Colorado Springs and its neighboring communities will face challenges on the way to economic prosperity in 2015, according to a recent economic outlook report by the Business Research Division of CU-Boulder.

The report, released last month during a forum at the university, included predictable optimism about future growth in the Denver metro area, but more of a realistic perspective for the next 12 months in Southern Colorado.

The report stated that the technology and defense industries largely drive the Pikes Peak regional economy and account for roughly one-fourth of the area’s income and revenue. (Aerospace and defense industries alone have an economic impact of $12.6 billion, or 44 cents on the dollar, according to the Colorado Springs Regional Business Alliance.)

The region’s fastest-growing industries are customer service and call centers, and major employment gains were seen throughout last year in education, health services, mining, logging and construction, according to the report.

But to keep industry growing in Colorado Springs, the report stated that the region must address issues including a lack of oil and gas exploration, a need for diversification to promote job growth and a shrinking manufacturing sector. The report also cited declining airport activity, the lack of city-owned industrial land, deteriorating infrastructure, having no defined strategy (in multiple respects), continual infighting in city government, less-than-progressive mass transit, low pay and “a perception that the community is overly conservative, anti-tax and contentious” as elements that may stifle growth.

Although El Paso County’s unemployment rate dropped from 7.5 percent in September 2013 to 5.1 percent in September 2014, the business division reported that was due to reductions in the labor force rather than an actual growth in employment.

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“The labor force declined from 303,391 in September 2013 to 296,745 in September 2014,” according to the report. “Over the same period, employment increased from 280,496 to 281,631 for a change of 1,135.”

The report stated that 15 of the 20 regional industry sectors experienced job gains from 2013 to 2014, with some of the most significant gains seen in professional and technical services, accommodation and food service, retail trade, health care and social assistance representing more than half of that growth in El Paso County. Job losses were experienced in five sectors, with the most significant in manufacturing and information, which the report stated tend to be some of the higher-paying jobs in the county.

Looking ahead, the report suggested the region will require more industrial production to improve employment and GDP growth, which should help grow wages, salaries and personal income — and that should translate into improved retail and housing sales.

In terms of housing, the report cited economists as expecting interest rates to rise in the second half of the year.

“Most economists expect interest rates will begin to rise during the second half of 2015,” according to the report. “How much it affects the mortgage market will depend on how high the 30-year mortgage rate increases. The regional economy continues to be clouded by the high proportion of economic activity generated by the military. Even in the absence of a base reduction in 2017 the scheduled military cuts will impact the local economy. Diversification and organic business growth will be key.”

There are also positives, according to the report, including the return of recreation and tourism, which has boosted local business and tax revenues after two years affected by natural disasters.

There also “appears to be an awareness of and desire to address some of the regional shortcomings,” the report stated.

“Additionally, greater focus on fostering entrepreneurship, innovation and small business growth will lead to strong economic performance as it has in other regions of the state.”

According to the report, the Colorado Springs commercial real estate market continues to slowly recover from the recession. Several years of little new construction in that market diminished vacancy from more than 20 percent to around 18 in 2014, which helped to drive demand. However, rent growth remained weak overall.

“Barring changes at the national level, slow expansion seems the likely scenario for Southern Colorado,” the report stated. “Expect only anemic gains in CRE activity for 2015.”

Slow growth is also characteristic of the region’s existing single-family home sales, which were up 1.5 percent through October 2014, according to the report. The average price for those homes had increased 3.6 percent over the same time, and the median home price was just below $225,000.

Data for the portions of CU’s report pertaining to Colorado Springs and its surrounding communities was contributed by Tatiana Bailey and Tom Zwirlein of the UCCS Southern Colorado Economic Forum.