2019 Economic Update

We release an economic forecast for the coming year each January, which is followed by an economic update in August. As we begin to focus our vision on 2020, does it appear that economic conditions in 2019 are taking shape as expected, better than expected, or worse than expected? We are happy to report that other than some softness in residential home prices, all indicators in the Metro Denver region point to an economic expansion that continues at a pace equal to or greater than what was forecasted in January.

World Output

The global expansion approached its three-year mark at the end of the first half of 2019. However, the International Monetary Fund (IMF) noted in its latest world economic outlook update that growth remains sluggish and there were several downside risks to the forecast. According to the IMF, risks included ongoing trade tensions and trade uncertainty that were slowing investment activity and weighing on sentiment. Another developing risk is the ability of central banks to support core inflation targets in many advanced and emerging economies. The IMF forecasts global growth will increase 3.2 percent in 2019 and 3.5 percent in 2020.

Growth in 2019 is expected to slow for some of Colorado’s key trading partners. In Canada, output is expected to fall from 1.9 percent in 2018 to 1.5 percent in 2019. In Mexico, growth is expected to slow significantly – from 2 percent in 2018 to 0.9 percent in 2019 – as consumption activity slows and investment remains weak under the shadow of a sovereign debt rating downgrade. Economic activity should improve in both countries in 2020, with each expected to post a 1.9 percent increase in output. China continues to experience the negative effects of tariffs and trade tensions coinciding with broader structural shifts in the economy. The pace of growth in China is expected to fall from 6.6 percent in 2019 to 6.2 percent in 2020.

After posting a 3.1 percent increase in the first quarter of 2019, U.S. GDP growth slowed to a 2 percent annualized rate in the second quarter. Robust growth in personal consumption expenditures (+4.7 percent) in the second quarter was partially offset by a decline in private investment (-6.1 percent). The slower investment activity was reflected by a decline in both nonresidential and residential investment activity. Slower growth in the second quarter was also affected by a growing trade deficit as exports decreased from the first quarter and imports increased. While GDP growth in 2019 is expected to remain slower than the 2.9 percent pace posted in 2018, the outlook for 2019 has been revised upwards from the 2 percent pace originally forecasted in January to 2.3 percent. 

Employment

Through the first half of 2019, employment growth has slowed both nationally and locally from the rate posted in 2018. Encouragingly, the state’s strong economy and availability of job opportunities continue to influence Colorado’s labor force participation. In June 2019, Colorado’s not seasonally adjusted labor force participation rate continued to trend upward, reaching 70 percent for the first time since October 2011. The state’s rate had dipped as low as 66.4 percent in January 2016. However, slower net migration and low unemployment have dampened employment growth.

Despite Colorado’s slower employment growth, it remains one of the fastest growing states in 2019. As of June 2019, year-to-date employment growth ranked Colorado 11th among the states, down from eighth in 2018. Nevada and Utah currently have the fastest employment in the nation, posting year-to-date employment growth of 3.7 percent and 3 percent, respectively. Colorado employment growth is expected to average 1.9 percent in 2019, slightly faster than the 1.8 percent pace forecasted in January.

Unemployment in Colorado remains near historic lows and labor market conditions are even tighter than what had been expected in January. The unemployment rate throughout the state averaged 3.3 percent through the first 6 months of the year, equal to the level recorded in 2018. The unemployment rate in Metro Denver has also remained at 2018 levels, with an average annual rate of 3.1 percent expected in 2019. 

Annual Employment Growth Rates

	2017	2018	2019 est.
Metro Denver	2.1%	2.5%	1.8%
Colorado	2.3%	2.4%	1.9%
U.S.	1.6%	1.7%	1.5%

Sources: U.S. Bureau of Labor Statistics; 2019 est.=DRP Estimate.

Six of seven metropolitan statistical areas (MSAs) in Colorado posted increased employment through the first six months of 2019 compared with the same time in 2018. The Boulder MSA was the fastest growing metro area in Colorado based on preliminary data through the first six months of the year, with employment increasing 2.9 percent based on strength in the area’s tech industry and professional and business services sector. While growth slowed in the Greeley MSA through the first half of 2019, the area still recorded a robust 2.7 percent rate of employment growth year-to-date, higher than the state average of 1.9 percent. Similar rates of growth were recorded in the Fort Collins (+2.7 percent) and Grand Junction (+2.7 percent) MSAs. Employment in the Colorado Springs MSA is 1.9 percent higher than last year as companies seeking a more affordable business location choose the region. The Denver-Aurora-Lakewood MSA posted the second slowest pace of growth through the first half of 2019, with growth falling from 2.5 percent in 2018 to 1.5 percent year-to-date in 2019. Pueblo recorded no growth in employment through the first half of 2019 compared with the same months in 2018.

Metro Denver Employment Growth by Supersector
 

Combining the Denver and Boulder MSAs, there are more than 1.7 million jobs located in Metro Denver. Dividing the employment base into 11 supersectors reveals that ten of the 11 categories in Metro Denver are expected to increase in 2019. The financial activities supersector is expected to post the only decline, contracting by 0.5 percent in 2019 due to fewer banking and insurance jobs. The transportation, warehousing, and utilities supersector is expected to post the fastest growth rate. This supersector has been influenced heavily by e-commerce activities and should add 2,500 jobs in 2019, or a 4 percent increase. Metro Denver’s largest supersector, professional and business services, is expected to be the second-fastest growing supersector (+3.4 percent) and will add the most jobs with employment increasing by 10,500 positions.

The forecast for employment growth in Metro Denver remains at 1.8 percent in 2019, representing the addition of about 30,000 jobs. Professional and business services and education and health services are expected to be responsible for about 50 percent of the job growth in 2019.

Commercial Real Estate

The outlook for the commercial real estate markets remains much the same as had been expected in January with some slight increases in vacancy rates expected by the end of the year, positive rent growth, and robust yet slowing construction activity. The notable exception is that industrial construction activity is on target to reach a new record level in 2019.

Office

The second quarter 2019 direct vacancy rate for office space of 8.9 percent was lower than one year ago, falling 1.1 percentage points from the second quarter of 2018. Nonetheless, the rate is expected to tick up slightly through the end of the year, reaching 9.5 percent in the fourth quarter. Despite the low vacancy rate, rent growth has moderated from the rapid pace recorded from 2013 to 2017. In the second quarter of 2019, average gross direct rent in Metro Denver’s office market increased just 1.2 percent over-the-year to reach $26.95 per square foot, down from the 1.7 percent increase recorded in the second quarter of 2018 and the 3.4 percent rate in the second quarter of 2017. About 850,000 square feet of space across 16 buildings was added in Metro Denver by the end of the second quarter of 2019. In contrast, 2.9 million square feet had been completed at the same time last year. However, there was still over 3.1 million square feet of space in 36 buildings under construction at the end of the second quarter of 2019. Expect about 1.9 million square feet of new office space to be added in 2019, down from 4.2 million square feet in 2018.

Industrial

Metro Denver’s industrial market remained strong through the first half of 2019 with record construction activity, stable vacancy rates, and moderating rent growth. The second quarter direct vacancy rate for industrial space was 4.5 percent, 0.5 percentage points higher than the second quarter of 2018 but consistent with the slow increase in vacancy since 2017. The vacancy rate is expected to rise further to 4.7 percent by the end of the year. Similar to the office market, rent growth in Metro Denver’s industrial market may be moderating. In the second quarter of 2019, the direct lease rate (NNN) of $8.15 per square foot was 1.9 percent higher than last year’s rate at this time, down from the 5.3 percent increase posted between the second quarter of 2017 and 2018. Looking ahead, vacancy and rent may be affected by the large amount of deliveries expected in 2019. There was 2.55 million square feet of industrial space completed across 21 buildings as of the end of the second quarter of 2019, a record amount of space added by this point compared with prior years. Further, there was 4.31 million square feet across 33 buildings still under construction at the end of the second quarter 2019. Based on current construction plans, a record 6.5 million square feet of industrial space will be completed in 2019, up from 5 million square feet completed in 2018. 

Retail

After falling consistently since the Great Recession, vacancy rates troughed in the retail market in Metro Denver at 4.1 percent in the fourth quarter of 2018. The direct vacancy rate in the second quarter of 2019 rose to 4.4 percent and is expected to continue the upward trend to 4.6 percent in the fourth quarter. However, vacancy rates remain healthy despite ongoing uncertainty in the market as consumer preferences and retail strategies shift. The market has posted steady rent growth over the past few years, with average rental rates posting a 5.9 percent annual increase in 2018 and a 2.4 percent annual increase to $18.97 per square foot (NNN) as of the second quarter of 2019. There were 49 buildings and 467,451 square feet of retail space completed in Metro Denver as of the second quarter of 2019. While the pace of construction has slowed compared with 2017 and 2018, the level of completions in the first half of the year was higher than levels recorded in 2014 and 2015. There was 1.15 million square feet of retail space across 68 buildings still under construction during the second quarter of 2019. In total, about 1.5 million square feet of retail space should be finished in 2019, down from 1.8 million square feet in 2018.

Direct Vacancy Rates

	4Q 2017	4Q 2018	4Q 2019est.
Office	9.6%	9.1%	9.5%
Industrial	3.8%	4.1%	4.7%
Retail	4.3%	4.1%	4.6%

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. After a dip in the last quarter of 2018 through the first quarter of 2019, confidence levels appear to be back on an upward trend. While the January–June average Consumer Confidence Index for the U.S. was 0.1 percent lower in 2019 compared with the same time last year, the average Mountain Region Index, which includes Colorado, was 3.5 percent higher. The high index level reflects confident consumers who are spending at a steady pace.

Nationally, total retail trade activity has been increasing at a 2.8 percent pace in 2019, lower than the 4.2 percent growth rate in 2017 and the 4.9 percent increase in 2018. Among the retail sectors, the fastest growth year-to-date has been in non-store retailers (+10.7 percent), food services and drinking places (+4.1 percent), and health and personal care stores (+4.1 percent).

The Metro Denver region is home to 3.2 million people. The population has been growing an average of 1.6 percent per year over the past 10 years, or an average of 47,500 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. Growth in net migration, and consequently population growth, has slowed significantly in Colorado and Metro Denver since peaking in 2015. In 2019, the population is expected to grow 1.4 percent in Colorado and 1.3 percent in Metro Denver.

Although data comparable to U.S. retail trade data is no longer available from the Colorado Department of Revenue, sales tax collections in the City and County of Denver and the City of Aurora indicate confident consumers are continuing to spend money. Sales tax collections were up 2.5 percent in Denver for the first three months of the year compared to the same period last year, whereas Aurora activity for the first half of 2019 was 7.2 percent higher than last year. 

Residential Real Estate

In 2019, Metro Denver’s residential real estate market has been punctuated by a decline in both home sales and residential construction activity, coinciding with the smallest over-the-year quarterly increase in single-family median home prices since 2012. The number of existing homes sold from January to June 2019 was 2.8 percent lower than sales during the first half of 2018. As predicted in January, this trend is expected to continue through the latter half of the year, resulting in 2019 being the second consecutive year of declining sales following a 5.5 percent decline in 2018. Sales are on target to be about 54,600 home sales in 2019, a decline from the peak of about 59,300 sales in 2017. While inventory remains significantly below levels posted prior to the Great Recession, it appears to be trending upward with 9,520 listings in June 2019, a level not posted since November 2013.

New residential permit activity is on track to post its first annual decline since 2009 as population growth has slowed in the metro region and builders continue to struggle with rising costs and a shortage of workers. Permit activity in the first half of 2019 is nearly 21 percent lower than the same period in 2018, with all property types posting a decline. The number of single-family detached units permitted is down nearly 18 percent, single-family attached units are down 41 percent, and multifamily units are 24 percent lower. Notably, multifamily permit activity is on track to decline for the third consecutive year following a 0.7 percent decline in 2017 and a 5.4 percent decline in 2018.

Home prices have risen rapidly in Metro Denver since 2011, with the median price in the region increasing over-the-year for 31 consecutive quarters through the second quarter of 2019. While growth in Metro Denver’s median single-family home price peaked at 14 percent in 2015, price increases remained robust through 2018, averaging an 8.4 percent increase each year. However, home price appreciation is moderating even faster than expected in the Metro Denver region. In the fourth quarter of 2018, the median price increased just 5.8 percent over-the-year and the pace slowed considerably to 1.2 percent in the first quarter of 2019 and 1.8 percent in the second quarter of the year. The slowing appreciation trend is also reflected in the Case-Shiller home price index where Denver’s index rose just 3.6 percent over-the-year in May 2019, the smallest over-the-year increase in the region’s index since 2012.

Residential Real Estate Indicators

	2017	2018	2019est.
Home Sales (closed)	59,258	55,987	54,587
Median Home Price
Metro Denver	$414,700	$449,900	$460,000
National	$248,800	$261,600	$272,200
Apartment Vacancy Rate	5.6%	5.9%	5.5%
Residential Building Permits*	24,021	24,209	20,902
Single-Family Detached (1 unit)	11,419	12,248	10,926
Single-Family Attached (2-4 units)	384	400	291
Multi-Family (5+ units)	12,218	11,561	9,685

*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. 2019est.=DRP Estimate

The apartment vacancy rate continues to remain stable, fluctuating between 5 percent and 6.4 percent on a quarterly basis since 2016. In the second quarter of 2019, the apartment vacancy rate in Metro Denver was 5 percent. The rate is expected to increase slightly throughout the remainder of the year to an average vacancy rate of 5.5 percent. After double-digit increases in the average apartment rent in 2014 and 2015, fourth quarter apartment rental rates increased 3.7 percent in 2017, 4.3 percent in 2018, and an expected 3 percent in 2019. In the second quarter, the average rental rate for all units ranged from $1,404 per month in Adams County to $1,680 in the Boulder/Broomfield market area, with an average of $1,520 per month throughout Metro Denver.

While hindsight is always 20/20, the expectation for economic activity in Metro Denver in 2019 first put forth in January remains in focus. Employment growth in Metro Denver has slowed to a 1.8 percent pace, reflecting the addition of about 30,000 net new jobs. Labor market conditions have tightened even more than expected, with the unemployment rate averaging 3.1 percent. Commercial real estate markets are sound with slowly increasing vacancy rates and a slight decrease in total construction activity, although industrial construction continues to reach new records. Consumer activity remains healthy, and a notable slowdown in the pace of both for-sale and for-rent housing cost increases is a welcome change for Metro Denver’s current and future residents.