BOULDER, Colorado – Regardless of the issue, it’s difficult to find sources of optimism in the current economic environment.
Every day, news appears about increasing unemployment, limited credit availability, burgeoning bankruptcies, abuses by industry leaders and proliferation of corrupt behavior by formerly trusted financial institutions. Personal and net wealth has declined by an average of 50 percent during the past year. Debate continues about whether the overall market has bottomed out and at what point and to what degree a sustainable recovery will begin in earnest.
The real-estate industry hasn’t escaped. The bursting of the housing bubble – resulting from an extended period of excessive construction activity exceeding true demand, followed by a combination of irresponsible lending and borrowing practices, which led to a record level of resulting foreclosures – can be seen in almost every location in the U.S. Part of the bad news is the corresponding difficulties in commercial real estate are in their infancy. We’ve just begun to experience the issues related to increasing vacancies and declining rental incomes characterizing the retail, office and industrial sectors, which are expected to worsen soon.
Nationally and in Colorado, there’s ample evidence to support the worsening environment in which we operate. The number of people buying vacation/investment homes fell 30 percent last year, according to the National Association of Realtors. The median price of a vacation home was US$150,000 in 2008, down 23 percent from US$195,000 in 2007.
Colorado market details
While median home prices in Colorado mountain towns are considerably higher on a per-unit and average-value-per-square-foot basis compared to national averages, sales volumes during 2008 and early 2009 are showing declines.
“From Aspen to Steamboat Springs to Vail, the reports at the major resort areas are about the same: 40 to 55 percent less dollar volume was recorded in 2008 compared with the previous year," according to Allen Best, a journalist who covers Colorado mountain communities.
In Steamboat and surrounding areas, sales volume declined 45.7 percent; volume decreased 52 percent in Vail and 46 percent in Aspen. In the Telluride region, sales volumes were down even more – 55 percent. Summit County suffered a more moderate decline of 35 percent in 2008, although with a steeper dive in December at levels closer to other Colorado locations.
As these patterns take hold, the broader Colorado mountain town economies are being impacted. Preliminary results indicate lodging occupancies in alpine resort communities declined this winter by 15 to 20 percent, and local retail sales tax revenues declined, although by lesser amounts. Total skier visits in Colorado are anticipated to decline this season as a result of below-normal destination trips being taken by out-of-state and international visitors, which typically account for more than half of Colorado’s winter volume.
Consequently, several significant planned real-estate developments at ski resorts are being postponed or slowed while the economic downturn continues. Furthermore, rapid expansion in energy-related industry on the Western Slope, which was a considerable contributor to acceleration of economic growth in the region, has been scaled back, at least temporarily, as prices of oil and natural gas moderate.
A more pleasant outlook
Yet, even with all the negative anecdotal and statistical evidence, there’s reason to be optimistic these trends are temporary and positive
news will appear during the next year. Here are the primary factors that form the basis for a more sanguine view of the future.
• Colorado will continue to be among the faster-growing regions of the country, with an in-migration of relatively young, active and upwardly mobile residents.
• Continued population growth within the Colorado Front Range will fuel growth in winter and summer/fall visitation at the mountain resorts and will continue to create demand for vacation home purchase.
• Colorado mountain resorts will retain their reputation as among the best in the world. Even with this year’s expected decline of skier visits, Colorado will continue to draw about 20 percent of the national total of visits, and will continue to appeal to a particularly affluent destination traveler segment – out of state and international.
• Summer and fall in the Colorado mountains offer incredible experiences. Visitation recently has been operating well below the potential levels in terms of the destination market. As the mountain communities focus greater attention on becoming truly year-round resorts, this will serve to increase investment opportunities associated with second homes and commercial lodging.
• During the past decade, Colorado mountain towns have seen diversified sources of housing demand, including tourism, second homes, relocation, a work force that recognizes increased professional management and service employment opportunities, and retirees who wish to enjoy an active lifestyle. It’s important to recognize this breadth of demand for homes, which will help to sustain the market and precipitate a recovery in the short term.
• Colorado hasn’t experienced the severity of the downturn suffered by much of the country. Even though volumes of real-estate transactions have declined during the past year, average prices per unit and per square foot have remained relatively strong, particularly in comparison to other regions of the United States. Clearly, uncertainties remain in the near term regarding issues such as the availability of credit and the willingness of financial institutions to lend to experienced developers and qualified buyers. Uncertainty also exists regarding the amount of deferred resales, which may come online once the market begins to normalize. Nevertheless, there’s reason to believe the mountain communities are well positioned to respond favorably to any upturn in the economic cycle.
While its evident construction and sales activity in the mountains formed a bubble that wasn’t sustainable, it’s also clear that opportunities exist for a rebound and renewal of investment activity, albeit at a reduced pace. Despite a generally pessimistic atmosphere, we’re likely to see the turnaround occur sooner than many might expect.