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— Multifamily Properties Quarterly — May 2016
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COLORADO | TEXAS
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ONE PROJECT AT A TIME.
H
omeownership is the Ameri-
can Dream for many, but
numerous would-be buyers
in Denver are finding the
dream to be very elusive.
Stories from residential brokers and
friends seeking to buy a home often
sound more like a nightmare. Buy-
ers often are faced with multiple
competing offers on prospective
homes, resulting in bidding wars
that increase the price well over the
asking price. Cash buyers or buy-
ers willing to put up nonrefundable
deposits are winning out, resulting
in a frustrating and difficult home-
buying process.
What is the challenge to buying a
home? Simply put, there is an over-
all housing shortage. This has been
a boost to the apartment market
because it keeps renters in greater
supply. However, with growing
demand from homebuyers, lack of
new condominium development and
ever-rising rents, the market might
be ripe for conversion, which could
be an attractive alternative exit
strategy for apartment owners.
Housing Shortage
After the downturn in 2009, resi-
dential real estate development fell
to record-low levels. The chart dem-
onstrates how wide the gap in resi-
dential deliveries is compared with
historical construction trends and
the expansive population growth.
Exacerbating the shortage is the
complete lack of for-sale condo
and townhome development. The
chart excludes most condo/town-
home development, because it was
difficult to find a consistent data
source for deliver-
ies; however, some
residential experts
pegged the num-
ber of condo and
townhome units
being delivered
prior to 2007 gener-
ally in the range of
2,000 to 3,000 units
per year. Since
then, the number
of deliveries has
fallen into the hun-
dreds of units per
year. If you take
2,500 units a year
for eight years, you
can see the market
is lacking at least
16,000 condo units
for sale compared
with the historical
construction deliv-
eries.
With pent-up
demand and a
substantial drop
in supply, why
aren’t more condo
projects in devel-
opment? Mainly
because there are
barriers to new
ground-up condo development
stemming from construction defect
litigation and cost to build, market
timing, and financing by the devel-
opment and buyer.
The current construction defect
laws make developers, contrac-
tors, architects and everyone on
the development team nervous
about building for-sale condos due
to the high risk of being sued. Until
there are substantive changes to
these laws, it will be difficult to get
many large-scale projects off of the
ground. This difficulty is attribut-
able to a development team being
required to carry much more insur-
ance, adding more cost to an already
expensive development environ-
ment.
Coupled with increasing land and
construction costs, the end product
will be expensive, effectively gear-
ing properties toward more affluent
buyers and creating a high barrier of
entry for first-time buyers, as well
as others in the entry-level housing
market. If and when the defect liti-
gation environment shifts in a more
favorable builder direction, develop-
ers, insurers and lenders still will be
sensitive to the risk and potential for
future lawsuits.
New developments can be a time-
consuming and risky endeavor.
There is timing risk ranging from
land planning and entitlement to
construction delays. While demand
from buyers for condos is high, wait-
ing a year or two for finished prod-
uct can change a buyer’s appetite
or the economic environment can
change, eroding buyer demand.
Financing for the development of
condos is scarce and will require
strong presales, strong borrower
liquidity and large equity down pay-
ments. When a developer can obtain
construction debt and equity, selling
Craig Stack
Senior vice
president,
Multifamily
Group, Colliers
International,
Denver
Bill Morkes
Associate vice
president, Colliers
International,
Denver
Market Drivers
Image courtesy Colliers International
The housing shortage is partly caused by the gap in residential deliveries compared to
historical construction trends and the expansive population growth.
