Colorado’s Outmigration Problem, and its Effect on Commercial Real Estate
navpoint / March 13, 2023
During the course of the COVID season, Denver saw a large influx of out-of-town home buyers pour into the metro and surrounding areas due to the new work-from-home policies adopted by large companies. This was good for the economy but also drove home prices and real estate prices sky-high. Now, with interest rates back to 2007 highs, and inflation affecting metro area cost of goods, people are once again moving out of Denver and into cheaper areas. The Denver area has shifted from an ideal destination with affordable housing options to an exploding metropolis catching up with LA and San Francisco on a cost-of-living basis. As a result, the Denver area, and Colorado, are experiencing outmigration that will alter the scene of commercial real estate in 2023.
Denver ranked 7th in outmigration among major cities in the fourth quarter of 2022. See the chart below, created by Redfin.com:
While 2,200 homebuyers seems like a small number in comparison to the San Francisco exodus of 26,900, the percentages are surprising.
Among Redfin.com users in major metro areas, Denver has the highest percentage looking to buy elsewhere at 31%, exceeding the national average of 24.6% of total users.
The national average of people looking to relocate out of major cities has steadily increased since 2017, reaching an all-time high in Q4 2022. While this may be concerning, it opens the door of opportunity in 2023.
How does this outmigration affect commercial real estate markets in 2023? As population decreases, so does the workforce. This means that the demand for commercial real estate will also decrease as businesses allow their employees to telecommute from a different city. As demand falls we see prices fall, and this is where the opportunity can be found. For most of 2022 the bid ask spread was too large for any value-add opportunities to make any sense on paper. Now, with decreasing prices, more properties will start to pencil for investors.
Another possible benefit of this outmigration and its effect on the market is a decrease in construction prices. Once again, the laws of supply and demand dictate price in a service market. As population decreases so will the need for construction, and contractors will need to lower their prices to set themselves apart in their competition for limited business. This will open the door for investors to consider ground up development in QOZ’s which require a doubling of the initial basis. These deals have been hard to justify with land and construction prices where they have been in the last couple of years. Now, QOZs and other development opportunities could be possible again, promoting the growth of both the population and the general economy.
Instead of mourning the downfall of the great state of Colorado, look for the carrot. In 2023, we can expect to see the prices of land, commercial real estate, and even residential real estate fall. While this will represent a loss of value for those who already own real estate, it will also afford new owners a prime opportunity to jump into a valuable market. In the coming months of dropping prices, reach out to NavPoint Real Estate Group for all your Commercial Real Estate needs and allow us to assist you in navigating this upcoming down market.
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