have a large block of space available as CenturyLink has announced that the company will downsize to between 100,000 and 150,000 square feet at 1801 California, leaving nearly 900,000 square feet of available space in that building. Still, analysts note that even though investment activity has leveled off, Denver remains a top 10 investment market in the United States.
NKFFR's The View report says conditions in Metro Denver's industrial market improved with positive absorption in the third quarter. Large national tenants - many of which are involved in renewable energy, technology, or healthcare - account for most of the current demand in Metro Denver's industrial market, brokers say. As many of these tenants are seeking larger spaces, industrial property supply is increasingly tight.
Industrial leasing activity was strong in the third quarter with more than 750,000 square feet of positive net absorption according to the Industrial Market Snapshot by Cassidy Turley. This was the highest quarterly absorption the market has experienced since 2008 and prompted the downward trend in the industrial vacancy rate. Analysts expect that historically low interest rates will attract new buyers into the market for both investor and user sales, but they predict speculative development will remain virtually non-existent for at least three more quarters.
Metro Denver's retail market improved with positive absorption in the third quarter, according to NKFFR's The View report. The completion of the new IKEA store in Centennial helped offset the closure of Borders bookstores, brokers say, and region-wide retail vacancy moved slightly downward. While speculative retail development remains largely on hold, NKFFR brokers expect infill projects will drive development momentum for several years.
Marcus & Millichap's Retail Research Market Update for Metro Denver suggests the region's market is gradually recovering. Retail sales have rebounded, the report says, and the pace of store closures has slowed considerably. Because only a small number of retail tenants are shopping for vacant space, brokers expect a slow decline in vacancy and a "substantial deficit" in rental rates that could continue for several quarters.
While the near-term outlook for Metro Denver's retail market may be tepid, retail activity is thriving in some parts of the region. Activity in the Central Business District, for example, could pick up considerably when Swedish retailer H&M opens its Denver location on November 10. The new store - located in the former Niketown space in the Denver Pavilions - will be the first H&M location in Metro Denver. Store spokespeople have already announced plans for a second location slated to open in Cherry Creek Shopping Center next year.