Is There a CRE Bubble in Denver?
- Jun 20, 2018
While many may be eager to jump right into commercial real estate investing, there is a time and a place for everything. Some may get into commercial real estate for the potential of high returns compared to other asset categories. Regular cash distributions and a steady income are often attractive incentives for those interested in buying into commercial real estate in areas such as Denver. However, timing is everything, and it may be time to reign in investment in the city.
Is Denver in a Real Estate Bubble?
Record numbers of potential homebuyers have helped contribute to rising home prices in the metro Denver area. However, homebuyers continue to be able to afford monthly payments as average inflation-adjusted PITI has risen accordingly. There is still room for homes prices to continue to rise and for buyers to make mortgage payments.
This may be an indicator that there is no residential real estate bubble in the metro Denver area. In addition, transaction numbers are close to the 25-year average. The peak of the bubble had sales that were an estimated 20 percent above the average. Currently, there are no signs of an overheated market. Tougher lender practices make it harder for unqualified buyers to purchase a home, and there is a relatively low default rate in the area. It is still cheaper to buy than rent in the metro Denver area.
What Does a CRE Bubble Look Like?
Despite similarities between the various sectors of real estate, the same positive trend seen in residential properties may not apply to commercial real estate. CRE prices are flat-lining compared to the peaks seen in 2016. This may be due to less development in traditional retail. Commercial real estate prices appear to have peaked as of September 2017, but the index has continued to drop and is now at the place it was at in May 2016. For investors, this means that pricing has cooled for commercial properties.
Sectors in commercial real estate are behaving differently. Industrial real estate is up more than 10 percent as warehouses and fulfillment centers are needed to support e-commerce sales. There have been fluctuations in multifamily units. Starting off with a flat index, it started to drop but then increased slightly. The index on office spaces has dropped considerably in the past few months and continues its downward trend from a year ago as technology and telecommuting options advance for employees across the country. Lodging has been hit hard since 2015 and continues to struggle in its recovery. The largest problems are seen in the retail sector where there have been steep drops in strip malls and malls. Loans are becoming more expensive and there is now a general downturn of CRE.
Both residential and commercial growth may be anticipated as construction continues in the Mile High City. Denver saw billions in construction projects in 2016. Construction in Denver addressed the need for industrial, retail, residential and office space. There are those who believe that Denver is getting close the end of its construction cycle and that the market will begin to head into its downside. However, much still needs to be seen to determine whether the conditions exist to state that it may not be the best time to invest in Denver commercial real estate.
The Future of CRE in Denver
Construction cycles are cyclical in nature and economists are predicting an end to the economic expansion in Denver. However, economists have been wrong before and Denver continues to experience both job creation and population growth, supporting the need for commercial real estate.
Daniel Ramos loves writing about real estate, personal finance, and interior decorating. When he’s not writing, he helps design top-notch home interiors in Denver.