Are We in a Bubble in the Denver Real Estate Market?

Over the last 100-years Denver has only lost population once and that was during the recession of 2002-2003. Since 2010, Denver’s population has grown by more than 100,000 people. Today Denver still has inbound net positive migration accompanied by strong job growth and the country’s lowest unemployment rate. The ratio of the number of jobs to the number of apartments has still not reached equilibrium even after the latest construction boom (15,000 apartments in the metropolitan area under construction, 9,000 in Denver). Denver’s ratio is 20% greater than Seattle’s.

Detached single family homes (DSF) construction has not kept up with the population growth. In most cities the percentage of the population that owns their own homes is near 65%. In Denver, it is 55%!

As a result, all types of development in Denver are strong. Retail, office, industrial, DSF, hospitality, healthcare, attached single family homes (ASF-Townhomes), condos, and even churches are all doing well.

Since we have way too many buyers relative to supply and the construction industry cannot supply more, you can expect prices to continue to go up. It’s supply and demand, stupid.

As real estate professionals, brokers and developers, we receive many questions about the market. For example, one of the most frequent is, “Are we in a real estate bubble?” I have been looking at the market from the development perspective that often requires a 3-year planning horizon. What I see is that the bad lending practices that brought us the last recession are gone. There is no oil bust of the 80’s. People are still moving here. Companies are coming. Our airport has greater connectivity than ever. The mountains are still a great tourist attraction (80 million visitors per year). Development investors frequently ask the same question. I tell them that, in my opinion, this market will continue as it is going unless there is some external force on the economy.

My crystal ball is cloudy, but I see no signs of a bubble.

Charles Roberts, President of Your Castle Real Estate asks, “What is a bubble? Does that mean that the market will fall next month? It is a very complicated question. We are not sure. Markets go up and down. The last upturn lasted 17-years. For all of you out there asking this question, don’t get offended, but I don’t think it is a great question. It’s a waste of time.”

The much more important things to focus on are the things you can control.

  • Develop your career,
  • Take care of your home, if you own one,
  • Figure out how to buy one if you do not
  • If you own commercial real estate do what is required to keep it in good shape and your tenants happy

A better question might be, “What would you expect to see six months before a downturn?” We believe leading indicators include an increase in inventory and days on market rising significantly. However, today we are at a 40-year low level of inventory. Inventory per capita is at a record low. This is the number one thing.

“Well, what about price reductions of property?” This is not a good predictor because, for example, today some sellers are aggressively pricing their properties in order to optimize their return. Since the real estate market is a very efficient market, this is a foolish idea. Over-priced properties will get a price reduction when the sellers wake up. This is not a science, but an art.

On the development side six years ago we were seeing 2400 sf per side duplexes built and sold for $600,000. Today they are listed for almost a $million. Those types of projects are not in the market’s sweet spot. Our next project will be a condo project for that sweet spot. $350,000 brings a fat buyer pool. We have three years to pull this off and a lot can happen in 36-months. We have to be prudent. We are seeing profit margins for developers getting squeezed because land prices are going up and construction costs are increasing at a rate faster than the prices for the final product. We, therefore, must be conservative in our planning. A condo at the $350,000 price point means what you are getting for that $350,000 is shrinking, but the price per square foot (PSF) is going up to $500-$550 for 600-800 sf units. We are looking for infill development in nice locations that are walkable.

In our planning we don’t consider price appreciation, but we are including cost increases. We use today’s sales prices. In my opinion, it is irresponsible to project price increases. I let the investors make their decisions based upon today’s prices. We are being just a little bit more conservative when we are buying land. The critical factor is “How long does it take to sell the units?” The carrying costs make this an important issue. We are planning for an extra six months to sell them.

Three years ago, I was saying exactly the same thing. Lots of people were reluctant to pull the trigger and did not make any money. We did. Some developers today are selling the projects at the entitlement stage to avoid this risk.

Another question we often are asked is “Is Denver an unaffordable market?” We still have room to get more expensive. 2012 was the most affordable year in the last 40. When one compares today’s prices to 2012, the market looks expensive. However, when compared to the last 40-years, we are at the average of affordability.

When I advise a small investor with $500,000 to invest, I get clear about a few things. What is the investors financial goal and risk tolerance? If the investor is interested in limited risk, long-term gain, we might find a small office building or warehouse. Why? Let me give an example. 38th avenue in Wheat Ridge. It is a great location but with little recent investment in existing assets. There are many older brick buildings with good structure. We might do an adaptive re-use, or do a face lift on an office building. For every Class A office there are 10-times the B or C clients. There is huge demand for warehouses.


  • Don’t worry about the bubble
  • Worry about what you can control
  • Don’t buy a house if you think you can sell it if you need to, don’t buy it. You don’t know. Don’t bank on it. Don’t buy a commercial building if you will need to sell it.

Some development clients ask “can I get out in 3-years?” I am providing them with 60-100% return over three years. I tell them, if you can’t manage the risk, don’t ask the question.

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