September 2011
Metro Denver's housing market weathers tough conditions; overall economy still dependent on significant job growth
A range of factors continue to affect Metro Denver's economic recovery. Despite slow growth and decreased consumer confidence, the area's housing market is steady given the overall economic climate. Retail and office vacancy rates are lower, and the commercial real estate market is stable, according to data compiled by the Metro Denver Economic Development Corporation (Metro Denver EDC) in its Monthly Economic Summary for September 2011.
While few would say the national housing market is performing well, Metro Denver is faring reasonably well. According to data from the National Association of Realtors, the Denver-Aurora-Broomfield MSA was one of 109 metro areas that reported a year over year decline in second quarter median home price, although the Denver decline (0.9 percent) ranked seventh smallest and was roughly one-third of the drop reported in the nationwide median (2.8 percent). Price declines are hardly good news for the market, but Metro Denver's comparatively modest drop shows the local housing market is holding its own under very difficult conditions.
The continued decline in Metro Denver foreclosure activity is another sign the market is withstanding tough conditions. Public trustees throughout most of the seven-county region reported year-to-date counts of new foreclosure filings in July that were 30 percent or more below comparable totals for 2010. Filings delays related to the "robo-signing" crisis have likely influenced the recent decline in foreclosures, but experts increasingly acknowledge the drop appears to be more than a temporary phenomenon. The various programs designed to help homeowners avoid foreclosure may finally be working, although the weakening job market is placing more homeowners at risk. Notably, the Mortgage Bankers Association recently reported that new mortgage delinquencies, a measure closely tied to the labor market, are rising again.
Because activity in the housing market is closely related to job trends, the recovery in the market could take time. One facet of housing, the apartment market, is gaining strength. Vacancies are down, rents are rising, and apartment construction has accelerated. Multifamily construction activity is still a fraction of what it was in healthier economic times, but apartment construction remains a welcome source of business for some recession-weary builders.
"Along with the recent multifamily development activity, there are other signs of growth in key industry clusters in the region," explains Tom Clark, executive vice president of the Metro Denver EDC. "Many Metro Denver aerospace and cleantech companies received large contracts and orders this year, and 14 Colorado companies were named on Inc. magazine's 2011 list of the 500 fastest growing private companies. Unfortunately we are still waiting on consistent and significant job growth in order for the economy to rebound. Substantial job growth will boost consumer confidence, support the housing market, and create demand for additional commercial space and development."
Decline in apartment, office, and retail vacancy rates are three of eight indicators that moved in a positive monthly direction in this report. Eleven indicators moved in a positive direction in last month's report. Fourteen indicators moved in a positive annual direction this month, compared to 15 last month.
Labor and Employment
Metro Denver employment fell by 12,000 jobs between June and July largely because of typical seasonal layoffs in public education. July employment declines in information and financial activities, both industries that are experiencing consolidation, were not typical. Because the numbers of industry supersectors reporting annual job gains and losses are nearly equal, total Metro Denver employment across all industries in July was roughly the same total reported last year.
Because job growth has been sluggish, the unemployment rate remains high. Metro Denver's average unemployment rate through the first seven months of this year (8.8 percent) was just one-tenth of a percentage point below the comparable 2010 average, and the statewide year-to-date average unemployment rate in July (9 percent) was also down one-tenth of a point. As labor markets have been slightly stronger elsewhere, the national average unemployment rate through July (9.2 percent) was down more noticeably from the comparable 2010 average (9.9 percent).
The average weekly number of new Metro Denver claims for unemployment insurance was 19 percent lower this July than it was in July 2010. Even so, the July 2011 average was almost 45 percent higher than the average reported in July 2007, roughly five months before the recession officially began. Similarly, the July 2011 average number of claims statewide was down 17 percent since July 2010 but was 45 percent higher than the average in July 2007.
Consumer Sector
Recent consumer confidence reports also suggest households are under new pressure. The Conference Board's U.S. Consumer Confidence Index reading for August (44.5) was the lowest reported since April 2009. Households' assessments of present conditions declined slightly between July and August, but a more dramatic drop in their near-term expectations suggests the debt ceiling disagreement and weak economic data have left consumers cautious.
The Mountain Region Consumer Confidence Index also declined between July and August, but a comparatively mild drop in households' six month expectations resulted in a smaller decline in the index overall. Mountain Region consumers were often more confident than their peers before the recession, but it is likely too soon to tell if this trend will return.
Metro Denver retail sales through the first four months of 2011 were 7.6 percent higher than the comparable 2010 sales total, although a spike in Adams County sales activity was responsible for a sizeable portion of the overall gain. Colorado retail sales were up 9.5 percent in April.
A turbulent August-marked by news of the debt downgrade, fiscal trouble abroad, weaker than expected GDP, and other negative developments-took a heavy toll on the stock market. Each of the major national indices ended the month down noticeably from the ending value for July, and only the Dow Jones Industrial Average maintained, by a narrow margin, a positive return this year. The Bloomberg Colorado index was down four percent for the year in August.
Weak consumer confidence levels do not always correlate with reduced spending. Such was the case with lodging activity during the midsummer, when local hotels reported a steady flow of visitors despite increasing caution among businesses and consumers. Metro Denver's average hotel occupancy rate in July (79.7 percent) was in-line with the long-term average, and the average room rate for July ($114.71) was 6.2 percent higher than last year's average rate.
Denver International Airport recently released revised passenger traffic statistics that show traffic through the first half of this year was 2.6 percent higher than traffic in the same months of 2010. While the increase in traffic is currently on-track to exceed airport officials' expectations for a two percent gain this year, carriers' planned capacity reductions could decrease gains in passenger traffic through the end of this year.
Residential Real Estate
July existing home sales in Metro Denver were 17.7 percent higher than the sales total for July 2010. An increase from last July's depressed home sales, however, still made for a sales total that was weak from an historic perspective. Because homebuyers and sellers are increasingly hesitant, unsold inventory in Metro Denver continues to contract. Total unsold inventory in July was 25 percent lower than the inventory reported in July 2010 and about 40 percent lower than the July inventory level typically reported before the recession began.
According to data from the National Association of Realtors, Metro Denver home price trends have varied widely through the region. The Denver-Aurora-Broomfield MSA was one of 109 metro areas that reported a decline in second quarter median home price since the same period last year, and the Boulder MSA was among the remaining 42 metros with second quarter median prices equal to or above the price reported one year earlier. The Denver-Aurora-Broomfield median home price in the second quarter ($232,700) was down 0.9 percent since last year, while the median for the Boulder MSA ($370,300) was up 5.1 percent.
The Mortgage Bankers Association's National Delinquency Survey (NDS) shows the seasonally adjusted rate of U.S. mortgage delinquency in the second quarter (8.4 percent) was slightly higher than the first quarter rate. Experts say long-term loan delinquencies, or those with at least three payments past due, are declining while new delinquencies are on the rise. Weak labor market conditions, they say, tend to boost the rate of new delinquency.
The Delinquency Survey also shows a continued decline in foreclosure rates. The notion that foreclosures are temporarily slowing due to legal delays appears to be false, the report suggests, because long-term loan delinquency is declining. If lenders were merely delaying foreclosure filings, long-term delinquency rates would presumably rise.
Metro Denver public trustees filed 32.6 percent fewer foreclosures through the first seven months of this year than they filed during the same period last year. Officials with each of the seven counties except Boulder reported counts for this year's new filings that were at least 30 percent below comparable 2010 numbers.
Metro Denver officials issued 4.6 percent more residential building permits in the first seven months of this year than they did during the same period in 2010, although numbers of permits declined year-to-date for detached homes (-1.2 percent) and condominiums and townhomes (-22.7 percent). The number of apartment permits issued in Metro Denver through July was almost twice the count issued during the first seven months of 2010, although apartment permits issued this year still total just a fraction of the totals reported during healthier economic times.
Commercial Real Estate
The CB Richard Ellis MarketView Denver Office report for the second quarter suggests vacancy rates are slowly declining with a gradual increase in property demand. Because the office employment today is smaller than the number working before the recession, property demand is still too weak to support major market improvements or new development. Ultimately, the report suggests, substantial and sustainable improvement in the office market will not occur until job growth improves.
The Grubb & Ellis Denver Office Trends report for the second quarter suggests the local market is slowly improving, although an ongoing "flight to quality" is driving some of the market's leasing activity as existing tenants trade up for better amenities. The increasing shortage of high-quality space could support more development activity in the future, the report says.
The CB Richard Ellis MarketView Denver Industrial report for the second quarter suggests the local market recovery-aided by limited construction over the past several years-is proceeding, although the rebound may occur more slowly than recoveries from other recessions. Because economic conditions remain uncertain, many industrial tenants are hesitant to accumulate too much inventory and hence have more limited demand for space.
The Grubb & Ellis Denver Industrial Trends Report for the second quarter suggests last year's flight to quality in the industrial market has made the available supply of Class A space much tighter this year. The more limited availability of top-quality space may mean more leasing of Class B property in the short term and more construction of new space in the long term, particularly when the economy improves and lease rates strengthen enough to support development.
CB Richard Ellis' second quarter MarketView report for Metro Denver's retail market suggests the retail recovery is proceeding, although high energy prices and weak job growth have discouraged the stable household spending essential to a strong rebound. Even so, investors are beginning to forecast growth in Metro Denver's retail rents, the report says.