When brokers were again able to show properties again post Covid restrictions there was a flood of activity. The statistics from ShowingTime advised that Monday, May 1st was one of the busiest days for showing since record keeping started in Metro Denver. I do believe the enhanced activity was a mix of true buyers and maybe some voyeurs. Let’s all admit viewing real estate online is actually quite enjoyable and a nice diversion.
Yet a recent commercial sale and a new residential listing are I believe exhibiting a flashing sign of caution and potentially a challenging period ahead of us. I do not envision the era from 2007 i.e. record prices that 3 years later included foreclosures and homeowners underwater. Yet with the major money-center banks adding loan loss reserves and cutting back on HELOC activity, being proactive versus reactive may be the manta for the next 6 to 18 months.
A Commercial Building Endures a Loss: The Citadel Building at 3200 E. Cherry Creek South Drive is unique as its location is between Cherry Creek and Colorado Boulevard. The building has 130,652 SF of finished space. The structure is a bit of an outlier as it is surrounded by deluxe and luxury residential. Even with its early 2000’s stone façade mixed with new-classical elements the building is consistently occupied. The lobby is attended. Present tenants include New York Life and Bessemer Trust.
- The building last sold in June 2017 for $37.03M
- The building just sold last week for $33M, a $4M loss in just shy of 3 years not including maintenance, upkeep and commissions.
As I have commented prior, 2017 in my personal hindsight seemed to be the pinnacle of the real estate market for both commercial and residential. I am not privy concerning the motivation for the sale. There could have been an upcoming large tenant departure which would impact the rent roll or the building may be in need of structural/cosmetic updates that cannot necessarily be passed through. The point is a loss is a loss.
A Classic Cape Cod in Cherry Hills Losses Value Over 13 Years: Cherry Hills Village is the most affluent suburb in Metro Denver. A bucolic setting of single-family homes, large lots, home to the world-class Cherry Hills Country Club that has hosted PGA events and a location between Central Denver and the Denver Tech Center. Yet the home value expansion post Great Recession seems to have favored central city locations leaving gains in the suburbs behind. This listing may reflect this trend as follows:
12 South Lane, Cherry Hills Village is on the larger size of homes in Cherry Hills. Located in what is considered Old Cherry Hills i.e. west of University Boulevard is a two-story home with 7,381 square feet above the ground plus a 2,341-square-foot finished basement. Luxury design details include a William Ohs eat-in gourmet kitchen. The 2nd level master includes its own fireplace, his and her closets an en-suite spa-oriented bath and a private patio. Additionally, the 2ndlevel has additional bedrooms, a gym and space that can be used as an extra apartment. The finished basement has a large recreation room with a media center, wine room and playroom.
- The home last sold for $3.475M in August 2007
- The asking price in May 2020 is $3.35M
Thus a $140,000 loss yet when considering inflation; the $3.475M in 2007 equates to $4.4M today. Of note the loss does not include real estate commissions. Assuming 6% on $3.35M would equate to another ($200,000) plus closing costs.
Unfortunately, the sales history of this house is not favorable as it has been listed prior:
In Nov 2007, 3 months after the initial purchase the house was listed for $3.785M or a 9% gain. It did not sell after 3 weeks on the market. Interestingly this is a period when the housing market started to show weakness and in less than one year later Lehman Brothers would file for bankruptcy.
The residence was again placed on the market as follows:
- July 2018: $3.950M or a 4.4% gain against the purchase price 11 years earlier.
- Jan 2019: Reduced to $3.695M or a 6.5% loss against the original purchase price.
- May 2019: Reduced again to $3.495M, removed from the market two months later.
- Sep 2019: On the market again asking $3.350M
- April 2020: Listing Removed
- May 2020: On the market again asking $3.350M
I do not have a crystal ball yet having been through downturns I would be concerned.
The following is the advice I am providing to my clients:
Buyers: If you plan to be in the house for a minimum 4-5 years, absolutely love it and OK with a potential 10%-15% reduction in value coupled with tax bill assessed during the pinnacle of the market let’s proceed. The reality is a home purchase, primary or secondary is an emotional process coupled with lack of liquidity and more recently challenging to draw monies out if needed. Thus, purchasing in the present market needs to be quantified on both financial and emotional spectrums.
Sellers: I am asking my sellers their true motivation to sell. If the answer is “If I get the price I want” I usually suggest I am not the real estate advisor for them. However, if the sale is required for financial reasons i.e. employment loss, relocation, lifestyle change and related I am advising price at market or slightly below to encourage showings and will work out commission structure to be more advantageous to their situation.
Unfortunately, the headlines suggest housing is retaining its value. Yet this is based on inventory in many markets having been cut in half due to Covid. Thus, the remaining listings may present on-paper a continued strong valuation HOWEVER this is based on artificially low inventory and questionable demand.
While many have suggested job losses have been in the lower sector of the economy i.e. the service sector, this is accurate. However we have what is called the Multiplier Effect. The point is, we are now experiencing job insecurity in not only the service sector and traditional blue-collar jobs but also in while collar high-income (6+ figure) and educated professionals and small businesses.
Headlines in Denver have been advising the housing market at $1M plus has converted to a buyer’s market. I would suggest that number i.e. $1M will continue to drop. While there may be a burst of activity this summer, I predict it will be on the lower end of the market and the upper end i.e. $700,000+ will be challenged.
I have also requested to opine concerning the 2nd home/vacation market. This is challenging; the upper end of the market is insulated i.e. not a concern to the top 1% of earners. More concerning is the owners of 2nd/vacation homes that relined on transient-stay incomes generated from listings on VRBO, Airbnb and related entities. That income stream evaporated suddenly and who knows when leisure travel will generate revenues again. If the stock market performance of the airlines and rental car companies is an indicator; more pain versus gain is on the horizon.
It is a brave new world out there and only time will advise how the markets do.