The Economic Outlook for 2016 & What That Means for Real Estate
Our economy seems to be at a crossroads. We can all sense that things are changing but with the unprecedented changes that we’ve seen in the last 10 years, it seems that many of us have become cautious of what the future holds. Let’s reflect on the last 10 years: it began with the economic boom/peak/whatever you want to call it of 2006-2007, which was followed by the Great Recession of 2008-2009. We saw few encouraging signs in 2009-2012 and some gains in 2013-2014 with a stellar year in 2015. So what can we expect in 2016?
Good news! We can expect moderate economic gains in 2016 as a nation. I am, however, going to focus more locally and expect even higher gains as a state of Colorado and higher-than-that gains specifically in the Denver Metro area based on 4 main areas of interest that I have identified: 1) The Global Markets & Gross Domestic Product (GDP), 2) Employment (growth rates and unemployment), 3) Key Industries, and 4) Changes in Population. I will then address what this means for Real Estate and Housing.
The Global Economy and GDP
It may have been very apparent that global markets (and resulting GDP) have been major talking points in the last few years in relation to our economic performance and there is a wide array of indicators that are affected. Remember Greece and most recently China? The uncertainty around these powerful economies has wrecked havoc on global markets. In fact, as a result of the extent that the factors of uncertainty are completely uncontrollable by the U.S., many view this as the single biggest area of risk/concern.
In terms of the risk of the global markets, there is more good news for the State of Colorado. We are very low risk in terms of the global economy and I have complied 3 main reasons:
The global markets for which we have the most/majority (33% of $8.3B in 2014) of our activity, Canada and Mexico, are very low risk. China comprises only 8% of our export activity
The economic outlook for Colorado’s key International trade partners is projected to be an increase in 2016 by the International Monetary Fund (IMF) with Canada increasing from 1.0% in year over year growth in output in 2015 to 1.7% projected in 2016 and Mexico increasing from 2.3% in 2015 to 2.8% projected in 2016
The real U.S. GDP annual growth rate is projected for the third year in a row to 2.6% from 2.5%, according to the U.S. Bureau of Economic Analysis
Employment
Denver Metro continues to add nonfarm jobs at a growth rate that is well above the United States at 3.2% estimated for 2015 vs. 2.1% for the U.S. and 2.9% projected for 2016 vs. 1.9%. Further, Colorado was the 3rd fastest growing state in nonfarm job growth in 2014 with 2015 estimated to hold within the top 10.
Since 2005, Denver Metro’s unemployment rate, according to the U.S. Bureau of Labor Statistics, has been significantly below the national average, but 2015 is estimated to be 3.8%, which is virtually zero! Further, of the total labor force in Denver Metro of 1.6M, 2016 is projected to drop further to 3.5%.
As a result of strong job growth rates and extremely low unemployment rates, employees can be choosey and demand better compensation. According to the U.S. Census Bureau, among similar cities, Denver Metro has the highest median household income at $66,870, beating Atlanta, Austin, Dallas, Phoenix, Portland, Salt Lake City and the U.S. as a whole at $53,657. Furthermore, Denver Metro has the largest percentage of the highest earners, those at $100k+, and the lowest percentage of low-income earners, those at less than $25,000.
Key Industries
I recently wrote a blog about the fact that Denver Metro was rated the best city to do business by Forbes magazine and it is clear from the findings in this blog that the quality of businesses are contributing to the strong job market and quality labor force. The key industries that contribute are the following: Aerospace, Aviation, Bioscience, Broadcasting & Telecommunications, Energy, Financial Services, Healthcare & Wellness and IT/Software. According to Development Research Partners, Energy, Health & Wellness will see the most significant job growth in 2016. Interestingly, Aerospace will continue to dominate in its presence in Denver Metro in relation to the rest of the U.S.
Changes in Population
Between 2010-2014, Denver Metro experienced some of the highest rates of population growth in the country at about a 7% increase for which about 60% was due to net migration (the remainder was due to the natural increase – births vs. deaths). The 2016 population is projected to be 3.12M and due largely to net migration, according to the Colorado Division of Local Government, State Demography Office.
What does this mean for Real Estate?
Nationally, Lawrence Yun, Chief Economist for NAR, expects an increase of 1-1.5% GDP due to concerns in Manufacturing but strong indications in Housing – New Home Building, and “enough to avoid recession”. However, compared to last year’s home sales increase of 7%, he expects about 1-3% increase nationally. Further concerning is the projected increase in sales price of 4-5%, which outpaces projected wage growth, creating a question of affordability.
More locally or statewide, we can expect to see many of the patterns that we witnessed in 2015 where Sellers saw an increase in their home’s value of 14% in the period of the 12 months prior to the Denver Metro Association of Realtor’s report in January 2016. Simply put, the real estate market will remain strong in Denver Metro in 2016, especially for Sellers. As we expect the biggest issue to continue to be inventory and the continuation of, by definition, a Seller’s Market. Some metrics that we use to determine this are:
# of Sales/Inventory
Days on the Market (DOM)
Average Sale Price
Median Sale Price
Volume in Sales $s
Inventory, Inventory, Inventory
For Denver Metro, 2015 was a record setting year when the industry hoped relief would come in the form of inventory. Well, according to the data, it did not. In a year over year comparison, there were 65,872 new listings for an increase of 5.69% from 2014. Initially, this data is very encouraging. However, once we dig a little deeper, we see that the following:
DOM was 31 --- 18.42% decrease from 2014
Average Sales Price was $363,143 --- 11.53% increase from 2014
Median Sales Price was $314,000 --- 14.18% increase from 2014
Total Sales Volume was $20.16B --- 14.5% increase from 2014
More specific to inventory, the number of “Active” homes increased by only 0.67% in December 2015 from December 2014. This may not be so discouraging, if we could see a trend in an increase of homes “Under Contract” and/or “Sold” which is simply not the case. This indicates that for as quickly as homes come on the market, there is a similar turnaround in getting them under contract and sold.
The Takeaway for Denver Metro Sellers & Buyers
Sellers
If the timing is right in your plans: SELL, SELL, SELL
A combination of strategic pricing, timing and marketing are fundamental to getting the most out of your sale
An industry expert with strong Negotiation skills that is savvy with the legalities will provide the basis for a superior sale
Buyers
Don’t continue to wait – there are no bargains in this market and there is no perfect time for the reasons demonstrated in this blog but the market is sure to continue to increase so don’t wait as there is a definite cost associated
Although there is no perfect time, there are better scenarios or pockets of opportunity that will meet your needs and goals. Some factors to consider: timing in regards to inventory and ranges of price points
Last few Tidbits & Interesting Facts
Scrape lots are now going for $350-400k where previously $200-250k --- If you are unfamiliar with the concept, this is where a house in a highly desirable neighborhood will be scraped usually with the intention of building bigger and grander new construction, usually for profit
Apartment Vacancy Rates in Denver Metro (across all 7 counties), hovered around 4.6% for 2012-2014 and even with increasing prices, it is estimated they will be 4.9% for 2015, according to Denver Metro Apartment Vacancy & Rent Survey --- As affordability is an increasing concern due to the disparity in rising cost of living outpacing wage growth (nationally and locally), compiled with stagnant growth in new construction, the demand for rentals continues to increase which ultimately causes prices to increase.
Apartment Rental Rates in Denver Metro reached staggering highs where the average cost in 3Q 2015 was $1,292, also according to Denver Metro Apartment Vacancy & Rent Survey. This average was across all apartment types in all neighborhoods and price points.
Due to Apartment Growth Rates & Multi-family New Construction, apartment prices will continue to rise --- Although the growth rate almost doubled from 2013 to 2014 and continued to increased in 2015, new construction of multi-family units and representing 43% of new construction, it was down in 2015 by 58% since 2012.
Commercial vacancy rates are decreasing and lease rates are increasing à according to CoStar Group, Inc., vacancy rates for Office, and Retail fell from 10.2% in 2014 to 9.4% in 4Q 2015 and 5.2% in 2014 to 5.0% in 4Q 2015 respectively. Industrial show a gain of only 0.1%, most likely due to regulatory limitation of new licenses in the marijuana industry. Interestingly, lease rates increased across the board.
How It All Comes Together
Denver Metro will continue to see gains in 2016. Economic indications are strong from all facets: GDP, Employment, Key Industries indicating the strength and quality of Employment and Changes in Population for a net increase due mostly to net migration. These factors combined with Housing factors such as continued increases in rent due to limitations in supply and increases in demand, create a rare environment where it makes sense to sell (increased prices) and to buy (continuation of increased prices in the future). The Housing market is continued to be further supported by a strong Commercial market where companies to continuing to find value in investing in this market.
