Google bets 2.1 billion that cities like NY, Denver, Atlanta, etc… are immune from WFH. …
Happy New Year! It is time for my annual Colorado real estate predictions. How did I do last year? I did really good especially with the uncertainty of the virus! (see below) 2021 is shaping up to be pretty exciting from a real estate perspective! The main economic drivers in 2021 will be the rollout of the vaccine, the work from home and now the back to the office phenoms, the shift to online shopping, and the flight to suburbia. What does this mean for Colorado Real Estate in 2021? Who will the winners and losers be?
How did I do with my 2020 Colorado Real Estate Predictions?
For my 2020 predictions I stated: “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.”
My predictions were spot on as Colorado continued to outperform the nation throughout 2020 becoming turbo charged in June. I didn’t predict how turbo charged the market would become especially in the resort communities with some markets like Aspen where the median home price doubled.
What is in store for Colorado Real estate in 2021
What is in store for Colorado Real Estate in 2021? 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 2021 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 2021.
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. In 2021 you will see a shift back closer to Denver as opposed to the exurbs as the work from home movement subsides. The front range should see modest appreciation in 21 as Denver becomes a hub for smaller regional offices.
Mountains/Resorts: The resort markets had historic years in 2020, with some markets almost doubling. 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 is at historic lows with extremely high building costs making it virtually impossible to add meaningful supply. 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 2021 and beyond.
The mountain resort areas will have good returns in 2021 with historically low inventory levels continuing. I don’t think it is possible to have another 2020 with returns in the mountains. We should see 10-20% increases in the resort communities (which is still amazing) as opposed to 40% percent. As the pandemic wanes the resort markets will remain in demand, just not as high as last year.
Other Areas: The more rural areas saw huge upside in 2020 with the flight out of metro areas. I think this trend will reverse in 2021 as people migrate back into more metro markets as the pandemic wanes.
Colorado 2020 Commercial Real Estate Predictions
On the commercial side, things are 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. People are note paying premium rents to be closer to the office as the office is now remote. You are already seeing high end properties provide more incentives to entice residents. As the vaccine rolls out you will see more demand return for the in-town properties, but tenants should still retain the upper hand on pricing. I think we will be about flat on multifamily as properties are already trading near historically low cap rates.
Industrial: I thought 2020 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 2021.
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 2021 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 do okay (think Cherry Creek or Main street in Steamboat Springs, Breckenridge, etc…)
Office: The trend continues to have more remote workers and smaller offices with less common areas. 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 and companies shed thousands of square feet of space in the metro 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 will take a shock like the rest of the country in the first quarter of the year as the virus spikes and the vaccine rollout begins, 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.
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 do well in 2021 with no huge downside risk except for office and retail on the commercial side. It is important to note that we will not have a 2020 repeat in Colorado as the pace of increases in 2021 will not match the torrid pace of last year. What do you think will happen to Colorado real estate in 2021? Do you have questions about my predictions? Leave a comment and I’ll respond.
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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.
Fairview is the recognized leader in Colorado Hard Money and Colorado private lending focusing on residential investment properties and commercial properties both in Denver and throughout the state. We are the Colorado experts having closed thousands of loans throughout the state.
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