Four Colorado Investment Markets to Watch
Recession-Proof Real Estate
I think the current real estate expansion in Colorado is getting poised for a correction and/or change. Real estate, like a hot air balloon, can’t go up forever—at some point, it needs a break to refuel. Colorado’s real estate boom is starting to get tired, and we’re already seeing a substantial slowdown in sales volume in Denver and the Front Range, indicating that change is lurking just around the corner.
What happens when the markets fall?
As a lender during the last recession, I learned some important lessons about what happens when the markets tank. We got to see how each loan performed under the stress of the financial meltdown. When I analyzed which transactions we lost on and which ones weathered the storm, there were three clear trends that predicted losses in both commercial and residential areas:
- Consistency: The more consistent a neighborhood, the better it fared during a downturn. I’m not saying all the houses look alike, but the majority of them were well-maintained and grouped at an average price point. Neighborhoods that had problems during the last recession had outliers that were considerably lower than others. For example, you could have a neighborhood with prices ranging from $200,000 to $1 million. If you own a property that is worth $1 million, you’re at a considerably higher risk due to the lower price points in the area. This was also a key indicator of success on the commercial side of real estate. Properties in uniform areas performed considerably better. For example, a building in an industrial park with many like properties did better than a property not in an actual industrial park but surrounded by different commercial property types of various price points and styles.
- Closer to core fared better: Properties closer to the city core in good areas typically fared better and came back much quicker than other areas. There’s a desire in many areas for city living as traffic has gotten worse and many companies have moved jobs back to downtown areas. Denver and Atlanta are good examples. Neighborhoods closer to city centers came back much stronger than outlying suburban areas.
- Supply: Areas with limited supply do considerably better in a down cycle. Take a neighborhood or commercial park with new construction coming online. Why would someone buy an existing property when they can buy a new property at a discounted price that a builder/developer must unload during a recession?
- Trendy Neighborhoods: Towards the end of the recession cycle, it seems as if every neighborhood is the next “it” neighborhood, with speculation for drastic price increase and appreciation. We’re seeing this throughout the Denver metro area and Front Range. This is typical behavior towards the “tail” of a cycle. These areas are much less solid than more established areas and therefore are at considerably greater risk during a downturn
Based on the information, above what areas of the state fit this profile?
Along the Front Range:
Boulder: I’m referring to the actual city of Boulder. Although Boulder is expensive, the area has strong fundamentals that will stabilize the market in a downturn. It has a highly educated workforce and companies that crave being located in that area, such as Google. This combination, along with lack of supply, will keep Boulder more stable during the next recession.
Denver: Overall, Denver County should fare well. When looking in Denver, narrow down the particular neighborhood’s stability by using the four criteria above. Denver, like Boulder, has a dearth of new properties which will stabilize prices, too.
Most ski areas in Colorado are “land constrained,” which leads to a lack of new supply. Building costs in the mountains are very high, which further limits new construction. There are two ski markets that jump to the top of my list when looking at areas that will best weather the next recession.
Steamboat: Steamboat, like other ski areas, is supply-constrained, and with the recent purchase by Alterra (Ikon pass), demand has increased substantially. Steamboat is still a relative value compared with other markets like Vail or Aspen, and considerably more land constrained than Summit County (Breckenridge, Frisco, Silverthorne and Dillon).
Aspen: Although Aspen is the priciest market on my list, it is still a very good area to purchase in on the low side of the market (under $2 million). Aspen has zero supply and continued demand due to its exclusivity.
If the recent changes in the stock market are any indication of what is to come in real estate, hang on to your saddle! Like any other industry, real estate goes in cycles. We’re currently at a high point in the market but the waters are becoming choppy. Using the four tips above and focusing on solid long-term real estate markets, you’ll enable your real estate portfolio to weather the next storm.