CREJ - Building Dialogue - September 2015

Housing Ladder is Key to Denver’s Continued Growth

John Beeble, chairman of Saunders Construction, has a 30- year history building in Colorado and offers his perspective on Denver’s future.

Chris Waggett is a founding principal and CEO of D4 Urban. He has over 30 years’ experience in development and funds management internationally, including nine years in Denver. He provides insight on the criticality of the real estate ladder and the metro Denver’ region’s continued economic prosperity.

JS: You’ve been a part of building Denver and had a hand in paving the road to the future. From your vantage point, what elements of our current vibrancy do you think will have the most impact on our future?

JB: Denver and the metro area have so much going for them. Mayor Hancock’s vision for downtown and the airport culminated by the airport cities and growth in the metro area have created what many call nodes linked by transportation. Nodes such as downtown Denver, the Denver Tech Center, Aurora Medical Center, Arvada and points beyond now linked by significant transportation including light rail and the new Interstate 70 redevelopment just getting started. The collaboration between multiple city leaders has set the stage for smart growth that will keep it pleasurable to live here. I’ve lived in Arvada for nearly 30 years and the possibility of having my morning coffee in Old Town and hopping on the light rail to downtown is fantastic!

One of our opportunities is to resolve the congestion to the access of our biggest asset as a region – the mountain areas and, specifically, the west-bound I-70 access thereto.

Let’s face it, beyond our strong and diversified business climate, it’s our recreation resources that give us a big advantage and reason people want to live here. We have to solve the transportation challenges there.

>JS: Colorado and the Front Range, in particular, have seen tremendous growth and new construction in the past few years. Coming out of the recession, what is the state of the construction industry and can you speak to the construction cost increases you are seeing in the market?

JB: Construction costs increases are a factor of supply and demand and I think it will be a short-term issue.

During the recession, we saw a great loss of labor and talent in the trades due to a drop off in construction activity. The protracted duration of the recession resulted in those workers leaving this profession to seek other job opportunities. I don’t think we’ll ever get them back. So now, we have an opportunity to train new workers for a variety of construction trades. The benefit to the current construction growth is that the industry has good jobs to offer both new and seasoned workers, which builds industry expertise and headcount. Until the building cycle tapers and/or labor resources meet the demand, we’ll see construction pricing on an upward path.

JS: Looking to the future, what do you see as our greatest challenge?

JB: Denver seems to be at the epicenter of the national scene. We have seen and continue to see a large increase in people moving to Colorado. The good news is that we have a lot to offer from jobs to recreation and a diverse business climate. Our challenge is to create a climate of growth for the long term for all our workers and businesses.

Part of the equation that has to be looked at is the housing ladder. The urban centers have built, some say overbuilt, apartment stock to fit the growth demand, but what happens when those renters want to buy their first house? The crazy residential real estate market we are seeing currently is just not realistic for the millennials who are maybe three to five years into their careers and finding real estate prices out of reach. We are missing affordable housing options that are between rental and single-family home prices – we’re missing housing product in the $200K to $250K range, for instance.

One of the answers is condos and owned affordable product. In the last 10 years, we really haven’t seen any new condo development. This leaves a huge gap in the housing options ladder.

We have to solve the legal framework that increases condo construction risk and makes it too expensive to embark upon.

Developers won’t develop condos. Contractors won’t build them and architects won’t design them.

Affordable housing is key to the sustainability of growth in Denver. We are at our strongest when we have conditions that help young people grow up, get educated, have robust job opportunities, and can live and own real estate in the urban corridors. We have all of the above except the latter. This is a critical challenge for our future.

It is the housing ladder topic that spawned a conversation with Chris Waggett, CEO of D4 Urban and chairman of Transit Alliance.

JS: Pertaining to the housing stock, specifically at affordable price range, what do you see as implications from the lack of entry-level ownership options?

CW: I moved here nine years ago, so I’m one of the many who migrated to Denver. We love the lifestyle, the opportunity, the business climate, openness to newcomers and the prosperity of Denver’s growth we’ve witnessed in the last nine years. It’s been fascinating to watch the pendulum swing from employees in 2006 to employer in the downturn, and now back to the employee. Talent is critical to our future and the good news is that we have lots of talent here and new talent moving here. Talent moves to where it wants to be and employers follow that educated talent. The symbiosis of talent and employers is important to Colorado’s economic engine.

Right now we have lots of rental options for young workers and then nothing between multifamily rental and single-family homes, whose price tags are either out of reach for most young professionals or are located in suburban locations that they don’t aspire to move to until they have families. Condominium construction is virtually nonexistent, so we have a both an affordability and housing product gap.

This gap is the result of constrained supply, which increases pricing, and we are simply pricing ourselves out of the affordable range. Key competitors like Dallas, Phoenix and Salt Lake City have relatively affordable median house prices of $165K to $175K compared to Denver’s at $330K and an average home price of $404K. This is a key concern for corporate relocations to Colorado in terms of being an attractive place for their workforce to live.

The ability to offer our young talent and our retiring baby boomers a full spectrum of affordable urban and suburban housing product types is critical to our future. I’m concerned that without it, we will see impacts on migration to Denver-metro region and an exodus from these two populations in search of affordable housing opportunities. Lack of housing affordability will be a headwind to growth – both economic and population. Loss of population will reduce our tax base and will impact our ability to attract businesses that seek talent, all of which could put us at risk in terms of continued prosperity and also in an economic downturn.

We have an opportunity to look to the future and prevent a loss of young, educated talent in the next generation by offering common sense construction defects reforms that would stimulate condo development as an affordable economic pathway to home ownership and close the housing gap. Furthermore, focusing that development around transit is “smart growth” and what was promised to, and endorsed by, the voters in FasTracks and the expansion of RTD’s light-rail system. It’s actually the only way that we can prudently manage population growth and preserve our quality of life.

The business and population growth that is going on in Colorado right now is amazing and it’s enabled us as a region to achieve what we are today. However, we need to be proactive to solve the housing affordability and options problem and it requires leadership from the state, cities and regional leaders – without a collaborative effort, I’m concerned that the housing affordability and opportunity issue could derail our positive growth and our regional prosperity. It’s just another reason why the Metro Mayors Caucus has been unanimously imploring the state to act on this issue as they know the impact it’s having in their communities now and going forward.

Finally, our first project is a market-rate affordable product at Alameda Station, known as Denizen. We are currently collaborating with Medici Communities to develop a tax credit affordable product on our mixed-use Bus Barn site, west of Alameda Station, that will be connected to it via pedestrian bridge. We would dearly like to be developing condominium product next for first-time homebuyers, but current legislative realities make this a challenging proposition.