Here are my Colorado real estate predictions for 2017

With 2017 coming quickly, it is time for my annual Colorado real estate predictions.  My 2016 predictions were accurate, with Denver house prices moderating toward the end of the year and outlying areas continuing to feel pain.

 What does this mean for 2017?  How will Colorado real estate be impacted from rising interest rates and increasing cost of living?

To get started on the predictions, it is important to separate residential trends from commercial trends, since each could be impacted very differently in 2017. 

First, on the residential side, there are really three major markets in Colorado: the Front Range (the Denver corridor); the mountain community/resorts (Steamboat, Aspen, Vail, Telluride); and other areas (Fairplay, Granby, Delta, Eastern plains).  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 $500,000 in the metro area should continue to see appreciation (not 15 percent/year like in the past), but they should continue to increase in price nicely.  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.

 Above $500,000 will slow down and appreciate slower than the below $500,000 category.  Wages aren’t keeping up with appreciation and with rising interest rates many buyers will be priced out.  Above 1m will be slow/flat.  There is considerable economic uncertainty (trade policies, tax policies, rising interest rates) that will keep some of the higher-end buyers on the sidelines

Mountains:  Depending on the market, below around $650,000 is still very hot in most mountain communities.  There are a couple factors that will continue to drive this price point.  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 at this price point is very low due to the high cost of building in the mountains.  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.

  The mid-tier markets ($650,000 to around $1.5 million, depending on the market) are going to continue to appreciate (albeit slower than the lower price points).  The high-end markets are going to be interesting.  Many high-end buyers in resort communities are international buyers.  With a stronger dollar (and our less accommodative trade policies) making properties more expensive, many of these buyers will sit on the sidelines (see my prior article: Aspen Tanks, what does this mean for you).  The ultra-high end markets will stagnate or even decline.

Other Areas:  The more rural areas of the state will continue to stagnate as net out migration continues to more robust markets.  For example, look at Delta. This area was heavily resource dependent.  Even with the new administration favoring extractive industries, many of the mines will not reopen due to cost competitiveness.  This same story is playing out in smaller markets throughout the state as the younger knowledge workers migrate to suburban or resort areas.

On the commercial side, things could get a bit more interesting.  With rising rates, many of the income properties that were bought at high valuations no longer make sense.  On the commercial side, I am going to focus on four categories: Multifamily, Industrial, Retail, and office.

Multifamily:  I think multifamily in the Front Range is ripe for a correction.  Many properties have traded on insanely low cap rates (3 percent or less) that do not make sense in a rising rate environment.  With the continued supply, the high-end apartments will not be able to continue the strong rent growths.  The cap rates will ultimately rise and push prices down

Industrial:  Is 2017 the year for the correction in metro industrial prices?  With marijuana related properties taking up an increasing percentage of the market, the industrial market will stay robust for 17 due to lack of inventory and in my opinion and have a correction a little farther down the line (18 or 19) as the “marijuana effect” transpires more.  See a more in depth discussion: Pot declines over 30 percent, what does this mean for real estate?

Retail: The trend towards online shopping continues and big box retailers will continue to feel the pain.  In 2017 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

Office: The trend continues to have more remote workers and smaller offices with more common areas to optimize space.  This will ultimately decrease demand.  On the flip side this decreased demand from existing companies will be surpassed by the net migration of new companies coming into the market.  In general I think office will remain healthy due to the number of employees/companies relocating to the state

What does this all mean?  Real estate is very market/price point specific.  Colorado has several unique markets that likely will react differently than other markets.

 There are a number of wild cards that could drastically alter these predictions such as large spikes in interest rates (longer term treasuries), trade wars, tax policies (like a possible elimination of the mortgage deduction). The year 2017 is going to be full of volatility (look at the wild swings in treasuries and stocks already) that will no doubt impact Colorado real estate.