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A series of real estate risk factors (Part 4)


Each risk factor has the potential to dampen demand!

 Commercial - A quiet lunch with a commercial real estate broker might be a good source for tales of woe these days, but looking at all of the empty shops next to the restaurant you’re eating at might be the most obvious litmus test. The carry on effects of falling GDP, less consumer spending and reduced business and consumer confidence are apparent whenever you go shopping. Add less demand for office space, less new businesses to cover the “churn” and a whole lot of over-leveraged investors, and commercial real estate could get ugly quite quickly.

How ugly it gets in Denver will be driven by some familiar factors – availability of credit, how quickly the local economy gathers steam and the overall rental demand – retail, residential and other commercial. FDIC insured banks have recently reported a doubling in troubled commercial real estate assets compared to 2008.

Conclusion: There is anecdotal and statistical support for significant downside risk in the commercial real estate space. Whether this represents a buying opportunity or another financial implosion is likely to driven by the availability of credit and the ability of current owners to weather the vacancy storm. This risk factor is ranked highest due to the level of uncertainty of the actual risk, and because the current administration’s rescue efforts haven’t been focused in this space.

Overall risk factor rating: 8 out of 10

Rental Demand

Rental demand in the commercial and residential markets is, not surprisingly, showing signs of weakness. With large and small retailers closing down, and many companies reducing their workforces, commercial property owners will experience greater vacancies and competition for tenants. Similarly, residential landlords have seen significant shifts in behavior – particularly in lower priced housing (where multiple families are attempting to rent single family homes and price has become a key driver for rental decisions).

Denver’s economic indicators suggest a much rosier picture than that of the broader economy. However, a quick drive around areas like Aurora North and Montbello will identify the volume of available rentals and the fierce competition for good tenants. The recent over-enthusiasm of investors in these areas means an oversupply of good rentals (as they can’t sell the homes for what they assumed they could). As selling conditions improve we can expect to see a drop in this inventory but there will continue to be significant rental competition throughout 2009.

Conclusion: This risk factor is an excellent example of the intertwined nature of all of the risk factors – economic conditions, the health of the housing market, appraisals and availability of credit will influence whether this risk factor falls by the wayside or has a significant impact in the future.

Overall risk factor rating: 6 out of 10

The analysis of our seven risk factors doesn’t change our generally optimistic view for the Denver real estate market. However, any one of these risk factors could slow down any market improvements and a combination of them could halt the upturn completely. Stay tuned for further updates!

Next week we’ll release the DREAM statistics for May!