In an effort to slow the double digit increase in taxes, there is a new…
With the dawn of 2019 it is time for my annual Colorado real estate predictions. How did I do last year? I hit the nail on the head! (see below) 2019 is shaping up to be considerably more exciting than 2018! The main economic drivers in 2019 will be the pace of rate increases from the federal reserve, market volatility, and the ongoing trade war. Each of these factors could have large impacts on residential and commercial real estate in 2019. For real estate in the upcoming year, the pace of rate increases by the federal reserve will have the largest impact.
How did I do with my 2018 Colorado Real Estate Predictions?
For my 2018 predictions I stated: “ 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. 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. ”
I hit the nail on the head, the tax plan “juiced the economy” and the federal reserve has been tightening faster than the market anticipated. As a result, volatility has also increased substantially.
What is in store for Colorado Real estate in 2019
What is in store for Colorado Real Estate in 2019? (see my national 2019 predictions here) Colorado is a unique real estate market that overall has outperformed the nation due to strong demand from employers and relocation. These trends should continue into 2019 albeit at a slower pace. To get started on the predictions, it is important to separate Residential trends from commercial trends since each could be impacted very differently in 2019.
Colorado 2019 Residential Real Estate Predictions
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 small appreciation. 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 500k will slow substantially. Wages aren’t keeping up with appreciation and with rising interest rates many buyers are priced out. Above 500k will also slow due to increased volatility in the stock market. I don’t think 2019 will be there year the “bottom falls out” in the front range, but overall the market will continue to slow considerably. The luxury market (above 1m) will be hit the worst in 2019 with inventory rising considerably and prices stagnating or possibly declining a little.
Mountains/Resorts: 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 and will continue into 2019 and beyond. The high-end markets are going to be interesting. Most high-end buyers are heavily invested in the stock market. As volatility increases high end buyers will likely pull back on purchases. On the high end, I see appreciation in many mountain areas in 2019 about flat.
Other Areas: The more rural areas of the state will continue to stagnate as net out migration continues to more robust markets. There will be some markets that buck the trend, but overall, these areas will continue to stagnate.
Colorado 2019 Commercial Real Estate Predictions
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. You are already seeing high end properties provide more incentives to entice residents. Overall cap rates will ultimately rise and push prices down.
Industrial: Is 2019 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. In C/D properties rents will fall and 2019 could be the beginning of a correction in this space. 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 and appreciate 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 2019 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
Colorado is unique and will react differently than other markets
What does this all mean? Colorado has several unique markets that likely will react differently than other markets. Overall Colorado’s economy is doing well and should outperform national trends, but it is important to note that there are several wildcards that could drastically alter these predictions such as large spikes in interest rates (both short and long term), trade wars, and market volatility. 2019 will begin with economic uncertainty the main driver of the market. Furthermore, the federal reserve has stated that they will continue rate increases to neutral (nobody really knows what “neutral” is) This has led to an increase in volatility as we get towards the tail of an economic cycle.
All these factors will contribute to a challenging year economically. Although most economists predict the next cycle to being sometime in 2020, there is a chance the next cycle could begin towards the end of 2019 depending the wildcards such as rates, trade, and volatility. 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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