CREJ - Office Properties Quarterly - September 2017
As the current economic expansion continues, people start to question where we are in the business cycle. The “official” declaration of U.S. expansions and contractions comes from the National Bureau of Economic Research. As of August, the current economic expansion has been underway for 98 months, which currently ranks as the third longest expansion since tracking began in 1854. Where we are in the business cycle is an important consideration for most companies as they plan and budget for changing sales and staffing expectations. While national business cycles are tracked using measures such as gross domestic product, personal income, industrial production and employment, these measures may not be available at the state level or are released with such a lag as to not be useful. Therefore, employment statistics, which are released on a monthly basis, are closely watched at the state and local levels as the key indicator of an area’s economic health. After ranking fifth for employment growth in 2015 and 13th in 2016, Colorado ranked 11th for employment growth as of mid-2017. Nevada and Utah currently hold the top spots in the country with a 3.3 percent increase in employment. Colorado employment growth is expected to average 2.1 percent in 2017, representing the addition of about 55,000 jobs. Six of the seven metropolitan statistical areas in Colorado posted increased employment from the first half of 2016 to the first half of 2017. The lone exception was the Grand Junction MSA, where employment declined 0.4 percent. The Fort Collins MSA grew the fastest in 2015 and 2016, and that trend continued into the first half of 2017 as the region’s employment base increased 4.3 percent. The biggest shift in position was in the Greeley MSA. After employment decreased by 1.3 percent in 2016, primarily due to the decline in oil and gas, employment expanded by 2.6 percent in the first half of 2017, ranking the Greeley MSA as the second-fastest growing MSA in Colorado. Nearly 1.7 million jobs are located in metro Denver, defined as the Denver MSA plus the Boulder MSA. Dividing the employment base into 11 supersectors reveals that nine of the categories in metro Denver increased through the first half of the year, with the exceptions of the information and manufacturing supersectors. The education and health services supersector reported the largest percentage increase in employment and added the most new jobs, averaging a 4.1 percent increase in employment in the first six months of the year, or the addition of 8,500 jobs. The professional and business services supersector is the largest of the 11 supersectors and added 7,200 jobs over the period. The natural resources supersector recorded the smallest increase in employment over the year, rising 0.5 percent with the addition of 500 jobs. Looking ahead, the Manpower Employment Outlook Survey expects that the percentage of companies hiring in the Denver MSA will increase 3 percentage points between the second and third quarters, with 30 percent of companies planning to expand their employment levels. By comparison, only about 24 percent of U.S. companies expect to add workers in the third quarter. According to the survey, job prospects are positive in most sectors of the economy, including transportation and utilities, wholesale and retail trade, information, financial activities, professional and business services, education and health services, leisure and hospitality, other services, and government. Hiring in construction and manufacturing is expected to remain unchanged. Employment in metro Denver is forecasted to increase by 2.3 percent in 2017, representing the addition of about 37,000 jobs. The employment growth rate in metro Denver in 2018 is likely to fall slightly as companies continue to struggle to find the workers needed as the region posts an average annual unemployment rate in the 2.5 to 3 percent range. • What does this mean for commercial real estate? A simplistic analysis of employment by supersector highlights expected changes in office, industrial and retail uses. Supersectors dominated by office users include professional and business services, government, financial activities and information. These four supersectors represent nearly 43 percent of metro Denver’s employment and were responsible for the addition of about 10,600 workers during the first half of this year, or 31 percent of the employment growth. Even with continued employment growth, the office vacancy rate is expected to increase in 2017 as newly constructed office space comes on the market. Industrial users are concentrated in transportation/warehousing/utilities, manufacturing, wholesale trade, and natural resources/construction, representing about 20 percent of total employment and 13 percent of new job growth. While the industrial vacancy rate also is expected to increase in 2017, continued demand for logistics space will keep the market healthy. Retail users are found in retail trade, leisure and hospitality, and other services. These three supersectors represent 25 percent of the region’s employment and were responsible for 32 percent of the employment growth, representing the addition of 11,200 jobs. Limited new retail construction is ensuring that the market remains stable as space is repurposed for uses other than traditional retail trade.