From 2014 through the first half of 2015, Denver, CO offered residential real estate investors — those owning 1-4 unit residential properties — some of the best chances at returns in the country.
The data in this recent study published by BiggerPockets in October shows that residential properties appreciated a staggering 13.4% in price over the period. Average Fair Market rents across the regional market came in at about 5.5% of property value across the period. Combined, this rent to value ratio and appreciation rate demonstrate the possibility of a whopping 18.9% unleveraged return, before expenses.
Whether or not prices and rents will continue to soar in the Denver market is a topic of much debate. However, many local investors are unable to see an end to rising real estate prices in sight. Real estate rents and prices come down to supply and demand, and so long as population and employment opportunities continue to outpace the construction of new residential units, investors may continue to see soaring real estate prices in the short-medium term.
The Denver Metro Forecast predicts that the market will see 18,836 housing starts through 2015, while experiencing a population increase of 50,000 and a reduction in unemployment.
High construction costs are frequently cited as a factor inhibiting new residential unit production. Bill Shaffer, an investor and real estate agent located in Denver comments, “I think the play is in the urban core for anything that is valued less than the cost of construction. Land is so expensive and construction costs are so high that there will be a scarcity in the urban core.”
As a Denver real estate investor myself and the author of this market index, I personally believe that some dramatic changes will have to take place in Denver’s economy or market before investors will start seeing prices decline, though there are certainly some types of properties that are likely to vastly outperform others.
On the other hand, Anson Young, another investor from Denver, comments, “I feel that in the last month or two we have seen inventory increase a little bit. I’m not sure if that’s just due to the winter market or whether it’s a sign of a market shift, but we’ve seen more recent price reductions over the past quarter than we have in much of the last 18 months.”
While the data tells part of the story, the missing pieces can be seen on the streets. A quick tour of Denver’s downtown, Cherry Creek, and Tech Center, along with the surrounding neighborhoods, shows incredible construction and development. It’s like I live in a different city than the one I lived in last year. Historic neighborhoods are inarguably experiencing gentrification — a hotly debated local topic in the neighborhoods that I choose to invest in — and the demographics are changing.
I have no idea whether the Denver market as a whole will continue to appreciate at the breakneck pace that we’ve seen over the past few years or whether it will slow down or even begin to see falling prices. It’s just too difficult to look into the data and come up with forecasts for appreciation and growth that investors can feel totally confident in.
However, the one conclusion that I keep coming back to time and again is this:
I love Denver, want to invest here, and want to stay here. And the data, the dozen or so cranes in the skyline outside my window, and my personal interactions with hundreds of investors and thousands of other residents here seems to indicate that this is a majority mindset.
I’ll put my money on that all day.
Have any predictions about the Denver market? What are you seeing in your locale?
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