Colorado Real Estate Journal - April 6, 2016
The national economy continued to make strides in 2015, a trend that has carried over well into 2016. Economic expansion remained on course despite gross domestic product growth h a v i n g slightly softened through the first three quarters of 2015. A strong fourth quarter made up for the first nine months of the year, resulting in annual GDP growth of 2.4 percent for 2015, which was identical to 2014. The labor market has been a particularly bright spot in the economy, with the unemployment rate having dropped to 4.9 percent as of January, 90 basis points below the level seen a year earlier and 490 basis points below the level five years ago. Additionally, February posted another healthy increase in employment, with 242,000 nonfarm payroll jobs added, resulting in an average of 228,000 jobs per month over the past three months. Strong GDP growth, coupled with healthy employment gains and several other factors, have brought continued economic success on the national level, benefitting commercial real estate fundamentals across the country. In 2015, the metro Denver area remained on the rise as it continued to realize robust economic and population growth, while having one of the lowest unemployment rates in the nation. Denver’s unemployment rate dropped to 3 percent as of January, ranking it the second lowest among large metropolitan statistical areas and well below the national unemployment rate of 4.9 percent. The unemployment rate is at its lowest level since May 2001 and well below the peak of 9.1 percent in 2010. Denver’s job market remained intact through the recession compared to those of most metropolitan areas, boding well for commercial real estate investors and owners.
The large influx of out-of-state residents coming to the city for jobs and a high quality of life have helped propel Denver’s housing market and fundamentals as a whole. The greater metro Denver area, including the Boulder MSA, had a population of 3.07 million based on July 2014 estimates from the U.S. Census Bureau, ranking it 18th among the nation’s 20 most populous MSAs. From 2010 to 2014, the population grew by 7.6 percent, the third highest rate of growth among the top 20 MSAs and the highest outside of Texas. Since 1960, Denver’s population has more than doubled and is projected to climb to 4.3 million by 2040. This represents a net growth of more than 39 percent, or a 1.5 percent increase in population per year on average, which is in line with recent growth. While metro Denver as a whole has been performing remarkably well, as evidenced by its economic standing, the current status of the oil and gas industry still creates heartburn for commercial investors and property owners in the Mile High City. A recent increase in layoffs and office closures has occurred over the last 12 months, bringing additional space to the market. While layoff announcements and offices going dark are never a good thing, the events that have occurred in metro Denver aren’t as damaging as they initially seem. The Worker Adjustment and Retraining Notification Act is a United States labor law that protects employees, their families and communities by requiring most employers with 100 or more employees to provide a 60 calendar-day advance notification of planned closings and mass layoffs of employees, as defined in the act. WARN Act filings provide meaningful visibility into major layoffs within Colorado, which can be broken down by industry and geography. In 2015, there were 6,634 WARN Act layoffs with 43 percent occurring in trade, transportation and utilities, followed by 21 percent in mining, logging and construction. Geographically, Denver saw 2,497 layoffs, which was 38 percent of the total and is in line with the state’s population distribution. Further research on Denver reveals that the greatest loss of employment was found in trade, transportation and utilities, which represented 1,521 layoffs, or 61 percent of Denver’s total employment loss. This was largely driven by Frontier Airlines having laid off 1,152 employees. Mining, logging and construction industries within Denver saw a total of 559 layoffs, representing only 22 percent of the metro’s total. So far in 2016, there have been approximately 2,100 layoffs, according to WARN Act filings reported through February. A majority of these layoffs came from professional services firms in Boulder and in southeast Denver, and were also predominantly office consolidations. As of February, there were no WARN Act reported layoffs from the energy sector, but this situation continues to evolve as new announcements make the headlines. While the impact of both Encana and Anadarko’s anticipated layoffs is still to be determined, any additional downsizing within the energy sector should not greatly impact metro Denver. Recent estimates place downtown energy-sector employment at 9,000 of the approximately 120,000 workers, representing only 7.5 percent of total employment. Even with additional anticipated layoffs, downtown real estate fundamentals should not experience a drastic change like that seen in the 1980s, when the vacancy rate rose to more than 30 percent on the heels of a construction boom. What the WARN Act data indicates is that while layoffs and office closures in the oil and gas industry have made the front page, they have not affected metro Denver as severely as one may think. To further support the fact that Denver is weathering the oil and gas downturn, occupancy in the central business district still remains at a healthy 10.6 percent, which is nearly unchanged from a year earlier. Although the announcement of several office shutdowns and layoffs has resulted in the release of additional space, the demand and diversity in the market as a whole have been able to outpace it. The impact of the oil and gas industry will still be felt for as long as it’s in a lull, but Denver’s diversity is providing a solid foundation for the city’s commercial real estate industry.