Denver overpriced?

Question

Bill S. · Answer

@Bill  Florence is correct about the number of units being constructed. Right now supply is about what is estimated for demand (we are still in deficit due to past 6-8 years of under supply). The supply is skewed when compared to historic norms. There are about 50% more apartments than for sale units (Historically 40% for rent and 60% for sale - now about 60% for rent and 40% for sale). That is in part driven by Colorado's construction defects laws. Another part is a shift in demand. Millennials tend to be renters over buyers. We don't know how long that will continue or what it means long term but that's where we are now.

I would point out that the new apartment units in the Denver Urban core being built are renting for $2.50+ per square foot. Look around at the new construction in the area you want to buy and see what they are renting for. As long as your price point is well below that, you should be in good shape. Most current Craig's List ads for small properties in the urban core are around or below the $2.00 per square foot rent amount. I'm not worried about new construction until my rent rates are closer to the $2.25 per square foot. If you are renting a newer condo unit at the top 25% of the market, you should be ready for some stiff competition if you haven't already experienced it. Last spring the vacancy rate in that market segment was 12%.

It might be wise to form a REIT to pick up some of the class A multifamily space. I predict that in the next 2-4 years there will be some blood in the water from poorly managed property in that space, but what do I know?

Travis Sperr · Answer

There are still a lot of deals in our market - might have to work a little harder to find, but they are out there.

Stefan Tsvetkov · Answer

@James Carlson Sure, can watch 38:00 and forward of my video lecture below. US Real Estate Valuations and Outlook Post 2020 Recession, Stefan TsvetkovIt is a county-level, as well as state-level analysis. Been working on enhancements to incorporate housing shortage (population/housing supply ratios), though the above indirectly reflects that.

Colorado among just 8 overvalued states right now (as of Q1 2020). Denver itself appears the least overvalued, but small geographies (counties/cities) are harder to predict at peak.

James Carlson · Answer

@Stefan Tsvetkov

Would love to see more of your study on this.

It's so interesting to read this thread now. "Is Denver's real estate market in a bubble?" "When's the crash happening?" "Prices can't go any higher." All questions and comments people were making back then ... and all questions and comments people are still making now.

I find looking back at this post personally interesting as well, as Erin and I bought our first place around that time five years ago -- a little 1br condo in Denver's Capitol Hill neighborhood. I remember people asking us then if we were scared. We said then what we say now: Inventory is super low. Demand is super high. Industry is diverse. Lifestyle and city offerings are amazing. This city ain't going anywhere.

Now, that 1br condo we bought in 2015 has appreciated roughly $105,000. We weren't psychic, and this market has made a lot of people seem smarter than they are, including us. But it makes you look at those supply and demand numbers and chuckle a little when someone asks if this is about to crash. Since 2015, we've bought seven properties, two of which we've since sold. We've bought our last two properties in Colorado Springs, and we're hearing the same things they said five years ago about Denver. I guess we'll see. I, for one, am bullish about Colorado Springs (and still Denver).

Thoughts?

Stefan Tsvetkov · Answer

@Travis Sperr An update as of Q1 2020. While Denver, CO was the best performing city in the U.S. in terms of 2007 peak-Current price performance (whopping 79%), it is in fact still fairly valued at ~0% valuation vs historical sustainable level, as based on incomes. Some outstanding growth in incomes happened as well. Above is a personal study I did for my data LLC.

Luke Miller · Answer

Agreed. We found a coveted cash-flowing duplex in this market. We paid a lot of money for it, but its in a great location and even if appreciation reverses, it still cash-flows well. The trick is to get with a great real estate agent. Account Closed and her whole team are great and know the areas well.

James Carlson · Answer

Thanks @Maria Vargas. I appreciate the good word! I'll send you your check later ... ;)

Maria Vargas · Answer

Denver is a high priced market and it seems to be hotter than ever, just ask any of the realtors in the area (@James Carlson is a great resource)! But like others have stated, rents are also high making it a great market to hedge against inflation. You may have to get creative as many of us done by renting by the room, or you may need to employ other creative means to make the numbers work. Consider getting into your 'investment' properties as owner-occupant, then converting them into rentals after your 12-month financing requirement. Denver is definitely a great investment market and I honestly do not think Denver will see a price decrease worth waiting for.

Bill Florence · Answer

@Bill S. Well said. Out in the burbs, my rentals are around $1.25 to $1.50 PSF for older "C" class properties. I shopped 1/1, B's and A's in central Denver (historic properties) and saw rents as high as $2+ but I didn't buy (yet) as the competition was too great for my model.

Denver overpriced?

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