Monthly Economic Summary – October 2011

Vacancy rates decline in the Metro Denver area, while new expansions show promise

The Metro Denver economy continues to struggle through a variety of economic conditions affecting the entire nation. Despite still slow job growth, a number of new expansions indicate positive momentum and support for the commercial real estate sector. Office, industrial, and retail space vacancy rates all decreased in the third quarter, according to data compiled by the Metro Denver Economic Development Corporation (Metro Denver EDC) in its Monthly Economic Summary for October 2011.

Today’s economic conditions are forcing many employers to reevaluate their business operations. Bank of America recently announced plans to eliminate 30,000 jobs across the country over the next few years. Local downsizings include Advanced Energy in Fort Collins, the National Renewable Energy Laboratory in Golden, and Butterball in Longmont.

While these announcements confirm the labor market remains unstable, other developments suggest more positive job and business conditions. Comcast Corp. recently announced plans for a new operations center in Douglas County, and Kaiser Permanente will open a customer service call center in the Lowry neighborhood. Convergys Corp. is hiring customer service agents throughout Metro Denver, and Boulder-based Regulus Pharmaceutical Consulting may nearly double its workforce.

“Although some businesses are still struggling through the recovery, there are some notable expansions occurring throughout the region,” notes Patty Silverstein, chief economist for the Metro Denver EDC. “The University of Colorado Boulder recently won a bid for the National Solar Observatory headquarters, Boulder-based MinuteKey Inc. received $10 million in private funding and will hire employees in software development in the next six months, the Lincoln College of Technology recently opened a new $23 million campus to accommodate more students and an expanded curriculum, and Portland, Maine-based Magellan Petroleum is moving its headquarters to Denver.”

This organic job growth may help support the region’s commercial real estate markets, which continued to stabilize in the third quarter. Lease rates have yet to improve, but gradual declines in vacancy suggest market conditions will remain stable until the economy fully recovers.

The commercial real estate indicators were among nine that moved in a positive monthly direction in this report, and 13 indicators moved in a positive annual direction. In the previous report, eight indicators moved in a positive monthly direction and fourteen moved in a positive annual direction.

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

Metro Denver employment across all industries was 0.1 percent higher this August than it was in August 2010. Statewide employment was up 0.7 percent over-the-year in August, and employment nationwide was one percent higher in August than it was last year.

About one-in-six U.S. employers that participated in the most recent Manpower Employment Outlook survey said they would hire during the fourth quarter. Those planning to hire was a smaller percentage than those that reported hiring plans in the third quarter survey (20 percent), and the percentage planning layoffs in the fourth quarter (11 percent) increased slightly from the third quarter percentage. Most employers remain focused on the status quo with nearly three-quarters of U.S. employers reporting that they were unsure about their hiring plans or would maintain current staff levels in the last three months of 2011.

A slightly larger 77 percent of Metro Denver employers that responded to the survey said they were unsure about their hiring plans or would keep staff counts unchanged during the fourth quarter. Sixteen percent said they would add jobs, and seven percent said they would eliminate positions.

Metro Denver’s August unemployment rate (8.3 percent) was slightly lower than in July (8.4 percent), but historical data shows the decline was more a typical seasonal shift than a true improvement in labor force trends. With job growth stagnant at best, unemployment has improved little since last year. Metro Denver’s average unemployment rate through the first eight months of the year (8.7 percent) was only slightly below the comparable average for 2010 (8.9 percent).

Colorado’s August unemployment rate (8.3 percent) was lower than the national average rate (9.1 percent).

Until job growth accelerates, unemployment insurance claims activity will remain at relatively high levels. The average weekly number of new Metro Denver claims for unemployment insurance was 11 percent lower in August than it was last year, but the August 2011 average was nearly 64 percent higher than the August average reported just before the recession began. The August 2011 average weekly number of claims reported statewide-while down 15 percent from the August 2010 average-was more than 68 percent higher than the pre-recession average for August.

Consumer Sector

The Conference Board’s U.S. Consumer Confidence Index increased from 45.2 in August to 45.4 in September, but households’ assessments of today’s economic climate weakened for the fifth consecutive month. A slight improvement in their expectations for the next six months – an improvement in the sense that fewer households expect conditions will get worse – was behind the small increase in the overall index.

The Mountain Region Index-which exceeded the national index by a healthy measure in August-fell in September to the lowest level (41.6) reported since April 2009. The current assessments and six month expectations of Mountain Region households fell sharply between August and September.

Metro Denver retail sales through the first five months of 2011 were 7.8 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.

Stock markets-impacted by European debt concerns, continued political disagreement, and uncertainty over the Federal Reserve’s “Twist” program (designed to lower yields on long-term bonds, while keeping short-term rates little changed)-fell further in September. Each of the major national indexes now has a negative year-to-date return; the S&P 500 was down the most (-10 percent) year-to-date in September, followed by the NASDAQ (-9 percent), and the Dow Jones Industrial Average (-5.7 percent). The Bloomberg Colorado Index was down 14.4 percent year-to-date in September.

Despite poor business and consumer confidence, Metro Denver hotels are performing relatively well. The region-wide average occupancy rate in August (78.4 percent) was noticeably above last year’s rate (74.6), and the August average room rate ($118.38) was up 3.3 percent over-the-year.

Passenger traffic totals for several days in July were among the highest reported in the history of Denver International Airport. Total passenger traffic for the entire month was up only 0.8 percent over-the-year, but airport spokespeople say passenger traffic is still on track to exceed 50 million this year. 

Residential Real Estate

Sales activity in Metro Denver’s market continues at a slow but stable pace. August sales were 29 percent higher than the August 2010 sales total, but were almost 21 percent lower than sales reported in pre-recession August 2007. Slow and steady sales activity- while perhaps a good outcome in today’s market-has done little to encourage potential home sellers. Region-wide unsold inventory in August was about half of the inventory typically reported in the month of August just before the recession began. Slow sales activity has also done little to boost home prices. The year-to-date average sales price of single-family homes in Metro Denver was up 0.1 percent in August, and the year-to-date average condominium price was down 1.4 percent.

Foreclosure data for Metro Denver show the region’s public trustees reported an increase in new filings between July and August. Still, the number of region-wide filings through the first eight months of the year was more than 32 percent below the comparable filings for 2010.

Denver-based Zocalo Community Development recently unveiled plans for a $60 million, 13-story apartment project in the Union Station neighborhood. The building-to be located at 17th and Chestnut streets-will provide easy access to the new rail lines under construction at Union Station and will house 220 apartment units and three restaurants. The developer hopes to qualify the building for LEED Gold certification and plans to break ground in early 2012.

Commercial Real Estate

Data from CoStar Realty Information, Inc. show direct vacancy in Metro Denver’s office market decreased between the second (13.2 percent) and third (13 percent) quarters. Office market lease rates-while not yet on the upswing-appeared to stabilize in the third quarter. The direct average rate per square foot ($19.85) was roughly comparable to the average reported during the second quarter.

Some of the largest Metro Denver office properties currently under construction include the DaVita headquarters in downtown Denver and two office buildings at the new St. Anthony Hospital campus in Lakewood. Office space at Fitzsimons Village in Aurora and the Red Rocks Medical Center in Jefferson County are the largest Metro Denver office projects completed so far this year.

Data from CoStar Realty Information Inc. show direct vacancy in Metro Denver’s industrial market remained at or near six percent for the first three quarters of 2011. While this stability suggests the market is withstanding the current economic conditions, vacancy remains high enough to prevent improvements in lease rates. The direct average rate in the third quarter ($4.56 per square foot) was 1.3 percent lower than the second quarter average and 3.6 percent lower than last year’s average rate.

While some brokers say large blocks of industrial space are in increasingly short supply, the industrial construction market remains relatively dormant. About 43,000 square feet of industrial property was under construction during the third quarter, and roughly 283,000 square feet of space has been completed so far this year.

CoStar data show direct vacancy in Metro Denver’s flex market has declined steadily throughout 2011. The third quarter direct rate (12.9 percent) was four-tenths of a percentage point below the second quarter rate and a full point below last year’s vacancy rate. While direct average lease rates have not yet rebounded, they have remained relatively flat through much of 2011. The third quarter direct average rate ($8.91 per square foot) was within three cents of the rates reported in each of the prior two quarters.

One Metro Denver flex property-with roughly 5,000 square feet-was under construction during the third quarter. No flex properties have been completed so far this year.

The third quarter was the eighth consecutive quarter in which Metro Denver’s direct retail vacancy rate declined from the prior period. Data from CoStar Realty Information, Inc. show the third quarter vacancy rate (6.9 percent) was noticeably below last year’s rate (7.6 percent) and even further below the rate reported during the third quarter of 2009 (8.3 percent). Average lease rates, however, are not as visibly improved. The third quarter direct average lease rate ($14.62 per square foot) was 0.5 percent higher than the second quarter average but was still 2.7 percent below last year’s average.

A King Soopers store in Adams County was the largest Metro Denver retail construction project underway during the third quarter. The IKEA store in Centennial and several stores in Lakewood’s Belmar shopping district are among the largest completed so far this year.

 *A full report is available to Metro Denver EDC investors.