Colorado Real Estate Journal - May 6, 2015
The construction sector remains strong, according to the spring- 2015 release of the Sherman & Howard Construction Index, a statistical indicator of construction-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 coming building season, Sherman & Howard foresees continuing growth in the industry for the near future. Broad economic indicators including the migration rate, population growth and unemployment rate all signal booming times for the construction industry. Unemployment hovers 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 millennial generation population in Denver. The firm expects these factors will continue to drive strong construction activity 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 spending in 2015 to top $13.4 billion, which should support an additional 8,000 industry jobs. The availability of craft labor continues to present significant hurdles to meeting demand in the industry, although it may be one of the only factors preventing overbuilding in some sectors. Cutbacks in the energy industry resulting from low oil prices may ease the ongoing labor shortage, but the impact of this recent change in the labor market 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 economic outlook. Although lending 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 termination of the Federal Reserve’s bond purchasing program. However, rate increases on the horizon may impact construction 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. Central business districts continue to dominate office space construction activity with signs of moderate growth in suburban locations. Roughly 2.8 million square feet of office space was under construction at the end of 2014, representing a 64 percent increase since the second quarter 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 industrial market ended 2014 at unprecedented levels, with vacancy at a historic low rate of 3.2 percent, which is 0.6 percentage points below this same period last year. Rapid absorption 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 construction since the mid-2000s with 1.4 million sf under construction. -Retail. At the close of 2014, retail vacancy in the Denver metro area was reported at 5.7 percent, approaching the lowest 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 supply of Class A space is tight. At the end of 2014, an estimated 1 million sf of retail space was under construction in the Denver metro area.
-Residential. Residential construction 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 slowing of multifamily construction 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 infrastructure funding has suffered at the hands of congressional gridlock, leaving states looking for alternative solutions to funding gaps. Yet despite the economic upswing in Colorado, increased state revenues may not yield significant 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 Budgeting projects taxpayer refunds under TABOR of up to $220 million next year, limiting the availability of general fund dollars for much-needed projects. Even if TABOR refunds do not curb the general fund, infrastructure projects would still face stiff funding competition 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 looming 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.