Wow, 2023 has been quite the year in real estate. The beginning of the year started out good but as interest rates rose substantially volumes dropped off a cliff and prices began falling. What do the changes mean for Colorado real estate in 2024? Will prices have a larger reset than we are already seeing? How will the mountain/resort communities perform compared to Denver? What happens to commercial real estate in Colorado?
2024 will finally be a big reset in Colorado real estate
Regardless of prices, real estate is already in a deep recession, with closing volumes down close to 20 year lows. At the same time interest rates are remaining above 7.5% (as of this writing). Late 2023, we started to see the beginning of what is to come in 2024 with values finally starting to come off their epic run in both Denver and most mountain towns.
Some macro economic wild cards
2024 is a hard year to predict as rates remain high there is increasing probability of something breaking in the economy. Here are some factors I am watching:
- Deficit spending/financing: The federal deficit has basically doubled over the last 3 years and all of this must be financed through the treasury market. As the treasury continues its borrowing rates could continue to spike. I see no end in site to the current deficit spending which will lead to rates higher for longer
- Interest rates/inflation: I’m not convinced that we are totally done with inflation, the labor market is still exceptionally strong which will continue upward pressure on wages and in turn products/services. Rates will have to remain high even in the face of a possible moderate recession
- What breaks? The federal reserve continues touting a soft landing, in order to accomplish this rates will need to remain higher for longer. This drastically raises the risk of something breaking. My first thoughts are commercial real estate and regional banks. But I don’t think the economy will come out of the high rate environment unscathed.
How the three factors above plays out could have substantial implications on real estate, for example if something in the economy breaks bad enough like commercial real estate, we could enter a recession with higher unemployment than anticipated. My gut says that rates will stay higher for longer due to the tight labor market and increased deficit spending which ultimately will put pressure on commercial and residential real estate prices.
2024 Colorado residential real estate predictions
I categorized residential real estate into three buckets 1. Front Range/Denver 2. Ski towns 3. Rural I know these are large buckets, but wanted to highlight some important trends in each one
Front range/Denver 2024 real estate predictions
Denver in the past was always a top pick of places to relocate to but things have changed quickly. Now Denver is commonly on the list of best places to move out of. The number one driver is cost. Denver has gotten expensive and as rates have doubled it has gotten even more expensive. This change is evident in the recent sales data with transaction volume down 25% and prices down 5.2% year over year.
Due to the high prices in Denver, the market is in store for a reset in 2024. Best case prices will be down around 10% year over year in 2024. Although inventory will remain tight as rates keep people locked into their houses you should see it start to increase as the economy softens. Keep in mind, even with a 20% increase, Denver will still be up over 30% since the pandemic buying spree.
Note, the front range suburbs will perform better than Denver due to their lower price points along with lower tax bills, better schools, lower crime, etc…
Ski towns (Steamboat, Breckenridge, Vail, Aspen, Winter Park, Telluride) 2023 real estate predictions
The ski towns will come off their highs. Look for drive up resorts like Breckenridge and Winter Park to come off around 10% as the Denver market softens. The destination resorts will fare better with prices staying flat to coming off around 5%.
The assumptions above could be drastically altered if the stock market corrects more than is predicted and/or there is a recession that is deeper than anticipated.
Other/rural/smaller markets in Colorado real estate predictions
I think the flight to the exurbs/rural areas will be a passing phenomenon in 2023 as people get back into the office and into old patterns. These are the highest risk areas as local income is not high enough to support the prices with the current interest rates. This will lead to a reset in the 10-15% range. Look for considerable inventory to come on the second half of the year as the employment rate increases and employees lose their leverage on work from home.
2024 Colorado commercial real estate predictions
Overall Commercial real estate will have a tough run in 20234as interest rates remain elevated, many deals no longer make sense. Furthermore, there is a glut in certain property types like office, apartments and large industrial that will take some time to adjust
Office: A space will get hurt with prices coming down around 10-20%, B/C space will get annihilated as the rents cannot keep pace with rising cap rates and vacancies increase. Look for the bottom to fall out in the office space with prices coming off 20-30% on B/C office space.
Multifamily: This sector will also get hurt as cap rates rise and rents flat line. Ironically B/C units will fare better as there is more demand for rents at the lower price points. Overall apartments will have a tough run in Colorado, but better than office
Industrial: This sector will languish in 24 as warehousing/distribution slows down with the shift of consumer buying preferences. It could take a few years to work through the large amounts of space which will put pressure on new rents. Long term Denver is well positioned as a hub for the intermountain west but in the short term look for some sizable resets in rents, vacancies, and ultimately prices.
Retail: Class A retail will do fine as most have long term leases, big box/lower tiered retail will struggle as consumers revert to traditional buying patterns and continue their pullback on goods purchase. Furthermore, rising wages will make in person retail more expensive and force another pivot to selling online especially in the lower tier sections.
Summary 2024 Colorado Real Estate predictions
2024 is going to be a bumpy year in real estate. We are already seeing signs of this on the residential side with the median prices off 5% in Denver from the peak and volumes down 25%. This is just the beginning of the reset in real estate throughout Colorado.
Whatever happens in Denver eventually spreads throughout the state albeit sometimes with a lag. 2024 will be challenging for real estate as volumes drop and values reset. Fortunately I don’t see a 2008 repeat, in residential but it will still be painful for anyone who bought in the last year or so or who has to sell for whatever reason.
Commercial real estate is a whole different animal with rents dropping, vacancy rising, and ultimately prices facing a huge reset especially in the office sector along with multifamily. If rates remain higher for longer, there will be increasing stress on every commercial property type as cap rates remain elevated.
Anyone in residential or commercial real estate is going to have a tough ride as volumes will stay extremely low throughout Colorado until there is a major reset in the economy that forces individuals and businesses to sell and rates to come down. Long and short 2024 in Colorado looks to stay the same for some but likely worsen for most. We can always look forward to 2025
Additional Reading/Resources
- https://car-co.stats.showingtime.com/docs/mmi/x/Statewide?src=map
- https://www.zillow.com/home-values/14934/breckenridge-co/
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Written by Glen Weinberg, Owner 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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