denver metro outlook

DENVER METROTHIRD QUARTER 2014

ECONOMIC OUTLOOK

THIRD QUAR TER HIGHLIGHTS

Sources: Metro Denver Economic Development Corporation Bureau of Labor Statistics Delta Associates Forbes Business Insider Denver Business Journal

+48,100 NEW JOBS

RatesDenver

Below NationalAverage

National Rates

6.5%2013

5.1%2014

Denver Population Denver Economy* Denver Business

Unemployment Continues to Decline* Job Growth Continues to Increase*

Denver Top 3 Job Growth Industries*

Professional/Business Services+14,100 JOBS

Education/Health+9,400 JOBS

Tourism/Hospitality+6,200 JOBS

Forbes 2014 Ranking for Metro Denver

1.9% GrowthIn The Past 12 Months

National

3.3% GrowthIn The Past 12 Months

Denver

7.7%2013

6.5%2014

38 Major Relocations or Expansions in Metro Denver by Notable Companies since January 2014

Colorado RankedFor The Nation’s

Top Economies For ItsHighly Diversified Economy

#1Business Insider, 2014

4thBest Place forBusiness and

Careers

4thAmerica’s

Healthiest City

6thAmerica’s

Fastest-Growing City

7thBest City for Millennials

10thBest Big City

for Jobs

Denver Population Trends*

“ DENVER RANKS #2

FOR RENTING TO

Millennials IN THE U.S.*

Realty Trac’s Q2, 2014

* Based on biggest percentage of change in that generation

* In the past 12 months ending on July 2014

DENVER METROTHIRD QUARTER 2014

ECONOMIC OUTLOOK

ECONOMY

Metro economy thrivesEconomic growth remains robust in Metro Denver (including Boulder), posting a strong gain of 48,100 payroll jobs during the 12 months ending July 2014. Recent payroll gains have continually beat the 20-year annual average for the metro area. The rate of job growth in Metro Denver was 3.3% during the past 12 months, trailing only the energy-intensive metros of Houston and Dallas and the reviving South Florida economy. By comparison, the national rate of payroll job growth stood at 1.9% over the same period. Six sectors featured growth rates above 3.0% during the latest 12 month period, including Mining/Logging/Construction, Manufacturing, Professional/Business Services, Education/Health Services, Tourism/Hospitality and Government. These sectors accounted for over 91% of new payroll jobs during the period. On the infrastructure front, the Colorado Department of Transportation (CDOT) released a $1.8 billion dollar proposal to ease traffic congestion along I-70 and I-25 in late August 2014. The plan calls for removal of I-70’s viaduct between Brighton and Colorado Boulevards; lowering I-70 between Brighton and Colorado Boulevards by approximately 40 feet; adding two tolled express lanes through the lowered stretch, and another lane through I-270; and building a four-acre landscape cover over I-70 as it runs by Swansea Elementary School.

Denver Metro Area Rate of Growth One of the Highest in the Nation Economic growth remains robust in Metro Denver

PAYROLL JOB GROWTH LARGE METRO AREAS | 12 MONTHS ENDING JULY 2014

PAYROLL JOB GROWTH DENVER-BOULDER METRO AREA

PAYROLL JOB CHANGE IN PERCENTAGE TERMS LARGE METRO AREAS | 12 MONTHS ENDING JULY 2014

SOURCE Bureau of Labor Statistics, Delta Associates; September 2014

SOURCE Bureau of Labor Statistics, Delta Associates; September 2014*12-month job growth through July 2014


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'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14*

20-Year Average=21,100

3 ECONOMY OUTLOOK DENVER METRO MARKET Q3 2014

DENVER ECONOMYTHIRD QUARTER 2014

UNEMPLOYMENT RATES LARGE METRO AREAS | JULY 2013 VS. JULY 2014


UNEMPLOYMENT

The region’s unemployment rate declined 140 basis points to 5.1% in July 2014 (not seasonally adjusted), from 6.5% one year earlier. The national unemployment rate (not seasonally adjusted) was 6.5% at July 2014, from 7.7% in July of last year, as the labor market continues to recover at a modest pace. Nationally, many of the new jobs being created are on the lower end of the wage scale, such as retail sales positions. This is less of an issue in Denver, where professional services jobs continue to be added in healthy numbers. We expect professional service jobs to lead regional job growth in the months ahead. This sector comprises approximately 38% of the metro area’s gross regional product.

12-month job growth through July 2014 in key industries:*PROFESSIONAL SERVICES

14,100 jobs added over 12 months ending July 2014 – 29% of growth

EDUCATION/HEALTH


TOURISM/HOSPITALIT Y


GOVERNMENT


TR ADE/ TR ANSPORTATION/UTILIT IES


MINING/LOGGING/CONSTRUCTION

4,100 jobs added over 12 months ending July 2014 – 10% of growth*Manufacturing, Financial Services, Other Services accounted for remaining 5% growth. IT accounted for negative -1% growth.

GRP = Gross Regional Product totals are estimated and may not add due to rounding.SOURCE BEA, U.S. Conference of Mayors, GMU Center for Regional Analysis, Delta Assciates; September 2014

Colorado’s business leaders’ expectations entering the third quarter remained positive for all metrics, as region-al and national economic conditions continued to expand. The Leeds Business Confidence Index (LBCI) measures the confidence of Colorado’s business leaders through a survey covering six categories: national economy, state economy, industry sales, industry profits, hiring plans and capital expenditures. The LBCI increased slightly, from 61.0 in the 2nd quarter of 2014 to 61.2 in the 3rd quarter of 2014 – an indication of stability, says Leeds. Capital investment expectations from Colorado businesses drove the reading higher, with that component increasing by 2.2% over last quarter. An overall reading over 50 indicates expectations of expansion, while a reading under 50 signals contraction. The 3rd quarter reading represents the eleventh consecutive quarter of improving expectations. In addition, optimism about the local Colorado economy beat expectations for the national economy for the 37th consecutive quarter.

Economic development initiatives have been highly successful thus far in 2014. Thirty-eight companies relocated or expanded in the region since the year began. Other regional economic indicators are also pointing in the right direction for the metro area. As Metro Denver Economic Development Corporation (EDC) reported, vacancy rates decreased across all commercial property types from the 1st quarter 2014 to the 2nd quarter 2014, as the expanding employment base led to improving real estate metrics. Additionally, residential building permits are up 62.1% through May 2014. Business filings continue to tick upward as well – Colorado recorded a 13.1% rise in new entity filings year-over-year ending in June 2014, and a 3.9% increase in existing entity renewals during the same time period. Initial unemployment claims are down 10.9% through May 2014 compared to this time last year, and Metro Denver EDC expects a 26% increase in companies expecting to add workers from 2nd quarter 2014 to 3rd quarter 2014. Metro Denver continues to attract highly-skilled workers due to a high quality of life, dynamic employment bases and rising wages that outpace the national average.

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6%

8%

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e

10%

National Average

CORE INDUSTRIES $ BILLION % GRP

FINANCIAL , PROFESSIONAL AND BUSINESS SERVICES

$74 38%

TR ADE, TR ANSPORTATION & UTIL IT IES $29 15%

INFORMATION $24 12%

STATE & FEDER AL SERVICES $17 9%

MANUFAC TURING $15 8%

MINING/CONSTRUC TION $13 7%

EDUC ATIONAL AND HE ALTH SERVICES $12 6%

HOSPITAL IT Y/ TOURISM $8 4%

TOTAL CORE INDUSTRIES $192 98%

OTHER $4 2%

TOTAL GRP: $196 100%

CORE INDUSTRIES DENVER-BOULDER METRO AREA 2013

0%

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4%

6%

8%

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July 2013 July 2014



MANUFACTURING

The Manufacturing sector is continuing to ex-pand in Metro Denver. The sector saw payrolls increase by 2,900 jobs, or 3.6%, during the 12 months ending in July 2014. ThyssenKrupp Industrial Solutions will expand its workforce in Greenwood Village by roughly 250 employees over the next few years. The expansion is thanks in part to $1.285 million in incentives from the Colorado Economic Development Commission.

FINANCIAL SERVICES

Financial Services sector employment in Metro Denver declined by 100 jobs – a negative 0.1% change – while the Professional and Business Services sector gained 14,100 jobs (a 5.3% increase) during the 12 months ending in July 2014. Net loans and leases are up 1.7% year-over-year through the 2nd quarter of 2014, and domestic deposits and net assets are up 5.3% and 2.6%, respectively, over the same period. Through the end of August 2014, the Bloomberg Colorado Index (BCOX) rose approximately 25.1% year-over-year, slightly lagging the S&P 500, which returned 25.2% over the same period. The BCOX is a price-weighted index designed to measure the performance of the Colorado economy. According to the latest PricewaterhouseCoopers’ MoneyTree report, Colorado firms raised $112.8 million in venture capital funding during the 2nd quarter of 2014, bringing the revised year-to-date total to $263.6 million. This compares to

BUILDING ACTIVITY AND CONSTRUCTION EMPLOYMENT 2005-2014

BUILDING PERMITS ISSUED DENVER METRO

SOURCE Bureau of Labor Statistics, U.S. Census Bureau, Delta Associates; September 2014.

SOURCE U.S. Bureau of Census, Transwestern; through August 2014

$188.5 million raised in the first half of 2013. On balance, we expect the number of deals and volume of funding in 2014 to exceed last year’s totals. On an industry level, software led the way with $75.7 million in funding during the first half of 2014, followed by Industrial/Energy and IT Services, which took in $61.8 million and $59.9 million, respectively.

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MINING/LOGGING/CONSTRUCTION

The Mining/Logging/Construction sector gained 5,100 jobs, or 5.8%, in the 12 months ending in July 2014. Employment rose at an 8.9% average annual rate in 2013, the highest among metro Denver’s major sectors. However, payroll gains were uneven within the super-sector, leading to a labor shortage for specialty trade contractors and general subcontractors. The Colorado Business Review sees the labor shortage contributing to higher construction costs, which could lead to more pronounced inflationary pressures in the short-term relative to other economic sectors in Colorado. Employment in the construction industry has been generally fueled by an improving single-family housing market and expanding multifamily and commercial construction.

VENTURE CAPITAL INVESTED IN COLORADO FIRMS 2006-2Q 2014

SOURCE PricewaterhouseCoopers, Delta Associates; September 2014*Note: Annualized

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ENERGY AND MINING

The resurgence of Colorado’s Energy and Mining sectors has been a boon for the state’s finances and future job prospects, and is a national leader in energy production across myriad energy sources.

According to a December 2013 report from the Colorado Energy Coalition, the state produced a record 64 million barrels of oil in 2013, contributing $6 billion to the economy. The sector had the highest rate of one-year growth (based on its contribution to the Gross State Product) of any sector in Colorado. However, voter concerns over hydraulic fracturing have led to outright bans in five communities, which could derail future production targets. At the time of this publication, three of the five cities’ bans have been overturned by district court judges in recent weeks. Economists at the University of Colorado estimate that a statewide ban on hydraulic fracturing over a long time span (2014 to 2040) would cost roughly 93,000 jobs and over $12 billion in gross domestic product (GDP). At the other end of the industry sector, Denver is among the national leaders in clean tech and environmentally-safe technology. Of the 50 largest metros in the United States, Denver ranked #10 on the Clean Tech Leadership Index produced by Clean Edge Inc., a research and advisory firm. Among the highlights in the report, Denver came in third in green building usage and eighth for clean tech investment, innovation and workforce.

INFORMATION

Employment in the Information industry declined by 1,300 jobs (or 2.5%) during the 12 months ending in July 2014, but the employment outlook remains bright for the sector, driven by investor interest and a steady stream of venture capital funding. Boulder-based telecom firm Zayo Group prepared a $100 million IPO in July 2014. The firm employs over 400 people in Colorado. Information and tech-related employment has been falling nationally and has yet to recover from its early 2000’s employment peak. Output growth, however, remains robust for the tech sector, advancing 49% in terms of regional GDP over the past ten years according to the 2014 mid-year Colorado economic update produced by the Colorado Business Review of the University of Colorado Leeds School of Business. Denver’s regional indicators continue to support the rosy outlook for the tech sector: the state ranks #2 in educational attainment, #3 in high-tech worker concentration and #4 in the State Technology and Science Index.

TOURISM AND HOSPITALIT Y

The Tourism and Hospitality sector added 6,200 jobs – a 3.7% increase – in the metro area in the 12 months ending in July 2014.According to Smith Travel Research, hotels in Denver experienced a 13.3% increase in RevPAR (revenue per available room) from June 2013 to June 2014. Only four of the top 25 hotel markets posted RevPAR growth greater than Metro Denver’s. According to the Colorado Business Review, Denver saw a record breaking number of visitors, visitor spending and lodger’s tax collection during 2013, marking the ninth straight year the city has seen an increase in marketable visitors. Colorado’s ski industry was aided by an early season start and a late finish – the industry recorded a 10% increase in visits over the 2012-2013 period, occupancy rose 8.5% and average daily rates increased 6.8%.

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MEDIAN SINGLE FAMILY HOME PRICE 2007-2Q 2014

SOURCE National Association of Realtors, Delta Associates; June 2014.

HOUSING

In Housing, the National Association of Realtors reported that the median sales price of an exist-ing single-family home in the metro area was up 10.4%, to $316,300, in the 2nd quarter of 2014 compared to the 2nd quarter of 2013.The median sales price in the Boulder metro area rose at a slower pace, up 4.1% to $448,800 in the 2nd quarter of 2014 compared to the 2nd quarter of 2013. We expect single-family home prices to continue to gradually rise across the metro area, mostly likely in the single-digit percentage range year-over-year. Mortgage rates are still low, but any increases may put downward pressure on home prices. According to the Colorado Division of Housing, foreclosure filings declined precipitously in May 2014, down 31.4% year-over-year from 1,113 to 763. Foreclosure auction sales also dropped sharply, falling 45% year-over-year from 720 to 396. The downward trend is likely to continue as long as employment is stable and mortgage rates remain low, says the Colorado Division of Housing. In 2013, it cost 3.5 times the median household income to buy a median-priced single family home – in the 2nd quarter of 2014, that number rose to 3.7 times the median household income. Nationally, housing affordability also deteriorated, with the ratio rising from 3.2 at year-end 2013 to 3.3 in 2nd quarter 2014 as home prices continued to rise.

Housing affordability continues to decline slowly in the Denver-Boulder metro area, as rising home prices outstrip changes in median incomes.On the multifamily front, the apartment vacancy rate across the State of Colorado fell to 5.2% during the 1st quarter of 2014, from 5.4% at year-end 2013. Average rents rose 3.4% during the 1st quarter of 2014 in conjunction with a rise in demand for multifamily housing, according to the Colorado Division of Housing. Vacancies may rise and average apartment rents may fall across the state over the next few years, as the large supply of new units in the pipeline will likely keep rent growth in check.

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Q107

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Q307

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RATIO OF MEDIAN HOME PRICE TO MEDIAN HOUSEHOLD INCOME LARGE METRO AREAS | 2013 - 2Q 2014

SOURCE Bureau of Labor Statistics, Delta Associates; September 2014.

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National Average=3.3

Copyright © 2014 Transwestern. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. Transwestern’s research affiliate, Delta Associates, prepared the economic portion of this report, and Transwestern prepared the balance of the market analysis. The information contained in the market analysis was gathered by Transwestern from CoStar and other primary and secondary sources believed to be reliable. However, Transwestern makes no representation concerning the accuracy or completeness of such information and expressly disclaims any responsibility for any inaccuracy contained herein.

METHODOLOGY

The information in this report is the result of a compilation of information on office,

industrial and retail properties located in the Denver metropolitan area. This report

includes single-tenant, multi-tenant and owner-user office properties, excluding

properties owned and occupied by a government agency.

CONTACT

Katy WilsonMarketing ManagerTranswestern [email protected]

Alexander (Sandy) Paul, CREExecutive Vice PresidentDelta Associates703.299.6373 [email protected]

Economic OutlookThe Metro Denver Area economy looks poised to expand during late 2014 and into 2015, and we expect that the strength of the Professional/Business Services and Energy sectors will continue to be the main drivers of growth in the region. We predict that households will benefit from higher wages, low energy prices and rising home values across the region during the balance of 2014. In addition, local business confidence remains in positive territory and start-up activity is vibrant. We foresee potential headwinds if interest rates rise significantly enough to affect accessibility to credit, but there has been little evidence of interest rate risk affecting momentum in the national economy thus far in 2014. Other potential challenges include intensified legislation in the oil and gas industry, geo-political risk that could stunt the state’s international trade dynamics, and regulatory issues surrounding the state’s marijuana industry. Due to the strength of the current economic recovery, we raised our three year employment projections for the metro area. For the 2014-2016 period, we project average annual employment growth in the Metro Denver area of approximately 3.0%, or 44,800 new payroll jobs per year. This would exceed the performance of the 2011-2013 period, when employment growth averaged 37,500 jobs per year. Our projected level of job growth is sufficient to support a healthy commercial real estate market in the metro area.

JOB FORECAST DENVER METRO AREA

SOURCE Bureau of Labor Statistics, Delta Associates; September 2014.

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

FORECAST2014-16 average annual job

growth = 44,800

2005-07 average annual job growth

= 27,400

denver metro outlook

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denver metrothird quarter

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