CREJ - Office Properties Quarterly - March 2017
Colorado, Denver and the north metro area will enjoy a strong 2017 with a booming economy and more growth than originally expected, experts speaking at two Vectra Bank annual economic forecast events predicted. At the Denver/Colorado event, economic experts discussed growth, doing business in a changing political and economic climate, interest rates and gross domestic product growth. At a metro North-focused economic event, experts provided an overview of the economy and shared thoughts on how a changing workforce may affect personal and business plans. •Business expectations. The state’s growth is anticipated to be “running on all cylinders this year,” said economist Patricia Silverstein with Development Research Partner. With net migration at an all-time high of 45,000 last year, Silverstein said 2017 migration will be slightly lower, at about 40,000. Generation Y has not yet reached its income potential, so Generation X is spending the most dollars and driving the economic activity today. As millennials come into their income potential years, age 35 to 55, they will play a larger role in strengthening the economy. Retail trade activity will increase, but expect inflation to take a bigger bite out of our income this year, reaching 3 percent, she said. Colorado will be in the top 10 states for employment in 2017, and while growth has been slow for some areas in Colorado, like Grand Junction, all areas saw expansion in 2016. “This was the fourth year that we’ve seen growth in the state’s super sectors,” said Silverstein. “In fact, all sectors have enjoyed growth at historic rates.” Super sectors include health care and wellness, information technology, aerospace, telecom, fossil fuels, and banking and finance. While the rate of growth in the country and state has slowed overall – down 0.2 percent from last year to 1.7 percent in Colorado – the state continues to grow twice as fast as the rest of the country, state demographer Elizabeth Garner told the metro North conference attendees. For business, the challenge will be attracting and retaining talent. While Colorado is experiencing a boom, many other states are as well. Colorado’s high housing costs – the 16th highest in the country – and competition to attract top talent within the growing millennial workforce population will require businesses to closely watch staffing needs and may need to increase compensation and benefits to attract new workers, Silverstein said. In-migration is on the younger side, which means businesses will be challenged to find older, experienced workers – especially considering that the 65-plus population will grow by 77 percent in the same 30 to 40 years it takes a person in an entry-level position to reach full potential. In addition to a “growing and slowing” economy over time, businesses must ensure they provide goods and services to attract top employees. By 2040, Hispanics and other nonwhites are expected to make up 45 percent of the state’s population. “Those new nonwhite workers are the new spender,” said Garner. “To prepare, businesses should think about diversity in both worker and client.” •Interest rates. At the 2016 conference, Burt White, managing director of research and chief investment officer for LPL Financial, predicted a 70 percent chance of a recession and potential negative interest rates. One year later, his forecast is for strong growth with no chance of recession. While it is a positive that the country avoided a recession, the low 2 percent growth in gross domestic product has slowed our post-recession recovery and dubbed it “the worst recovery ever,” White said. While low interest rates may be positive for borrowing, it also hampers consumer’s ability to increase savings, going as far as to call it a “disservice to the economy and growth,” he said. The average number of interest rate hikes following a recession is 16 and the lowest number of increases was 10. However, interest rate increases following this recession equals only 2 percent. With the average three increases per year, the interest rate will take nearly five years to get back to a healthy GDP following this past recession, White said. “We receive two times more interest in savings as when we pay interest,” said White. This lack of interest on savings hurts the people who need it the most. White predicts 2.5 to 3 percent growth in 2017 and earnings in the mid-single-digit or high-single-digit earnings and return. Contrary to what economists thought would happen, when interest rates were at the bottom, spending went down and people saved more. In 1980, a person needed $763,395 to have $100,000 in interest income for retirement. By 2000, a person needed $2 million. Today, one needs $14 million to make $100,000 from interest income on savings. However, White assured attendees that the country does not need much growth to get back to a healthy 3 percent GDP within a year and a half. •Economic growth. While the pro-growth promise of the new administration has potential for the country, White cautioned that, historically, it’s excesses that cause recessions. “It ain’t over until ‘overs’ are everywhere … over borrow, over hire, over spend, over leverage,” said White. “We were over extended and over in 2009. Today, we don’t see overs, but a pro-growth agenda could also create too many overs that could drive another recession.” A “Trump bump” in the first two years of the new administration’s implementation of pro-growth policies allowed Phyllis Resnick with the Colorado Futures Center to predict gross domestic product growth to 3 percent this year. However, this new growth and continued low unemployment brings pressure of increases in prices, demand for higher wages, inflation and interest rate hikes. “We can’t grow at those outside rates forever,” said Resnick. “Over time, the stimulative policies [President Trump] is proposing, such as tax cuts and infrastructure spending, will put a natural break on this growth.” While there is no recession in the forecast, the probability of one in the next two to three years is higher, said Resnick. Another pressure point for Colorado is housing, with 59 people needing new housing every day. The state’s 1992 TABOR amendment will play critical role in Colorado’s ability to pay for services as the state ages. As the economy grows, it’s expected to exceed population plus inflation, which will increase TABOR-related tax refunds to grow up to 18 percent, or $600 per capita by 2035. While attractive to tax payers, the general fund and its largest budget items such as K-12 school funding will suffer. Combined with the expectation that, under our constitutional measure that limits property tax, the state will see significant decrease in property taxes, from 7.96 to 6.5 percent in coming years – adding another drain on the general fund budget. This affects the state’s ability to pay for programs at county, district and state levels. The metro north also is experiencing unprecedented development, mainly spurred from the expansion of public transportation. “FasTracks is the biggest driver in a change of lifestyle and change in who wants to live here,” said Barry Gore from Adams County Economic Development. “It’s a very dynamic and exciting time in the metro North region with many opportunities and challenges on the horizon.”