Despite a volatile stock market, continued weakness in the housing sector, and a slightly weaker labor market, Colorado is weathering the economic impacts better than its neighboring states, according to data compiled by the Metro Denver Economic Development Corporation (Metro Denver EDC) in its Monthly Economic Summary for February 2008.

The nation's current economic troubles largely started in the housing sector. As a result, the impacts vary significantly across regions with different housing characteristics and industry bases. The hard-hit U.S. western region includes Colorado, but the state has so far fared better than many of its neighboring states. Metro Denver's existing homes market, for example, ended 2007 on a fairly flat note. Roughly 49,800 home sales closed throughout the year, marking a one percent decline from sales closed in 2006. A forward-looking measure, the count of homes under contract, was also flat in 2007 and fell fewer than 100 contracts shy of the prior year's count.

Conversely, Metro Denver's commercial real estate market had a strong year in 2007, and real estate analysts expect further investment in 2008. A diverse and stable industry base keeps Metro Denver's office market attractive, but some of the cost advantages that buyers and tenants have enjoyed in the past may be shrinking. A fourth quarter report by CB Richard Ellis notes that asking rates in Metro Denver rose 10 percent in 2007, pushing the average lease rate past $20 per square foot. Economic uncertainty weakened fourth quarter office market activity, but the report suggests Metro Denver's office market is still poised to see a healthy 2008.

Key points from this month's report include:

Labor and Employment

·          Employment in Metro Denver continued a subtle drift downward as 2007 ended. An additional 4,000 jobs brought December year-to-date employment growth to 1.7 percent, down slightly from the 1.8 percent growth posted in each of the prior five months.

·          Metro Denver ended 2007 with an unemployment rate well below 2006. The region's unemployment rate averaged 3.9 percent for the year, down from 4.4 percent in 2006. Monthly data, however, reveal a slightly weaker labor market. At 4.4 percent, Metro Denver's December unemployment rate was up from 3.9 percent in December 2006.

Commercial Real Estate

·          A report recently released by Grubb & Ellis calls fourth quarter a transition period for Metro Denver's office market. Building sales posted an 11 percent over-the-year decline, which marked an abrupt turnaround from a near 60 percent gain through the first three quarters of the year.

·          A fourth quarter report by Grubb & Ellis observes a similar cost disparity between older and newer space. The vacancy rate rose to 6.7 percent in 2007, an uptick the report says was driven by new deliveries and subsequent negative impact on smaller shopping centers and neighborhood strip malls.

·          A fourth quarter report by Frederick Ross Company also describes Metro Denver's industrial market as stable and less exposed to a weak economy than its office and retail counterparts. Industrial market vacancy was just over six percent in fourth quarter 2007, down from seven percent in fourth quarter 2006, marking the lowest industrial vacancy rate reported since 2000. Absorption for fourth quarter also rivaled a 2000 record.

·          CB Richard Ellis also reported a healthy industrial market in its fourth quarter report. Industrial vacancy rates ticked up slightly, but the report notes that the rise was due to the consolidation of several large tenants and the delivery of speculative. The vacancy rate rose to 6.6 percent from 6.1 percent in third quarter, and average rental rates ticked down from $6.04 to end the year at $5.97. Still, annual net absorption throughout Metro Denver topped the 10-year average by more than one million square feet, with healthy trends expected to continue in 2008.

·          Denver's retail market ranks 19th among the 43 U.S. markets examined for Marcus & Millichap's 2008 National Retail Index. Thanks to declining vacancy and above-average growth in retail sales, Denver's position improved from a 25th-place ranking in 2007.

·          Similarly, a fourth quarter report by CB Richard Ellis views Metro Denver's retail market as fairly strong despite growing weakness in the housing sector and consumer spending.  Metro Denver had negative absorption of retail inventory in the fourth quarter, and vacancy rates rose to 6.4 percent.  The fourth quarter's average lease rate of $16.10 was up from the third quarter, but the report notes that increasing amounts of Class A space have put downward pressure on Class B and C prices.

·          A fourth quarter report by Grubb & Ellis observes a similar cost disparity between older and newer space. The vacancy rate rose to 6.7 percent in 2007, an uptick the report says was driven by new deliveries and subsequent negative impact on smaller shopping centers and neighborhood strip malls.

·          A report recently released by Grubb & Ellis calls the fourth quarter a transition period for Metro Denver's office market. Building sales posted an 11 percent over-the-year decline, which marked an abrupt turnaround from a near 60 percent gain through the first three quarters of the year.
*A full report is available to Metro Denver EDC investors.