ARTICLE ABOUT DENVER REAL ESTATE MARKET: HIT BOTTOM?
Real estate market ready to hit bottom, start rebound
Erin Johansen Denver Business Journal
First, the bad news: Real estate insiders say this year's residential and office market won't be much better than last year's.
The good news: The market might be at — or near — the bottom.
While the residential real estate market was healthy compared with the sluggish office market, it's not untouched by the recession either. Low interest rates have stimulated sales — especially at entry-level prices — but there's still a huge number of unsold homes sitting on the market. This surplus has caused prices to flatten and appreciation to decrease.
Neither real estate sector is likely to show a dramatic improvement until there's significant job creation in the region.
While job growth in the metro area is expected to be positive in 2003 — an improvement over this year's loss of more than 30,000 jobs — it will not probably be enough to yield a huge economic improvement.
"What we are forecasting for employment growth in 2003 for metro Denver is just above .6 percent or about 8,100 jobs," said economist Patty Silverstein, president of Development Research Partners. "That's slightly below the national growth rate for the second year in a row."
"Obviously, the economy relies on job growth and we'll see positive job growth in 2003," said Greg Morris, president and CEO of commercial real estate firm Fuller & Co.
But despite some job growth this year, Morris predicted any significant improvement in the office market will take years.
According to a 2002 year-end and 2003 forecast report just released by Fuller & Co., the metro area office vacancy rate is higher than 16 percent and reaches 20 percent when space for sublease is included.
Paul Keilt, a broker with tenant representation firm Equis Corp., said he thinks the office market has "hit bottom" — he also believes it will stay there through most of 2003.
"I think for all intents and purposes, we've hit the bottom for transactions and amount of vacancy," Keilt said. "But I think we'll still get lower effective lease rates because of more concessions. The [asking] rate will hold up, but the actual rate will be down. It will drift lower."
"There are all these rumors about how the United [Airlines'] bankruptcy and AT&T Broadband's layoffs will affect the market — but the market is already soft and it's already a tenant's market," Keilt said. "So what. Things are already bad — another 100,000 square feet won't matter that much. It might extend the recovery, but it probably won't drop rates. It's already brutal."
During the last quarter there's been an increase in the number of tenants looking for new space, say many brokers, which could mean businesses are starting to make decisions. But a company moving from one metro-area building to another doesn't help the overall vacancy rate.
"I'd like to be optimistic and say it will pick up by year end, but why [would it pick up]? A stagnant year will be good news," Keilt said.
Others are more optimistic.
"I think rents will remain flat, which is a positive sign from what we've seen in '02," said Sergio Castaneda, an office broker with CB Richard Ellis. "Tenants are actually recognizing that prices are now a good value and there's a bit of a sense of urgency right now."
Castaneda, who represents both landlords and tenants, said he thinks the office market has hit bottom.
Most of the layoffs that will occur have occurred, he said.
Castaneda said he's started seeing that some landlords are less willing to give concessions. "We're seeing landlords pushing back a little bit. They're not willing to give every concession tenants are asking for — they're just not willing to do every single item."
Silverstein also predicts the commercial market will not change much from last year.
"I see some more rent concessions as landlords try to fill up their buildings again, but unless the job market takes a dive again, we shouldn't see much more vacancy," Silverstein said.
"There will still be some vacancy, but it will probably be relatively stable. That is if [developers] don't build a lot."
"I think it will an improvement compared to the last two years," Castaneda said. "We won't see as many subleases, and rents will remain flat, which is an improvement."
There are differing opinions about how the residential market will hold up during 2003. But again, a big factor will be job growth because people buy homes when they are secure about their jobs and because a strong job market is a reason for people to relocate to the state.
"People move to where they perceive the jobs to be," Silverstein said. "Given that we have pretty lackluster job growth excepted for next year, fewer people will move here."
The state demographer is forecasting that about 20,000 people moved to the state in 2002 and of those about 10,000 moved to the Denver area.
During peak years, some 70,000 people moved to Colorado, which means about half those people moved to the Denver metro area, Silverstein said.
New Colorado residents represent a portion of those buying homes.
"It's only one component, but it helps us understand what might happen to the housing market," Silverstein said. "I would expect that we will see — or should see — even more of a slowdown in our building permits."
In 2002, building permits for rental and for-sale homes were down around 23 percent from 2001 through November. "I don't think it will be that steep next year, because we'll still have new households formed and some internally generated housing demand. But market conditions and slower home sales could lead to a 10 to 15 percent decline for both single and multifamily," Silverstein said. As permits dropped last year, Silverstein and some other economists welcomed the trend because builders were adjusting to the demand, rather than saturating the new housing market.
Silverstein said appreciation already has slowed and that could continue, saying home appreciation ranging from negative 5 to positive 5 percent would not surprise her.
Nationally, the new housing market has remained strong with the Commerce Department reporting last week that new homes sales were up 5.7 percent from October.
On Dec. 30, 2002, the National Association of Realtors reported that the national existing single-family home market slipped in November, but the organization still projects a record year for existing-home sales.
These sales declined 3.5 percent from October 2002, which had the fourth-highest sales pace on record, according to NAR.
For 2002, NAR projects there will be more than 5.5 million sales of existing homes, which exceeds 2001's record of 5.3 million existing home sales.
Locally, broker opinions about the new year's housing market vary.
Tony English, who runs brokerage firm RE Stars said his "outlook's not that hot for 2003."
"I think we'll have more of the same with a slightly downward trend on pricing and activity. We have the same supply of homes on the market as we have for last three months. Buyers have dropped off, and there's more on the market," English said. "We don't have the buyers we had a few years ago. It's a supply-side market. We will see our normal seasonal rallies, though."
Leeann Iacino, an owner of Prestige Real Estate Group LLC is a little more optimistic.
"If the interest rates stay low, I think we'll see the market stay pretty steady. But houses have to be priced below their market value to sell within a decent amount of time," Iacino said.
Iacino also said there are a lot of homes on the market.
"I think we're a year out before we see the inventory back to a normal inventory," she said.
Part of this surplus has to do with job losses in the region.
"People can't find jobs. Other people are nervous about their jobs."
Prestige had a record year in 2002 and Iacino attributes that to first-time home buyers.
"There are lot of first-time buyer programs. That's also the segment that feels more secure about their jobs."
If interest rates stay low, Iacino predicts that home priced under $300,000 will sell well in the new year.
"I'm very optimistic about the coming year," said Edie Marks, a broker with The Kentwood Co. "Many people who didn't make decisions this year are telling me January is the time. Many are the big buyers. I think it will be better than this year."
While she sells at price point across the board, Marks — who ranks at the very top in annual sales volume — is probably best known for her upper-end listings.
"There still a lot of bottom fishers in market. I've gotten a lot of people making very low-ball offers. I think a lot of these people are going to outsmart themselves. They're waiting for the bottom and I think we've seen it already," Marks said.
"I predict things will slowly get better over the course of the year," said Larry Fullerton a residential developer and founder of the Fullerton Co. "I would say after about five years of a very strong downtown market, supply finally caught up with demand. Hopefully later in 2003 we'll back to equilibrium."
Fullerton, current president of the Colorado Association of Home Builders, has built condos in downtown Denver's Golden Triangle neighborhood and recently finished Saint Luke's Lofts in Uptown among other projects.
Silverstein also believes the real estate market will improve over the course of the year.
"I think it will play out very differently from the first half to second half of the year," Silverstein said. "We have been pretty darn flat here recently — but that's preferable to declining. There will be some pickup toward end of year. With 8,100 jobs it might not be a lot to get excited about — but it's preferable to the drops of this year." |
