Although HH, the Colorado tax reduction initiative was ultimately defeated, there was one profound item…
Happy New Year! It is time for my annual Colorado real estate market predictions. Is it dawn or dusk for real estate in Colorado? The main economic drivers in 2020 will be the pace mortgage rate increases, the election, and end of cycle volatility. Each of these factors could have large impacts on residential and commercial real estate in 2020. For real estate in the upcoming year, how consumer confidence reacts to these economic drivers will be the main story. How did I do last year? I hit the nail on the head! (see below) 2020 is shaping up to be considerably more exciting than 2019!
How did I do with my 2019 Colorado Real Estate Predictions?
For my 2019 predictions I stated: “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.” My predictions were dead on as Colorado real estate market continued to outperform the nation throughout 2019 while at the same time slowing considerably.
What is in store for Colorado Real estate in 2020
What is in store for Colorado Real Estate in 2020? 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 2020 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 2020.
Colorado 2020 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, Vail, Breckenridge, 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. Mortgage rates are starting to rise a little due to continued economic optimism driving the 10-year treasury higher. This will hurt houses above 500k as buying power is impacted. Above 500k will also slow due to increased volatility in the stock market which will likely pick up throughout 2020. I don’t think 2020 will be there year the “bottom falls out” in the front range, but overall the market will continue to slow considerably at the higher price points. The luxury market (above 1m) will be hit the worst in 2020 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 2020 and beyond. Properties under 1m will continue to be in high demand 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 2020 about flat. The one note is large ranch properties. These will be increasingly difficult to sell due to lack of demand and considerable increases in supply.
Other Areas: The more rural areas of the state will be flat as net out migration continues to more robust metro markets. There will be some markets that buck the trend, but overall, these areas will continue to stagnate.
Colorado 2020 Commercial Real Estate Predictions
On the commercial side, things could get a bit more interesting. There is currently a rush to quality income properties as fear of a market peak and other assets looking less desirable. On the commercial side, I am going to focus on four categories: Multifamily, Industrial, Retail, and office.
Multifamily: I think multifamily is somewhere near a peak. Many properties have traded on insanely low cap rates (3% or less) that do not make sense with stagnating rents. 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. I think we will be about flat on multifamily as properties are already trading near historically low cap rates.
Industrial: I thought 2019 would have seen a correction in the industrial sector due to the Cannabis industry. As prices for Cannabis have fallen it is no longer profitable in most cases to grow inside metro areas; there is a huge shift to outdoor/greenhouses which should unleash a ton of low-end C/D space. See a more in depth discussion: Pot declines over 30%, what does this mean for real estate?. High end space A/B with tall ceilings will continue to be in high demand and will continue to remain strong and appreciate as Denver’s prominence as a regional “Hub” continues. I see industrial and light industrial as the brightest spot in commercial real estate in the Colorado Front Range in 2020.
Retail: The trend towards online shopping continues and big box retailers will continue to feel the pain. In 2020 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. Class A retail in great areas will continue to do fine (think Cherry Creek or Main street in Steamboat Springs, Breckenridge, etc…)
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. This could be another bright spot in commercial real estate in 2020.
Colorado is unique and will react differently than other markets
What does this all mean? The Colorado real estate market 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 consumer sentiment which can be extremely fickle. 2020 will begin with volatility as the election nears and mortgage rates rise a little (I’ll do a separate article on this topic) . Furthermore, the federal reserve has stated that they will take a “pause” (nobody really knows how long the “pause” will be). This is typical to see volatility to rise along with uncertainty as we get towards the tail of an economic cycle.
Fortunately, I don’t believe we will see another economic cycle surface until early 2021 after the election. Real Estate in general in Colorado’s front range and resort markets should hold up okay in 2020 remaining flat with no huge downside risk. It is important to not forget the important words of Mark Twain: “history doesn’t repeat itself but rhymes”. Will late 2020 begin the next rhyme or will it be 2021?
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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, Bloomberg, Businessweek, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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