January 6-January 19, 2016 —
COLORADO REAL ESTATE JOURNAL
— Page 17
Finance
T
hroughout Colorado
and most of the coun-
try, real estate, in gen-
eral, was very good in 2015.
With 2016 on the horizon,
where will real estate head in
the upcoming year? Have we
hit our peak and will 2016 be
an inflection year? What will
happen on home price appre-
ciation? How about commer-
cial appreciation? Where will
interest rates head? Will oil be
a drag on real estate? How will
China impact the U.S. economy
and our real estate market?
Colorado, in general, is in
a unique economic situation
compared to other states. There
is substantial relocation and
job growth, which is driving
the recent appreciation in both
commercial and residential
properties. Although Colorado
is performing above the major-
ity of other states by various
metrics, we are not immune to
the national and international
factors that could transpire in
2016.
There are five main focus
areas to watch in the upcoming
year: commercial appreciation,
residential appreciation, inter-
est rates, oil prices and the
China impact.
n
Commercial appreciation.
In my opinion, 2016 will be
an inflection point for many
property types in the Colorado
Front Range. For example, on
the multifamily side, I don’t
think there is much more room
to grow. I’ve seen Class B/C
apartments trading on 3 caps.
As interest rates rise and rents
moderate (considerable supply
is coming on line), multifam-
ily should start coming back
in line with historical norms.
The second property type to
watch is the industrial sector in
many metro areas throughout
the state. The primary driver
of the increase in this area has
been the marijuana demand.
As producers transition to low-
er-cost options (greenhouses)
and lower-priced areas (think
Pueblo or Trinidad), the premi-
um paid for warehouse space
will subside. For the industrial
sector, we are at or near a peak.
n
Home price appreciation.
The rapid rate of home price
appreciation will continue to
moderate. A good example of
what the rest of the country
will experience is occurring in
Denver. According to a recent
Denver Post article home pric-
es are beginning to cool down.
This same trend will play out
in markets throughout the
country as price appreciations
slow down to reality. Although
I don’t see signs of the bub-
ble like the ‘06-‘07 recession,
I don’t think prices in most
markets throughout Colorado
will continue on their torrid
pace; they will return to more
historical norms.
n
Interest rates.
The Federal
Reserve last month increased
the federal funds rate by 0.25
percent. The wild card is what
happens in 2016. The most
recent recovery is shaping up
to be much less robust than
past recov-
eries
with
wage growth
s t a g n a t i n g
and little sign
of inflation
(see oil prices
below). This
will enable
the Fed to
take a very
m e a s u r e d
and moder-
ate approach
to rates. I do
not expect
a
major
increase in rates over the next
several years due to the low
inflation measures (many econ-
omists polled also think we are
in for a period of lower rates).
n
Oil.
Oil is a big driver of
real estate in many markets
(think the Western Slope and
some of the Northern Colorado
markets) and also a driver of
the housing market. With low
oil prices, inflation is lower and
consumers have more dispos-
able income. (Historically most
consumers drove relatively the
same amount regardless of gas
prices, with the 50 percent drop
in prices at the pump this goes
straight into consumer spend-
ing.) Oil has a basic supply and
demand problem. There is way
too much supply and demand
continues to shrink (vehicles
are substantially more efficient
today than 10 years ago). On
the supply side, there is no hint
of supply coming down. In the
last OPEC meeting (no surprise
to anyone), it appears that the
major producers will contin-
much better, with increasing
fuel efficiency on the horizon.
In a nutshell, oil is a double-
edged sword. If you are in the
business or a market that is
dependent on the success of
the business, it is bound to suf-
fer. On the other side, the low
oil prices will help dampen
inflation and also enable high-
er consumer spending.
n
China.
China is an inter-
esting wild card. The Chi-
nese economy will decelerate
over time. (It is just not pos-
sible to keep growing at their
pace). The Chinese will likely
go through another round of
devaluation to their currency
to try to spur the economy,
which could have implications
on the U.S. China is the largest
U.S. trading partner so manu-
facturing in the U.S. could be
in for a wild year. Along with
a possible devaluation, the dol-
lar likely will strengthen; as
rates rise, the dollar becomes
stronger. The stronger dollar
makes our exports more expen-
sive to foreign buyers.
Along with the possible
impact to the U.S. economy
with a decline in exports to
China, will Chinese buyers also
be dissuaded from investing
in U.S. real estate? According
to a recent study as reported
by Bloomberg, the Chinese are
now the largest purchasers of
U.S. real estate. The Chinese
are also one of the largest for-
eign buyers of commercial real
estate. There are two factors
that could influence the invest-
ment activities of the Chinese.
First, a stronger dollar makes
their U.S. purchases more
expensive. Second, on the flip
side, will this be counteracted
with a flight to quality? Many
Chinese buyers are trying to
diversify their holdings out
of China into perceived safer
markets like the U.S. real estate
market. Will the flight to qual-
ity offset the stronger dollar? It
will be interesting to see how
this will play out in 2016, but
personally I think the flight to
quality should outweigh the
stronger dollar.
So what does this all mean?
2016 promises to be an excit-
ing year in both commercial
and residential real estate in
Colorado and throughout the
country. There are also a num-
ber of macro factors that could
drastically alter these predic-
tions. (For example, what if the
Chinese economy went into a
free fall or there were a large-
scale terrorist attack on U.S.
soil?) The best advice for 2016
is to stay nimble since volatility
in 2016 is almost inevitable.
s
Glen Weinberg
Chief operating
officer, Fairview
Commercial Lending,
Denver
