Development Challenges for the Denver Metropolitan Area

Unless you have been asleep for the last 18-months, or have no interest in the real estate market, or the overall Denver economy, you probably know that Denver’s population continues to grow. The reasons behind the population growth may not be so apparent. Are families having more babies? Well, no, but inbound migration to the Denver area remains strong. Job growth is attracting candidates, and the fame of Denver as a great place to live is spreading. The fact of the matter is that over the last 40+-years this has been a continuous process (except for the 2002-03 recession).

The result is that the real estate market continues to see price increases. The unusual fact is that all development sites are strong: churches, apartments, office, residential, industrial, and retail. In-fill sites (core Denver) and rural lots are both trading at record high prices per square foot. Out-of-state investors are scanning the market looking for value-add opportunities that are becoming harder to find. Single-family home builders are looking further away in places like Fort Lupton and Elizabeth in order to build affordable homes for first-time home buyers.

As we examined in the blog entitled, “Where is the greatest demand for Class A office space in Denver?,” millennials are beginning to marry, have kids, and are seeking to exit the central business district so that they can buy a house and raise their kids in neighborhoods where there are good schools.

In 2004, at the height of the government-subsidized home ownership bonanza, 69.4% of families owned their own homes. By 2009 that number had fallen to 67.5%. Today, it is at 62.9% nationwide. In Denver, however, the number is at 55% and, like the national average, continues on a downward trend. What does this mean for the commercial real estate market? More apartments, of course. There will be 15,000apartment units delivered in 2018.  9,000 in City of Denver.  This is the 3rd largest number of units in the US, behind only New York and Dallas.  13 of the 17 land sales over $10 million will become apartments in three years. There are more developers seeking land than there are parcels to sell. Prices are going to increase. At the current rate of construction of new homes, there is no possibility that new home construction will increase much from the current delivery levels in the next3-4 years. Therefore, all of the population growth (migration, and more births than deaths) will go into rentals. 

The biggest risk factor to the apartment market is if no-growth (e.g., Boulder) or slow-growth (e.g., Golden, or proposed in many other areas) legislation passes.  Construction will really slow down, and the people that own rentals will accumulate really serious wealth. 

Product mix

The population segment least-well served by the housing market is first time home buyers. Normally, condominiums might be their point of entry in the housing market. Today, condos are only 8% of the unit mix in the pipeline which is much less than the historical average (Thank you, Colorado Bar Association). Essentially none of the units under construction are affordable; most are in the $500 – $800 price per square foot (PSF) super-luxurious building. The historical average indicates there should be three times as many condominiums under construction. There are only 1,029 units in production, which might be all of 8-10 buildings.

Townhomes (ASF, attached single family) are about a third of production, which is much higher than normal. Townhomes are (or, at least,were-thank you Denver City Council and your slot home zoning amendment: “…alongwith requiring that more units face the street, changes include requiring features like porches for street-facing units, reducing building height, limiting rooftop decks, as well as adjusting dimensions for setbacks, courtyards and driveways”) a great way to squeeze more units onto an acre of land. They are happening all over Denver and Douglas counties.

Because of the higher cost of land, development sites for detached single family homes are increasing densities. Gone are the 50’ x 125’,6,250 square foot lot. Today they are 30’ wide with homes 22’ wide for entry-level homes. Since the market boasts too many buyers relative to supply and the builders cannot increase the pace of supply, prices will continue to rise.

You can calculate the pace of delivery of new homes pretty easily: count the number of permits; they will be delivered in six to twelve months. Count the number of finished lots that are “shovel-ready”; those homes will be delivered in 12 to 24 months. New home delivery is not a mystery; count the raw land sales to predict shovel-ready lots. They will be ready in 24-to 48months.

There are 11,000 shovel ready lots, and we are building12,800 homes to deliver in next 12 months. The finished lot inventory is less than 50% of a “normal” market. This results in builders’ acute anxiety.

Denver has no more parcels available, except for the buy, scrape, and build new segment. Thus, pressure on re-sale homes will continue.  New builds will not bring a material amount of inventory. Row homes and townhomes will increase their share of the product mix. There is no relief in sight for first-time home buyers.

Even if there were lots available in Denver, it still requires two years to get the permits, design, engineer and actually build the homes. Given this crisis, why can’t the Denver building department accelerate approvals? Given the fact that ASF (slot homes) increase density and make infill sites more affordable, why would the Denver City Council amend the zoning code to make building them more difficult? Is there a disconnect somewhere?

The Denver metropolitan area is composed of many communities(Denver, Commerce City, Thornton, Wheat Ridge, Arvada, Westminster, Aurora,Centennial, Littleton, Louisville, Highlands Ranch, Northglenn, Golden, CastleRock, Lakewood, and maybe some others I have forgotten). All of these communities are faced with the same problems: a lack of homes for first time home buyers. The CBDs have a limited supply of lots for offices. Demand for warehouses and distribution centers is strong.

These developments occur where there is land, the zoning isappropriate, and the price justifies the investment. Given the demand and thedearth of homes for first time home buyers, maybe the communities could joinefforts to more efficiently manage the scarce resource that is developable land.

  • Is there a role for a unified community (DenverMetropolitan Area) approach to help make the land use more efficient:
  • Are the locations being developed for the distribution centers, warehouses, and industrial sites ideal for their use?
  • Are these communities working on their own masterplans for development independently? Are they collaborating and sharing information, financial analyses, and planning expertise?  

Add to the equation the transportation and water challenges the metropolitan area faces, and I would bet that there is redundancy galore in the expenditure of resources trying to solve the same problems.

The development of the Colorado Aerotropolis (or Denver Airport City, or the Denver Aerotropolis-whatever its correct name is) is the perfect laboratory for multiple communities to plan together the solutions for these challenges. The currently designated aerotropolis land area is located in Denver, Aurora, and Commerce City. However, as the aerotropolis effect spreads, the other communities in the Denver Metropolitan Area will be impacted. The proof is found in cities around the world where the aerotropolis phenomenon has been developing for years. Look at Dallas, Amsterdam, Singapore, Seoul, and Paris. Denver can learn from what has occurred elsewhere.

Is this going on? If it is, are the results of the planning available to the community? Who, or what organization, is the driving force?

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