Allot has changed in the last six months. Interest rates have skyrocketed, appreciation has continued,…
I wrote a few weeks back about how Denver Colorado is the second fastest “gentrifying” area in the country just behind San Francisco. Nobody has really talked about it but “gentrification” is happening (already happened in most ski towns) at an even faster pace in smaller markets like Breckenridge, Aspen, Steamboat, Winter Park. What does this mean for real estate both in the gentrified market and adjacent markets?
What is gentrification
Gentrification is a general term for the arrival of wealthier people in an existing urban district, a related increase in rents and property values, and changes in the district’s character and culture. Many aspects of the gentrification process are desirable with reduced crime, new investment in buildings and infrastructure, and increased economic activity in their neighborhoods.
Gentrification is occurring in cities throughout the United States as urban areas are becoming desirable. It is ironic In the 80 and 90s, the goal of many cities was to invigorate “challenging” in town areas. Tax breaks and other incentives were given to help “clean up these areas”. The changing of inner cities to desirable and coveted areas to live worked very well.
Now the pendulum has swung the other way with gentrification of challenging areas now looked at negatively, as wealthier owners figuratively “push out” less advantaged with higher property costs, rents, etc..
How does gentrification happen in real life?
Regardless of what the fancy studies say, gentrification is a very simple economic event. People want to live in an area, the area they want is too expensive, so they buy a house near the area they desire that isn’t as nice and then spend money fixing it up. Depending on the price point, buyers go further and further into less desirable areas to afford a property. For example, someone might want the amenities of Aspen, but can’t afford a four million house Fortunately if you go a few miles another direction, the house prices are now 1m in Basalt or Carbondale. The 1m home is looking really good to buyers as at least they can own a house. Buyers that might wanted to live in Basalt or Carbondale now might look at Glenwood where you can buy a 500k home. Prospective buyers in Glenwood might look to rifle where you can buy a home for 300k. This is happening in every mountain town throughout the state. This same cost benefit analysis snowballs on itself as more people go into the less desirable areas, they then become desirable, aka gentrified.
What is driving gentrification in the mountain towns?
The ski towns are not immune from the same market forces impacting cities throughout the country. The various mountain towns actually are further down the gentrification road than many other cities. I would go out on a limb to say that many are already 100% gentrified.
- Lack of land/ restrictive land use policies: There is physically little if any land left to build. Furthermore, restrictive land use policies are exasperating the shortage. For example, if you look at the zoning of many properties, they are zoned for one single family home. There are thousands of examples where people try to build higher density (duplex, triplex, row homes), etc.. and cities will not allow them as they “change the character of the neighborhood”. This is the number one driver of gentrification as there is little way to meaningfully increase supply.
- High build costs due to increased regulations: The mountain towns have strict building codes that get more complex every year. Complexity always adds costs. For example there are new energy requirements for how tightly a house must be sealed, the R value for windows and insulation, energy efficiency of appliances, . all these new requirements add substantial costs which makes building very expensive.
- High labor costs: Labor costs in all the mountain communities is exorbitant, skilled labor like plumbers can charge 150 and hour. The huge labor costs get added into prices making it impossible to build lower cost inventory.
Who wins from gentrification of the ski towns?
The obvious winner is anyone who owns property in the mountain towns is a net beneficiary of the changes with higher prices. But there are other winners that don’t own property directly in a ski town. As prices have increased exponentially in many mountain towns, the growth has been pushed to adjacent communities. Leadville Colorado is a great example. As the Vail Valley got too expensive people moved to Leadville and commuted into Vail or Summit County. Other examples of beneficiaries are Silverthorne, Georgetown, Oak Creek (outside of Steamboat), Glenwood Springs, Rifle, Carbondale, Basalt, etc… Each of these cities has seen large increases in value as people get priced out of the various ski markets. Look for this trend to not only continue, but accelerate as the ski towns continue to appreciate.
Gentrification is not only impacting the ski towns, but adjacent areas that are also becoming beneficiaries. Gentrification is a byproduct of lack of inventory which leads to an economic mismatch. The market has responded as it always does with increased prices as demand outstrips supply. Every mountain town talks about the large increases in prices (gentrification) and impact on residents but there has been little to no real progress made as the real culprit, lack of supply, has yet to be addressed. Will cities make radical changes to solve the economic riddle and reverse years of gentrification? Unfortunately, the real estate market has already answered the question with a no as prices are continuing to rise rapidly even during the economic malaise of the pandemic as inventory remains constrained.
Additional Reading/ Resources
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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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