Article by: Denver Post
In the wake of construction defects reform, developers are warming up to condos but challenges remain
In the nine months since Colorado lawmakers passed a construction-defects bill aimed at reviving the Denver area’s near-dead condominium market, there has been a slight increase in construction but not enough to declare the problem solved.
The numbers so far — a 7.4 percent increase in under-construction condos in metro Denver in 2017, representing just 55 additional units — demonstrate it may be a few years before production begins to meet the state’s considerable demand, if that happens at all. For now, large builders are remaining on the sidelines, leaving the market to smaller developers, and many of the projects underway are aimed at more affluent buyers who aren’t necessarily the ones the new legislation was meant to benefit. But it’s still early and there are signs of movement.
“We knew it was going to take some time to build up confidence again in a marketplace that was frozen for so long,” said Rep. Alec Garnett, D-Denver, who co-sponsored last year’s closely watched bipartisan defects bill. “I am really encouraged by what I am hearing and seeing up and down the Front Range. A lot of people were going to build for-rent — and they changed their plans to build for-purchase products.”
The new law requires that more than half of all residents of a condo complex support legal action before a lawsuit can be brought against a the complex’s builder over construction flaws. That’s a higher threshold than allowing homeowners association boards to initiate legal action, which builders said led to frivolous or predatory lawsuits and scared many out of the condo market. Garnett and Rep. Cole Wist, R-Centennial, also a co-sponsor on the bill, have said they are not expecting new condo-related legislation at the statehouse this session, hoping a year of calm will allow developers to relax and get to work.
“I think we still have concerns about insurance rates being too high for builders. I think we want to let the market adjust to what happened last session and the Vallagio decision, and see if that drives insurance rates down,” Wist said, referring to a Colorado Supreme Court ruling last spring that struck down the ability of homeowners associations to change bylaws without builder consent, giving developers another layer of legal protection. “So we’re monitoring that together. (Alec and I) talk on a regular basis.”
Work either began or continued on 796 condos in the seven-county Denver metro area in 2017, according to national research firm Metrostudy, up from 741 units Metrostudy was tracking at the end of 2016. Both figures are well above the 187 condos launched or under construction in 2015, but John Covert, director of Metrostudy’s Colorado office, pointed out it’s nowhere near the 3,000 starts seen in 2006, the peak of the last housing cycle.
The defects ordinance has created a “relatively open legislative pathway,” Covert said, but large, production-focused builders such as KB Home still are not launching condo projects in the state. That leaves the work to smaller, local companies and specialists. With a maze of state and local regulations to navigate, a tight labor market and often lengthy production schedules, Covert said the metro area may not see a dramatic increase in production for years yet.
“Things being as they are today, it’s a challenging environment,” he said. “I still think we’re a ways off to getting back to the same volume that we saw at the peak of the previous cycle.”
Golden-based Confluence Cos. has been active in the condo market. The company cut the ribbon last week on the Mirador at Tennyson, a 24-unit project housed in the renovated El Jebel Shrine building next to Willis Case Golf Course in northwest Denver. Confluence is building 40 condos in downtown Castle Rock, and its Zia development will create 119 for-sale units to Denver’s Sunnyside neighborhood. Zia is expected to break ground this spring and feature 25 condos reserved for people making 80 percent of area median income, exceeding city requirements for affordable housing in large, for-sale projects.
Confluence CEO Tim Walsh sees why many developers have been slow to embrace condos. Even with construction defects on the books, insurance companies have built higher premiums into condo jobs after years of lawsuits, he said. For-sale projects demand more peer and consultant review to ensure quality than apartments, driving up costs. Once municipal development fees, labor and material costs, and financing are factored in, he said it can be difficult to turn a profit.
But Walsh is paying attention to the same trends many analysts and lawmakers believe will motivate developers to embrace condos: a glut of baby boomers reaching the point where they want to sell their houses and move into something smaller and more manageable, and a mob of millennials now making enough money to move out of apartments and buy entry-level housing. Rents are actually falling in Denver as apartment production catches up with demand, further incentivizing for-sale work.
“I believe we have sort of hit a saturation point on apartments now and some developers are looking to build condos to diversify a little bit,” Walsh said. “The changes to the condo laws have certainly helped more people get comfortable building.”
Garnett and others are hoping that increased production will address another issue with Colorado’s condo market: It’s not affordable.
Condo prices rose 9.8 percent in Denver last year, hitting $335,000, according to Colorado Association of Realtors. The jump came during a year in which for-sale condo inventory rose just 3 percent, association spokeswoman Kelly Moye said, indicating demand was a major driver of prices.
Affordability issues aren’t confined to the metro area. The Colorado Housing and Finance Authority, which is dedicated to helping lower-income residents finance home purchases, issued 1,145 mortgages to first-time buyers moving into condos last year. The average monthly payment was $1,207, CHFA officials said. That’s roughly 22 percent of the monthly income for a family making $65,686 per year, Colorado’s median household income in 2016. Analysts generally view 30 percent of monthly income as the point when housing costs become burdensome on the residents, meaning many low-income families would struggle to pay even CHFA rates.
Sales at the Coloradan project near Denver’s Union Station demonstrate the demand for affordable condos. The 19-story building at 1750 Wewatta St. is nearly a year from opening but all 49 studios there — ranging from $265,000 to $370,000 — have already sold, according to Brad Arnold, vice president of sales and marketing for developer East West Partners. One-bedrooms at the Coloradan start at $575,000.
The Coloradan will feature 33 affordable units to meet Denver’s inclusionary housing ordinance. Arnold expects them to go fast.
The 196-unit Lakehouse condos, near Sloan’s Lake in west Denver, are under construction. It won’t help affordability concerns. Units there start at $499,000. Brian Levitt, president of project developer NAVA Real Estate and Development, said his company is now designing a 200-unit condo project for central Denver. Like Lakehouse, it will feature concrete and steel construction and market-rate prices. With construction defects on the books, Levitt said he expects more developers to jump into the market and produce more attainable, wood-framed condos, but with persistent labor shortages in the construction industry and a shrinking pool of qualified subcontractors, he is skeptical the state will see the production many are hoping for.
“The demand is there. But I think there are only a few projects that will be built,” Levitt said. “Get them now while you can because I think it’s going to be a short cycle.”
Affordability advocates aren’t sympathetic to the argument that construction costs are leading to condos that are not affordable for many would-be buyers. For them, familiar culprits are at work in the Denver housing market: profit margins and greed.
“I would say that the condo projects that are under construction now are exacerbating the wealth gap and they are not providing an entry point for people who are lower to mid-level incomes,” said Tony Pigford, a board member with equality-advocacy group All In Denver. “They are not attainable for teachers or firefighters or a lot of other common folks and it’s actually exacerbating our housing crisis and wealth gap and general inequality.”
Lakewood Mayor Adam Paul is eagerly awaiting the day a new condo project breaks ground in his city, the first Colorado municipality to address construction defects via an ordinance passed in 2014. The city last year became a focal point for residents pushing back against Colorado’s development boom in the form of a still-pending growth restriction initiative, but Paul said Lakewood is starved for for-sale housing, particularly of the affordable variety. It’s incumbent on elected officials, he said, to listen to the development community and continue to support it in the quest for more condos.
“I think we need to continue to hear from the private sector to understand what they’re lacking, why they might not be jumping full in,” he said. “If there is something they need on the public side, we need to act to bring the market back to the state of Colorado.”