We are still lending. First, I want to give a hats of to these folks for their creativity, they took their bikes down a black run. This pic is the only time I saw them upright from top to bottom! I hate to update predictions only three months into the year, but the Coronavirus has thrown a wrench into the economy. What does this mean for Colorado real estate? Will the Coronavirus derail the breakneck growth in Colorado Real Estate?
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. In the first half of the year real estate throughout Colorado will stagnate with very few transactions as the market copes with the depth of the pandemic
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 be in high demand. 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 as the stock market has fallen substantially. I don’t see huge price declines in store in the Denver metro area under 1m as inventory is still limited. 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. You likely will see a little inventory of nightly rentals put up for sale as they are unable to cash flow due to the resorts closing early and mountain towns closing down for months. Fortunately, inventory is very limited so they should be absorbed relatively quickly with little impact on prices. 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. Due to the virus, we will see a substantial pull back on purchases. On the high end, I see slight decline in many mountain areas in 2020 as the market continues to wobble. 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. The Coronavirus has only exasperated this trend. Look for this only to accelerate the rest of the year as many retail spaces goes dark. 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. The Coronavirus will accelerate this trend with office remaining week as more workers move to remote locations. Older properties will be difficult to lease while newer class A/B properties will likely have lower rents due to decrease in demand. Office will be difficult into the future as the workforce is altered from the recent pandemic.
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 will take a shock like the rest of the country in the first half of the year, but should come back quickly and outperform national trends. It is important to note that there are several wildcards that could drastically alter these predictions such as how quickly the pandemic is contained and how quickly consumer sentiment comes back which can be extremely fickle.
2020 will be challenging the first half of the year and begin recovering the second half of the year. How quickly the recovery takes hold is the million-dollar question, but Colorado will remain desirable for relocations of businesses which will continue to drive the economy.
Fortunately, the Coronavirus should be a short-term shock that most can recover from relatively quickly. 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 except for office and retail on the commercial side. With all the current uncertainty, now is the time to sit back and relax and wait out the storm until June.
We are still lending as we fund in cash!
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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 Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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