Colorado real estate boomed ― then this happened

Colorado is experiencing a sustained influx of people relocating to the state. The reasons are obvious: more than 300 days of sunshine each year, Colorado’s mountain resorts full of skiing, hiking and wilderness adventures are less than an hour drive away, and the business economy is strong. The city was named the top city for careers and business this year for a second year in a row by Forbes magazine.

The largest segment of new residents to the region is made up of millennials with advanced degrees and jobs that don’t require them to live in a specific city or state. Some of them are coming to Denver because of the listed attractions above, not because they have a job here. This trend started at the early stages of the Great Recession. However, around that same time, construction in Denver slowed dramatically as real estate loans slowed due to subprime loans defaulting.

A Residential Housing Imbalance

Migration to the Denver metro area surged while home building was stagnant. After 2011, when markets and the economy started to improve, home building did begin to climb, but demand far out-weighed supply in the housing market.

Besides the housing market economy, one reason for the Denver housing supply imbalance is Colorado’s construction defect laws. The laws in Colorado are more burdensome to home builders compared to many other states across the country. Specifically, the law extends the duration that a home owner can pursue damages against the builder for a complaint they have about their home, and allows for just two homeowners of an association to bring a lawsuit.

This has enabled a very lucrative environment for litigators. The laws have a two year window for each defect, whereby most states have a two year total statute of limitations. This substantially lengthens the time a homeowner or homeowner’s association can sue a contractor for negligence.  

These laws have made some large home builders reticent to build in Colorado, specifically single-family homes and condos. The new trend is to build multi-family rentals with the idea they will convert to condominiums when the construction defect laws are more favorable or after the statute of limitations has expired. Since the end of 2011, construction on large scale apartment complexes in the Denver metro area have exploded with many new trendy neighborhoods being created.

Real Estate Investment Opportunities

Thinking of investing in The Denver Metro Area real estate? You may want to think twice. The housing supply factors have driven exponential growth in home values and rental rates, significantly inflating the Denver housing market prices. Investors who were bullish on Denver real estate in the 90s are now investing in other opportunistic markets. Thus Denver is not as affordable or as good an investment as it once was. Cap rates, or the rate of return an investor can make on real estate, are at historic lows due little inventory.

Housing Market Affecting Denver Economy

The housing market is affecting other economic areas in Denver. For example, a negative outcome of our population growth is that new areas have fostered gentrification around the metro area. Those living below the poverty level in Denver have seen far fewer options for housing.

Employees in many industries struggle to have discretionary income after making monthly high rent or mortgage payments. Voters may have helped this issue in November when they passed Amendment 70 to increase minimum wage payments to $12 an hour. However, this increase won’t be finalized until 2020.

High demand for housing in Colorado isn’t affecting just one industry. Migration to the state has also strained transportation and infrastructure in the metro area. Massive investments in our roads and alternative transportation methods are needed to keep up with the migration that is projected to continue into the next decade.

The trend of moving West has caused a boom in Colorado and many other Western states; however it comes with unintended consequences. The challenge is to balance growth in a way that enables a great community and state for everyone.

Darren Markley is the market leader for The Private Client Reserve Denver office for U.S. Bank. He provides investment management, private banking, trust and estate services as well as wealth planning leadership for a team of management professionals. He has extensive experience in the financial services profession and has been in the industry for more than 20 years.