Is Denver being bypassed by our Next Generation of Most Talented

Are Best and Brightest Bypassing Denver

Historically Denver has attracted the best and brightest, a city that continually ranks in the top 5 for residents educational attainment. Granted our weather is spectacular i.e. average 300 days of sunshine annually, an active city and state, which continually ranks  the lowest rates of obesity and a population oriented towards a healthy lifestyle.

However as mentioned in my May 13th, 2019 blog post there are headwinds specifically the cost of living. Of the top ten most expensive urban locales when taking into account housing costs and average salary, Denver was #2, not a ranking to be proud of. Yes as a city and metro area we continue to attract businesses, most recently VF Corporation coupled with an entrepreneurial spirit. However are our attributes enough to compete?

It is no secret that Metro Denver may be experiencing net out-migration i.e. more people moving out versus moving in. While the outflow may have been stanched due to housing prices stabilizing coupled with increases in wages, there is still concern.

What made me consider the content for this blog post was the following headline:

  • Nearly 25% of Wealthfront’s tech clients in the Bay Area plan to leave Silicon Valley for New York; Austin, Texas; and other more affordable cities, a survey of the firm’s investors found.

Ok to start, what is Wealthfront and why should we as Denver residents be concerned? First Wealthfront is an investment management firm that provides robo-advisor services. OK, before the next question, robo-advisor services is to millenials what Charles Schwab and Fidelity is to us Generation X members and what the former EF Hutton (when EF Hutton talks, people listen), Merrill Lynch and other investment advisory firms  are to the Baby Boomers.

Wealthfront’s clients are skewed towards the millennial and tech savvy generation so their client base is not exactly representative of general trends yet does provide insights to a workforce who are generally highly educated, entrepreneurial, and working in white-collar professions with higher salaries.

During the first 5 months of 2019, Wealthfront surveyed 2,700 of its clients who work in the Bay Area at tech companies. The results are interesting (of note a small sample size yet still of interest):

  • Fewer than a quarter of Wealthfront’s tech clients in the Bay Area plan to purchase a home in San Francisco proper. Those who choose to remain in California’s Silicon Valley think they’ll snap up a home in the neighboring cities of Sunnyvale, Mountain View and San Jose.
  • But nearly a quarter of clients think they’ll part ways with the Bay Area altogether, opting for other comparatively cheaper cities.

Those other cities are as follows and of note Denver did NOT make the list:

New York/Newark/Jersey City: While at first blush somewhat surprising as Manhattan is not known for its affordability just across the Hudson River cities including Newark and Jersey City have become hip and desirable with millenials and others due to affordable housing options and an easy commute to New York City via PATH, NJ Transit, Ferry Service and or course car and bus.  Many tech companies have outposts in NYC. The median list price for a home in the New York-Newark-Jersey City metro area is $525,000, according to Zillow. Within that region, Manhattan commands the highest median list price, which is $1.569 million.

Austin: While many would not consider Austin affordable and within Texas one of the most expensive urban areas Austin offers affordable housing — at least compared to San Francisco — and no state income taxes (Colorado is a flat 4.63% regardless of income). The median list price Austin is $400,000, according to Zillow. Austin also hosts plenty of tech companies, including Apple and vacation rental service HomeAway.

Seattle:While not affordable to most of the American population, this city that is home to Amazon and Microsoft and Boeing (manufacturing, HQ is in Chicago) and cheaper than Silicon Valley. The median home value there is $699,950 according to Zillow.

Los Angeles: While in the same state, Los Angeles and the Bay Area could literally be separate countries. From demographics and industry to weather, hard to imagine the two metro areas are within the same state. And while Los Angeles is not a city known as affordable the median home list price is $829,994, Companies located in the so-called Silicon Beach area include Ring, the home security company now owned by Amazon, and matchmaking service Tinder.

Chicago: Historically known as the 2ndCity, the reality is Chicago is affordable, centrally located and is developing a tech sector to complement its dominance in futures/commodities trading, transportation and multiple corporate headquarters. The median list price of a home is $349,900, according to Zillow. Of note Chicago is home to mutual fund research provider Morningstar, and it’s an outpost for Salesforce. The city has also set out to encourage additional tech jobs through a public-private partnership known as World Business Chicago.

 

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A Listing in Congress Park May Be a Predictor of the Future of Denver’s Real Estate Market

Reality can be challenging.

As a real estate broker I am also a voyeur. I look at the new listings daily on behalf of clients and also for myself as it is no secret, my wife and I sold our Cherry Creek North residence and are casually looking for a replacement residence.

Concerning the listing; as it is public information and being marketed here is the address: 827 Jackson Street, Denver.

I viewed the listing on the MLS and was intrigued. To be honest I am not the strongest proponent of the eastern streets of the Congress Park neighborhood i.e. Garfield St, Jackson St and Harrison St as they are impacted by Colorado Boulevard coupled with mixed-uses i.e. single-family, rental and condo apartments, parking lots and so forth. Sale prices on those eastern blocks generally lag the more central Congress Park neighborhood streets.

Full disclosure I lived on the east-side of the 200 block Harrison St abutting Colorado Boulevard thus I am well aware of the impacts on real estate values.

Back to the listing. While offering in my humble opinion limited curb appeal I will be honest the interior images presented on the MLS caught my eye, well worth a visit.  I scheduled a preview and visited the listing within the first week on the market.

A unique design with a front room incorporating design elements of a loft i.e. vaulted ceilings, exposed electrical conduit, support beams and so forth. The kitchen while small is efficient and well-designed. The two bedrooms are quite small and the one bathroom on the at-grade level is ¾ i.e. lacking a bathtub and would be challenging for two persons to use at the same time. Also due to location of the bathroom, access is via one of the bedrooms or through the kitchen, no direct access from public/entertainment areas of the home.

The basement is attractive, finished and rarely found, walk-out to the back yard via stairs. There is also a full bathroom in the basement including a tub. However it is a basement and thus some prospective buyers may be challenged by the below grade orientation.

Overall impression, a darling house, perfect for a first-time buyer but definitely not for us for reasons that are personal.

Now concerning the listing, the pricing and the marketing.

First, a history of the residence:

  • April 2008: Listed at $284,900
  • May 2008: Reduced to $277,500
  • July 2008: Sold $280,000

 

  • Nov 2009: Listed at $329,000
  • Dec 2009: Sold $301,900
    • Gross Profit: $21,900 before commissions and closing costs.
  • Aug 2015: Listed at $400,000
  • Oct 2015: Sold $380,000
    • Gross Profit: $78,100 before commissions and closing costs.

Now this is where the listing becomes interesting. It seems the buyer in October 2015 embarked on a renovation of the interior with the updated loft-style design orientation as mentioned prior.

  • June 2018: Listed for $585,000
  • June 2018: Sold for $620,000
    • Gross Profit: $240,000 before renovation costs, commissions and closing costs.

One must assume multiple bids and sold for $35,000 above the original list price. The Listing Broker and the Selling/Buyer Broker are both affiliated with Liv Sothebys one of the dominant and well respected real estate brokerages in Metro Denver.

Yet less than one year after the sale where the buyer paid $35,000 over the asking price, the residence is back on the market:

  • April 2019: Listed for $650,000
  • May 2019: Reduced to $635,000

The residence is now being listed by Redfin AKA Real Estate Redefined, a full-service real estate brokerage which promotes savings on both listings and purchases. The seller has signed with Redfin and I presume agreed to a commission of between 1% and 1.5% (as noted on their web site) so I assume for this blog entry 1.25% or $7,937 based on the reduced $635,000 asking price. Of note while not a fixed rate based on discussion with peer brokers affiliated with traditional full-service firms, the listing brokers I work with are in the 2.9%-3.3% range concerning a listing commission.

Per the listing on the MLS the co-op commission i.e. the commission paid to the broker representing the buyer which is paid for by the seller is listed at 2.8%. Thus if sold for $635,000 the co-op commission would be $17,780. Add the Redfin listing fee of $7,937, the seller is paying in excess of $25,000 in commissions to sell the property.

However the home is listed at $635,000 down from $650,000. Thus even if sold for the asking of $635,000, deduct $25,000 for commissions and even before closing costs and title insurance we are now at $610,000 or $10,000 below what the seller paid one year ago in what I assume was a multiple bid situation.

The reality is even with the use of a lower-cost brokerage option i.e. Redfin, the seller will still be losing money from their original purchase. This happens and it is becoming more frequent as the pinnacle of the market seems to be behind us and head-winds seem to be ahead of us. Buyers who acquired between 2016 and 2018 seem to be taking the losses especially those on the upper tier of the market.

When the seller purchased for $620,000 or $35,000 over the asking they probably assumed a continued upward trajectory concerning value and thus bid over asking. I do not know the circumstances for the sale and subsequent loss. I assume a loss of value was not considered when the multiple prospective buyers were submitting their highest and best offers a year ago.

 

 

Denver is Number 2 on the List of…..

Most expensive cities to live in; not exactly the top of the list a city wishes to be on.

The list is based on a cost of living index having taken into account a city’s median income and having compared it to what it costs for homeowners and renters to live comfortably in the city. These numbers were derived from Go Banking Rates, which was able to ascertain the ideal incomes in major U.S. cities using the 50/20/30 rule.

The 50/20/30 rule suggests you take 50% of your income for necessities (housing, food, healthcare, transportation), 20% for savings and 30% for personal items you don’t need but want.

#10 San Jose, CA

  • Average Ideal Income: $170,586
  • Median Income: $96,662
  • Cost of Living Index: 1.76

#9 Honolulu, HI

  • Average Ideal Income: $157,765
  • Median Income: $80,078
  • Cost of Living Index: 1.97

#8 Boston, MA

  • Average Ideal Income: $124,901
  • Median Income: $62,021
  • Cost of Living Index: 2.01

#7 San Francisco, CA

  • Average Ideal Income: $197,250
  • Median Income: $96,265
  • Cost of Living Index: 2.05

#6 Oakland, CA

  • Average Ideal Income: $136,778
  • Median Income: $63,251
  • Cost of Living Index: 2.16

#5 Long Beach, CA

  • Average Ideal Income: $131,702
  • Median Income: $58,314
  • Cost of Living Index: 2.26

#4 New York, NY

  • Average Ideal Income: $138,500
  • Median Income: $57,782
  • Cost of Living Index: 2.40

#3 Los Angeles, CA

  • Average Ideal Income: $143,300
  • Median Income: $54,501
  • Cost of Living Index: 2.63

#2 Denver, CO

  • Average Ideal Income: $106,128
  • Median Income: $38,991
  • Cost of Living Index: 2.72

#1 Miami, FL

  • Average Ideal Income: $107,245
  • Median Income: $33,999
  • Cost of Living Index: 3.15

Now that you have gotten through the list let me add the following for thought:

As a trained urban and regional planner one significant geographical feature of the cities listed comes to the forefront; 9 of the 10 cities on the list are coastal. Thus their ability to physically expand horizontally is hindered by water. The one exception is Denver which while in a basin can easily expand in all four directions with the major constraint in the future being potable water supply.

Another interesting observation concerns Denver and Miami and the Cost of Living Index. Miami, while having a diverse economy is also challenged income-wise by its higher than average population of retired residents; thus living on fixed or limited incomes. Thus the disparity between housing cost and income can be somewhat justified coupled with a real estate market that is buoyed by out of the region demand from snowbirds of the north to capital sheltering from Latin and South America.

Denver is truly the outlier on the list. Our economy is more diverse than Honolulu but not by much.  In addition Denver is the only city/region on the list without a major seaport concerning trade and commerce.

Denver has been attracting the best and brightest for many years due to our pleasant climate and until recently an affordable cost of living. Yet is our cost of living and lifestyle sustainable longer-term if incomes do not catch up?

While Denver may be attractive concerning companies looking to relocate i.e. VF and others the reality is cost of living and lifestyle can be a determinate concerning corporate relocations. My concern if Denver continues on this trajectory concerning a disparity between income and cost-of-living coupled with competition for our brightest and best from cities such as Salt Lake, Austin, Dallas, Minneapolis, Atlanta and others; should be we concerned?

Yes! Denver historically has been a boom and bust city and while we may be fortunate to ride this wave of in-migration and housing price inflation increasing our wealth effect the same scenario happened in the late 1960’s before the inflation of the 1970’s. Also happened during the oil boom of the 1980’s until jobs fled en masse to Houston and Calgary in the late 1980’s into the early 1990’s.

This time may be different…yet even The Wall Street Journal advises:

For 2019 Graduates: The New Cities for New Grads: Salt Lake City, Pittsburgh and Baltimore. These emerging locales offer hot jobs for young workers—plus reasonable rents.

Next week a home listed in Congress Park that may be an example of Irrational Exuberance catching up with the reality of a charing real estate market.

 

 

 

 

Yes the Sky Does Have a Limit

For those old enough to remember The Concorde, the supersonic passenger airplane passengers traveling at 60,000’ were treated to an astonishing site of the blue sky below turning ink black above and viewing the curvature of the earth. So what does this have to do with real estate?

I have always believed the deluxe and luxury real estate market was and is an indicator concerning the future of the overall housing market. I have noticed anecdotally when markets are climbing out of recession the deluxe and luxury real estate shows early activity as it seems astute buyers understand the opportunities these properties offer in an up-cycle market.  I also find the same concerning markets that have crossed the pinnacle and are now on the downside of the curve. In Denver during the past 18 months we have witnessed a slow-down concerning the upper-end of the market including longer days on market and price adjustments: below is an example:

461 Race St:

  • 9/17: Placed on Market $4.85M
  • 6/18 Reduced to $4.65M
  • 8/18: Reduced to $4.1M
  • 4/19: Relisted $3.85M

My concern is a recent statistic concerning Billionaire’s Row in New York City. (Full disclosure I used to reside in a building adjacent to 220 Central Park South one of the buildings included in Billionaire’s Row).  While not actually a row the moniker concerns a section of Midtown West Manhattan bounded by 55thStreet on the south to Central Park South on the north, 5thAvenue on the east and 8ThAvenue on the west. Of note 432 Park is included in Billionaire’s Row as though east of 5thAvenue it does back onto 57thStreet and was also one of the first condo buildings to sell units for over $50M USD.

The construction of 157 West 57thStreet completed in 2014 (a mixed use structure with a Park Hyatt on the lower floors and condominiums above designed by architect Christian de Portzamparc many believe was the catalyst for the moniker and due to savvy marketing reinvigorated a bland congested segment of Midtown Manhattan and turned it into the supposedly most desirable address in the world in a similar league of One Hyde Park, Peak Road, Avenue Foch and other prestige addresses.

Subsequent to 157 West 57thStreet other towers are being constructed. I use towers conservatively as many are taller than the Empire State Building one mile south a defining structure of the Manhattan skyline.  Height sells as many of the buildings promote their unobstructed view of Central Park to the north as a selling point (as the structures tower over the neighboring mostly pre-war apartment and office buildings.

Yet of interest is a report from Miller Samuels a respected appraisal and market guidance firm based in New York. The New York Post nailed it: “Swank apartments are begging for buyers on Manhattan’s “Billionaires’ Row” — with more than 40% sitting unsold in towers that top out at 100 stories.

Concerning 157 West 57thStreet as mentioned prior, only 84 of its 132 pricey condos have been bought — leaving more than a third of them still on the market and none under contract. Six other nearby buildings (as noted above) have as much as 80% of their units available, the figures show, with the total value of all the unsold inventory estimated by one analyst at between $5 billion and $7 billion.

Another building that’s set for completion next year — Central Park Tower, at 217-225 W. 57th St. — will put an additional 179 apartments on the market.

Back to market forecast. As mentioned having been through three market cycles in my real estate career I truly believe the deluxe and luxury market is a forecast for the overall housing market. As one broker in NYC mentioned: “This happened in 1988 to 1992, when there was a glut of condos that didn’t sell. They were smaller and less expensive, but it led to bad times”.

The issue with Billionaire’s row could be timing. Yes a glut of condos all coming on-line with prices starting at $7,000 USD per square foot and some breaking the $10,000 PSF price. The reality is there are only a finite number of prospective buyers in the world at that level of wealth. Coupled with world events i.e. sanctions on Russia, limiting of currency departing China, increasing but below inflation oil prices, South American money heading to Miami, uniform cash thresholds,  reality is the finite market for these units continues to shrink.

Is Billionaire’s Row an anomaly? Of course. The first to the party i.e. Time Warner Center and 432 Park Avenue seem to have done OK. Those joining the party subsequently and potentially in haste should be concerned.  As developers, their success is their sales. However with leveraged capital and banks/financial institutions providing working capital exposure the risk is spread. However at some point mortgages need to be paid, asking prices may have to be slashed and as I have shown in past blogs re-sales have incurred losses.

Am I concerned about the developers and the banks? On a micro level, no. I am concerned about the fallout from massive defaults to empty buildings to job losses as when such real estate does not sell the multiplier effect does impact down the food chain.

During the Internet bust of the early 2000’s Alan Greenspan warned of irrational exuberance.  Prior to The Great Recession that begins in 2008, real estate on all levels was suddenly considered a commodity. Is the lack of sales activity on Billionaire’s Row a harbinger of the overall real estate market? When the deluxe and luxury market sneezes there is a good chance the overall market will eventually catch a cold.