2018 Economic Update

As of August 2018, the current economic expansion has been underway for 110 months, which ranks as the second-longest expansion since tracking began in 1854. The longest expansion was from March 1991 to March 2001, a period of 120 months. Most analysts expect that the U.S. economy will maintain its current momentum through 2019, resulting in this economic cycle ultimately being declared as the longest in U.S. history.

World Output

The global expansion approached its two-year mark at the end of the first half of 2018. While growth in world output remained steady in the first half of 2018, expansion appears to have peaked in some economies and growth became less even across countries. The International Monetary Fund (IMF) releases a detailed world economic outlook each October and brief updates quarterly. The IMF reaffirmed the expected growth rate projected from the April 2018 update in the July 2018 update, forecasting that global growth will reach 3.9 percent in 2018 and 2019.

A closer look at some of Colorado’s key trading partners reveals mixed economic performance. Canada is expected to grow at a rate of 2.1 percent in 2018 and 2 percent in 2019, slower than the 3 percent rate recorded in 2017. However, the Mexican economy is forecasted to accelerate in 2018 and 2019, growing at a rate of 2.3 percent and 2.7 percent, respectively. Projected activity in the Euro Area is basically on par with the prior two years as political risk has diminished, with anticipated growth rates of 2.2 percent in 2018 and 1.9 percent in 2019. Nonetheless, slower growth expectations in the United Kingdom remain, with growth slowing to 1.4 percent in 2018 from 1.7 percent in 2017. The Chinese growth rate is also expected to slow, falling from 6.9 percent in 2017 to 6.6 percent in 2018 and 6.4 percent in 2019. After a temporary boost to 1.7 percent in 2017, growth in Japan is expected to slow back down to 1 percent in 2018, and then slow further to 0.9 percent in 2019.

After posting a 2.2 percent increase in the first quarter of 2018, U.S. GDP growth accelerated to a 4.2 percent annualized rate in the second quarter. The faster pace reflected positive contributions from personal consumption expenditures, business investment, and government spending. GDP is expected to maintain momentum in the last half of the year. As a result, GDP is expected to increase 2.9 percent in 2018 and 2.7 percent in 2019. Of the four components of GDP, consumer spending has been the key to growth, with growth increasing from 0.5 percent in the first quarter to 3.8 percent in the second quarter. After a slight downturn in nonresidential fixed investment in 2016, investment rebounded in 2017 and continued to grow at a strong pace through the first half of 2018. Imports remain greater than exports, resulting in a negative contribution to GDP, and government spending was relatively stable.

Employment

After dipping to 12th in 2016, Colorado’s employment growth rate once again ranked among the top 10 states in 2017, posting the sixth highest rate of growth. As of July 2018, Colorado year-to-date employment had increased 2.8 percent compared with last year and the state was on track to rank fifth for employment growth. Idaho and Utah currently hold the top spots in the country, with both states posting a 3.3 percent employment increase. Colorado employment growth is expected to average 2.6 percent in 2018 and slow to 2.1 percent growth in 2019 as worker availability remains constrained.

All seven metropolitan statistical areas (MSAs) in Colorado posted increased employment through the first seven months of 2018 compared with the same time in 2017. The Greeley MSA was once again the fastest growing metro area in Colorado after the decline in the oil and gas industry affected growth in Weld County in 2015 and 2016. Through July 2018, Greeley MSA employment has increased 4.8 percent. The Colorado Springs (+3.3 percent) and Fort Collins MSAs (+3.2 percent) are also growing at faster rates than the state. The Metro Denver region is growing at about the same pace as the state, while the Grand Junction (2.5 percent) and Pueblo MSAs (0.2 percent) are increasing at a slower pace than the state.

Annual Employment Growth Rates

 

2016

2017

2018 est.

Metro Denver

2.6%

1.9%

2.6%

Colorado

2.4%

2.2%

2.6%

U.S.

1.8%

1.6%

1.5%

Sources: U.S. Bureau of Labor Statistics; 2018 est.=DRP Estimate.

Nearly 1.7 million jobs are located in Metro Denver. Dividing the employment base into 11 supersectors reveals that nine of the 11 categories in Metro Denver increased through the first seven months of the year. The other services supersector and the government supersector posted the only declines. The information supersector reported the largest percentage increase in employment, averaging a 6.1 percent increase in the first seven months of the year. The professional and business services supersector added the most new jobs with employment increasing by 8,900 jobs. The professional and business services supersector is also the largest of the 11 supersectors. Another supersector with notable growth was the natural resources and construction supersector that increased 5.9 percent in the first seven months of the year and added 6,200 jobs. The financial activities supersector recorded the smallest increase in employment over-the-year, rising 1.2 percent with the addition of 1,400 jobs.

Metro Denver Employment Growth by Supersector
Chart 1

Employment in Metro Denver is forecasted to increase by 2.6 percent in 2018, representing the addition of about 42,000 jobs. Through the end of 2018, the other services supersector is expected to be the only one to shed jobs. Natural resources and construction; transportation, warehousing, and utilities; and leisure and hospitality are expected to be the fastest growing supersectors through the end of the year. Professional and business services and leisure and hospitality are expected to be responsible for nearly 40 percent of the job growth in 2018. The same as the state, Metro Denver employment growth in 2019 is likely to fall slightly to 2.1 percent.

While companies continue to struggle to find more workers with an unemployment rate averaging 2.8 percent in Metro Denver and 3 percent throughout the state in 2018, more employment opportunities and rising wages have boosted Colorado’s labor force participation rate (LFPR). In July 2018, Colorado’s not seasonally adjusted LFPR recorded its highest level since 2011, rising to 69.9 percent from a low of 66.4 percent in January 2016.

Commercial Real Estate

The addition of an estimated 42,000 net new jobs in Metro Denver in 2018 provides the momentum for the continued expansion of the commercial real estate markets. Although the three main market types generally have posted rising vacancy rates in the first half of 2018, increasing lease rates and low levels of sublet space have created an environment conducive to brisk construction activity.

Office

Current data suggest that momentum in the office market may be slowing slightly, although the demand for large blocks of space is still high. The second quarter 2018 direct vacancy rate of 10.1 percent is higher than the same periods in 2016 and 2017. The average lease rate rose 2 percent over-the-year to $26.61 per square foot during the second quarter of 2018, which was slower than the 2.8 percent increase in 2017 and the 5.4 percent increase in 2016. Nearly 2.9 million square feet of office space has been completed as of mid-2018 with another 3.7 million square feet under construction. About 80 percent of the office space under construction is located in the City and County of Denver. Based on projects currently under construction with an expected 2018 delivery date, a total of 4.4 million square feet will likely be added to the market in 2018, up from the 3 million square feet delivered in 2017.

Industrial

The second quarter direct vacancy rate for industrial space was 4.5 percent, 0.4 percentage points higher than 2017 and 1.1 percentage points higher than the second quarter of 2016. The direct vacancy rate has risen steadily since a low of 2.6 percent posted in the third quarter of 2015. The average lease rate increased 3.4 percent over-the-year to $7.86 per square foot (NNN) during the second quarter of 2018, a faster pace than the 1.2 percent increase recorded in 2017, but slower than the 13.6 percent pace recorded in the second quarter of 2016. More than 1.3 million square feet of new industrial space was brought online during the first half of 2018, and another 6.3 million square feet of space remains under construction. Most of the industrial activity is occurring along the I-70 corridor, with 85 percent of the industrial space under construction located in Adams County. Assuming that all projects with an expected 2018 delivery date are completed as planned, 6.9 million square feet of industrial space will be added to the Metro Denver market in 2018, a new record for industrial completions in one year. While about 2.4 million square feet of space to be completed in 2018 is for Amazon, the large amount of space to be added to the market will likely slow the construction momentum heading into 2019.

Retail

Some analysts describe Metro Denver’s retail market as being in equilibrium, with relatively stable vacancy rates and a consistent level of new construction. The direct vacancy rate increased 0.2 percentage points between the second quarters of 2017 and 2018 to 4.5 percent. However, the second quarter vacancy rate was the same as the rate posted in the second quarter of 2016. The average lease rate in the second quarter increased 4.5 percent over-the-year, to $18.19 per square foot (NNN). While the pace of rent growth was slower than the 5.6 percent rate posted in the second quarter of 2017, it was higher than the 4 percent rate posted in the second quarter of 2016. There were 48 projects totaling about 530,000 square feet of space completed during the first half of the year, with Jefferson County and Douglas County recording the largest amounts of completed space. Nearly 1.6 million square feet of space in 66 buildings was under construction as of the end of the second quarter of 2018. About 1.6 million square feet will likely be added to the retail market in 2018, the same amount that was added in 2017. 

Direct Vacancy Rates

 

2Q 2016

2Q 2017

2Q 2018

Office

9.0%

9.8%

10.1%

Industrial

3.4%

4.1%

4.5%

Retail

4.5%

4.3%

4.5%

Source: CoStar Realty Information, Inc.

Consumer Activity

Consumption, or consumer activity, is the largest component of U.S. GDP, representing approximately 69 percent of the total. The Consumer Confidence Index tends to be a reasonable indicator of future consumer activity. The January–July average Consumer Confidence Index for the U.S. was 7.7 percent higher in 2018 compared with the same time last year. The average Mountain Region Index, which includes Colorado, was 1.4 percent higher. The high index levels reflect confident consumers who are spending at a steady pace.

Nationally, total retail trade activity has been increasing at a 5.3 percent pace in 2018, higher than the 2.9 percent growth rate in 2016 and the 4.7 percent increase in 2017. The slower pace in 2016 was mainly attributed to the low and falling price of gasoline. “Core” retail activity, which excludes gasoline, motor vehicles, and building materials, is on pace to accelerate for the second consecutive year after the pace of growth slowed in 2016. Core retail activity increased 3.3 percent in 2016 and 3.8 percent in 2017. As of mid-2018, core retail activity has increased 4.9 percent year-to-date.

Consumer Activity

Chart 2

The Metro Denver region is home to 3.2 million people. The population has been growing an average of 1.7 percent per year over the past 10 years, or an average of 50,000 net new people each year. Net migration, or the number of people moving into the region less the number of people moving out, has been responsible for 60 percent of the population growth. The remaining 40 percent of the population increase comes from natural increase, or the number of births less the number of deaths.

Consumer activity in Metro Denver has also been increasing at a brisk pace. Although data comparable to U.S. retail trade data is no longer available from the Colorado Department of Revenue, data for state sales tax collections by county may be used as a proxy. Currently, this data is available only through the end of 2017, so it is difficult to project the spending patterns of the region’s 3.2 million people through the end of 2018. State sales tax collections in the seven-county Metro Denver area increased 5 percent in 2017, up from a 3.5 percent increase in 2016. As the Mountain Region consumer confidence index has displayed higher levels of confidence than found nationally, it is expected that consumer activity has been increasing at a faster pace in Metro Denver than the nation.

Residential Real Estate

The rapid increase in home prices combined with limited inventory of for-sale homes in Metro Denver is making it challenging for some households to move into a home ownership position. As of the second quarter of 2018, the Boulder MSA had the sixth-highest median home price of the 178 MSAs tracked by the National Association of Realtors. The Denver MSA ranked as the 13th most expensive market. While home price increases are moderating, the median home price in the Denver MSA is expected to average $444,600 in 2018, a 7.2 percent increase over last year. In comparison, the national median home price is expected to average $261,000, a 4.9 percent increase over 2017.

The number of existing homes listed for sale increased over-the-year in May (+9.2 percent), June (+5.3 percent), and July (+4 percent) of 2018, but inventory remains significantly constrained. In July 2010, there were 23,450 active listings. The July inventory level decreased steadily through July 2017 when only 7,352 single-family and condominium units were listed for sale. While the 4 percent increase to 7,643 units in July 2018 is welcome, limited inventory and rapidly rising prices have forced some potential buyers out of the market. As a result, the number of home sales in 2018 has declined from the 2017 level. While the Metro Denver region is on target to post about 54,300 home sales in 2018, a 6 percent decline from 2017, sales activity is still at a healthy level given the size of the market.

Residential Real Estate Indicators

 

2016

2017

2018 est.

Home Sales (closed)

56,142

57,788

54,300

Median Home Price

 

 

 

   Metro Denver

$384,300

$414,700

$444,600

   National

$235,500

$248,800

$261,000

Apartment Vacancy Rate

5.7%

5.6%

6.0%

Residential Building Permits*

23,496

24,021

22,402

   Single-Family Detached (1 unit)

10,663

11,419

12,854

   Single-Family Attached (2-4 units)

532

384

253

   Multi-Family (5+ units)

12,301

12,218

9,295

*The U.S. Census Bureau tracks building permits according to the number of housing units in the structure. 
Sources: Denver Metro Association of Realtors; National Association of Realtors; Denver Metro Apartment Vacancy & Rent Survey; U.S. Census Bureau.

Builders continue to add new housing units throughout Metro Denver. Following a 7.1 percent increase in single-family detached building permits issued in 2017, permits are up more than 18 percent through June 2018 compared with the same period in 2017. Metro Denver is expected to record approximately 12,850 single-family detached permits in 2018, a 12.6 percent increase and the highest number since 2006. While single-family detached construction activity remains robust, the number of permitted multifamily units has declined sharply in 2018. Year-to-date through June 2018, multifamily permits have decreased 30.5 percent. Multifamily permit activity is on pace for the second consecutive year of decreases, following a 0.7 percent decrease in permits in 2017. 

The apartment vacancy rate has been relatively stable over the past two years, fluctuating between 5 percent and 6.4 percent on a quarterly basis. In the second quarter of 2018, the apartment vacancy in Metro Denver was 6 percent. The rate is expected to increase slightly throughout the remainder of the year to an average vacancy rate of 6.3 percent. After double-digit increases in the average apartment rent in 2014 and 2015, fourth quarter apartment rental rates increased 4.3 percent in 2016 and 3.7 percent in 2017. Rent increases continue to moderate, with a 3.5 percent growth rate expected in 2018. In the second quarter, the average rental rate for all units ranged from $1,387 per month in Adams County to $1,652 in the Boulder/Broomfield market area, with an average of $1,484 per month throughout Metro Denver. 

While most economic indicators continue to improve at a steady pace, there are signs that momentum is slowing in a few facets of the local and/or national economies. Most notably, home sales activity is starting to slow due to rapidly rising home prices and limited new supply. Commercial real estate markets are generally sound, with a few signs of caution in some market types. On the other hand, the momentum continues in consumer spending, which has largely supported overall economic activity. Employment is still expanding, although labor supply constraints and international trade concerns are influencing the pace of growth.