Although HH, the Colorado tax reduction initiative was ultimately defeated, there was one profound item…
With 2018 coming quickly it is time for my annual Colorado real estate predictions. 2018 is sure to be exciting. The new tax plan will change things up for 2018. In a nutshell, the new tax plan should cause short term rates to rise more rapidly than anticipated as the federal reserve seeks to “get ahead” of possible inflation. The tax plan will also provide a little more liquidity into the market keeping the economy moving at least another year. How will Colorado real estate be impacted from rising interest rates and increasing cost of living?
To get started on the predictions, it is important to separate Residential trends from commercial trends since each could be impacted very differently in 2018.
First, on the residential side there are really three major markets in Colorado: the front range (Denver front range corridor), the mountain community/resorts (steamboat, Aspen, Vail, Telluride, etc..), and other areas (Fairplay, Granby, Delta, eastern plains, etc…). Each of these areas will perform radically different in the coming year. I know the groupings are large, but each group will be an indication for what is likely to transpire in each submarket.
Front Range Residential: In the front range houses below around 500k in the metro area should continue to see appreciation (not 15%/year like in the past), but they should continue to increase in price nicely. This is due to the lack of supply (many builders are focusing on higher price point properties) at this price point and continued net migration. Above 750k will slow down and appreciate slower than the below 500k category. Wages aren’t keeping up with appreciation and with rising interest rates many buyers will be priced out. Above 1m will be flat. There is considerable economic uncertainty (mortgage deduction caps, tax policies, rising interest rates, etc…) that will keep some of the higher end buyers on the sidelines
Mountains: Depending on the market, below around 1m is still very hot in most mountain communities. There are a couple factors that will continue to drive this price point. First, there is a huge desire to live in many mountain communities from individuals that are location neutral (aka can work from anywhere and are choosing a lifestyle). Along with net migration into the mountains, inventory at this price point is very low due to the high cost of building in the mountains. The high building costs are due to lack of buildable land and labor costs in these areas. Along with high cost of building in resort areas, the inventory is also being further constrained as more homes are used for nightly rentals (returns are significantly higher than for traditional monthly rentals). This is a huge issue in most mountain communities. The mid-tier markets (1 to around 2m depending on the market) are going to continue to appreciate (albeit slower than the lower price points). The high-end markets are going to be interesting. Many high-end buyers in resort communities are international buyers. With a stronger dollar (and our less accommodative trade policies) making properties more expensive many of these buyers will sit on the sidelines (see my prior article: Aspen Tanks, what does this mean for you).
Other Areas: The more rural areas of the state will continue to stagnate as net out migration continues to more robust markets. For example, look at Delta, CO, this area was heavily resource dependent. Even with the new administration favoring extractive industries, many of the mines will not reopen due to cost competitiveness. This same story is playing out in smaller markets throughout the state as the younger knowledge workers migrate to suburban or resort areas. The smaller rural markets are going to continue to stagnate.
On the commercial side, things could get a bit more interesting. With rising rates, many of the income properties that were bought at high valuations no longer make sense. On the commercial side, I am going to focus on four categories: Multifamily, Industrial, Retail, and office.
Multifamily: I think multifamily in the front range is ripe for a correction. Many properties have traded on insanely low cap rates (3% or less) that do not make sense in a rising rate environment. We are already seeing a moderation in rent growth. With the continued supply, the high-end apartments will not be able to continue the strong rent growths. The cap rates will ultimately rise and push prices down
Industrial: Is 2018 the year for the correction in metro industrial prices? With marijuana related properties taking up an increasing percentage of the market, the industrial market in the front range has split in two. I have seen more class C/D properties gobbled up by marijuana growers that have decreased the overall supply in the market. This trend will likely continue but we should start seeing a correction in marijuana C/D industrial space as prices of marijuana continue to fall. See a more in depth discussion: Pot declines over 30%, what does this mean for real estate? Class A/B industrial with high ceilings will continue to remain strong as Denver’s prominence as a regional “Hub” continues
Retail: The trend towards online shopping continues and big box retailers will continue to feel the pain. In 2018 I see the trend of redeveloping some of the older retail sites continuing and even accelerating throughout the metro area as available building sites continue to diminish
Office: The trend continues to have more remote workers and smaller offices with more common areas to optimize space. This will ultimately decrease demand. On the flip side this decreased demand from existing companies will be surpassed by the net migration of new companies coming into the market. In general, I think office will diverge. Older properties will be difficult to lease while newer class A/B properties will remain in high demand with the continued relocation of companies to the area
What does this all mean? Real estate is very market/price point specific. Colorado has several unique markets that likely will react differently than other markets. There are a number of wildcards that could drastically alter these predictions such as large spikes in interest rates (both short and long term), trade wars, tax policies (like the cap of state/local taxes and cap on mortgage interest deduction). There is considerable economic optimism going into 2018 that will continue driving the market but remember the current economic expansion is getting a bit long in the tooth so volatility should start to pick up towards the tail of a cycle. Colorado is a bit unique with large demand for real estate as a result of net migration. Look for these trends to continue through 2018, but don’t forget the important words of Mark Twain: “history doesn’t repeat itself but rhymes”. Will 2019 begin the next rhyme?
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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