CREJ - Journal

Page 30 —

COLORADO REAL ESTATE JOURNAL

— May 6-May 19, 2015

Construction, Design & Engineering

he construction sec-

tor remains strong,

according to the spring

2015 release of the Sherman

& Howard Construction Index,

a statistical indicator of con-

struction-related activity in

Colorado. The long-term trend

continues to indicate a healthy

and growing market locally

as the index is calculated at

111.05, a number not seen since

2007. Based on current activity

and projections for the com-

ing building season, Sherman

& Howard foresees continuing

growth in the industry for the

near future.

Broad economic indicators

including the migration rate,

population growth and unem-

ployment rate all signal boom-

ing times for the construction

industry. Unemployment hov-

ers just under 4 percent in

Colorado, 1.5 points below the

national rate. And Colorado’s

unemployment rate remains

remarkably low in spite of

rapid population growth of 1.7

to 1.9 percent. Much of that

growth has been realized as a

result of a rapidly growing mil-

lennial generation population

in Denver. The firm expects

these factors will continue to

drive strong construction activ-

ity through 2015 and much of

2016.

Construction employment

in Colorado grew by a robust

12.54 percent since this time

last year and now totals 138,200

jobs. Analysts forecast the total

value of construction spend-

ing in 2015 to top $13.4 billion,

which should

support an

a d d i t i o n a l

8,000 indus-

try jobs. The

availability

of craft labor

continues to

present sig-

nificant hur-

dles to meet-

ing demand

in the indus-

try, although it may be one

of the only factors preventing

overbuilding in some sectors.

Cutbacks in the energy indus-

try resulting from low oil pric-

es may ease the ongoing labor

shortage, but the impact of this

recent change in the labor mar-

ket will take time to develop.

In January, the Federal

Reserve Board observed a

continued easing of lending

standards and terms for many

loan categories resulting from

heightened competition and

an increasingly favorable eco-

nomic outlook. Although lend-

ing appears to have tightened

in the oil and gas sector, the

overall easing trend has now

extended to 15 consecutive

quarters. Lending rates remain

low despite the recent termina-

tion of the Federal Reserve’s

bond purchasing program.

However, rate increases on the

horizon may impact construc-

tion project economics in late

2015 and into 2016.

Sector-specific performance

in Colorado has been strong

across the board, with all

major sectors showing signs of

expanding activity.

Office.

Centralbusinessdis-

tricts continue to dominate

office space construction activ-

ity with signs of moderate

growth in suburban locations.

Roughly 2.8 million square feet

of office space was under con-

struction at the end of 2014,

representing a 64 percent

increase since the second quar-

ter of 2014. The office vacancy

rate in metro Denver remains

low at 10.4 percent, with Union

Station remaining the epicenter

of Denver’s office space boom.

Lease rates in the area are some

of the highest per sf in Denver.

Industrial.

Denver’s in-

dustrial market ended 2014

at unprecedented levels, with

vacancy at a historic low rate

of 3.2 percent, which is 0.6 per-

centage points below this same

period last year. Rapid absorp-

tion of marginal and obsolete

Class B and C buildings by the

marijuana growing industry

has caused a historic spike of

demand within the industrial

construction sector. The market

currently supports some of the

highest levels of industrial con-

struction since the mid-2000s

with 1.4 million sf under con-

struction.

Retail.

At the close of 2014,

retail vacancy in the Denver

metro area was reported at 5.7

percent, approaching the low-

est vacancy rate seen over the

past decade. Demand for retail

space varies widely depending

on the size and location of the

space, but generally the sup-

ply of Class A space is tight. At

the end of 2014, an estimated

1 million sf of retail space was

under construction in the Den-

ver metro area.

Residential.

Residential con-

struction remains the hallmark

of the construction industry,

with multifamily development

driving growth in most areas.

Strong population growth and

forecasted net inmigration of

56,000 in 2015 are expected

to drive new permit issues to

12,500 units. The multifamily

vacancy rate has dropped just

below 5 percent, but may be

trending upward. Sherman &

Howard does not expect slow-

ing of multifamily construc-

tion activity until the vacancy

rate creeps above 6.5 percent.

Another four to five years of

strong residential building is

likely in store before market

forces slow the pace of growth.

Infrastructure.

Federal in-

frastructure funding has suf-

fered at the hands of congres-

sional gridlock, leaving states

looking for alternative solu-

tions to funding gaps. Yet

despite the economic upswing

in Colorado, increased state

revenues may not yield signifi-

cant increases in state spending

on key infrastructure projects.

Growth of the state budget is

limited by the Taxpayer Bill

of Rights, and the Office of

State Planning and Budget-

ing projects taxpayer refunds

under TABOR of up to $220

million next year, limiting the

availability of general fund

dollars for much-needed proj-

ects. Even if TABOR refunds

do not curb the general fund,

infrastructure projects would

still face stiff funding com-

petition from other spending

priorities including education,

which has received increased

attention from state and local

lawmakers.

Construction activity is

expected to remain strong

across all Colorado sectors for

the balance of 2015 and into

2016. The decrease in oil and

gas prices, coupled with loom-

ing increases in lending rates,

are expected to have mixed

impacts on the long-term rate

of growth in the industry.

However, the outlook for the

near- and midterm remains

strong.

Growth projected to continue in construction sector

Blane Harvey

Practice operations

manager, Sherman &

Howard, Denver

David Frommell

Attorney, Sherman &

Howard, Denver

Jay Sturhahn

Attorney, Sherman &

Howard, Denver

Broad economic

indicators

including the

migration rate,

population

growth and

unemployment

rate all signal

booming times for

the construction

industry.