Metro Denver counties win supreme court approval to limit growth

After being tied up in litigation, the Colorado Supreme Court just authorized a new anti growth initiative to substantially limit growth within the 11-county metro area (from CO springs to Ft. Collins) and all the cities/towns within. The new initiative limits new residential development to 1% of the existing homes/year.  This is modeled after Boulder, Lakewood, and Golden’s growth initiatives.  What does this mean for real estate?  Why is this important?  Will this pass?  What are the implications of a growth limiting law?

What is the new initiative?

The goal of the anti growth initiative is to substantially curtail residential growth within the Denver metro area.  Daniel Hayes, a resident of Golden and the author of the proposal to limit growth throughout the metro area, states “I think it’s been good for the city,” Hayes said. “Why does Boulder have all those jobs? Because of the low housing growth due to land set aside for commercial and industrial. It’s increased the amount of jobs there, it’s set aside land for jobs.”

The new anti growth proposal is modeled after existing laws in Boulder, except it would encompass the entire metro area: 11 counties, and all cities and towns within them, including the rest of Boulder County, along with Broomfield, Denver, Adams, Arapahoe, Douglas, Elbert, El Paso, Jefferson, Larimer and Weld counties.  On the surface, the new initiative appears stricter than Boulder in terms of the residential construction exceptions it would grant to the 1% growth rule. The ballot initiative would allow for 0.15% additional expansion above 1% for affordable housing and senior housing, meaning the biggest legal growth rate for each individual town, city and county targeted would be 1.3% a year, if affordable and senior homes took up their full extra allotments.

Lakewood was a roadmap for metro

Against long odds; in the last election cycle, Lakewood joined Boulder and Golden in limiting growth. There is a new ordinance in Lakewood (Denver metro suburb) to limit any new housing development to 1% of existing units per year.  Last year 1500 housing units were permitted, under the new proposal the number would be closer to 600 -650.  This initiative would also require Lakewood city council to hold a public hearing and vote on any projects greater than 40 units.

Why did the Lakewood initiative pass?

Builders and realtors raised $450,000 to defeat the Lakewood initiative as opposed to $18,000 for the initiative backers which shows a major shift in the political winds.  If you look at the political climate in the front range (where most of the state population is located) it is clearly trending to the left.  This new political climate has passed a green roof initiative, affordable housing initiatives, and other progressive initiatives.

Furthermore, many people living in the state for a while would agree that the state has changed quite a bit with all the new growth/building and would like to see some sort of limit to moderate the growth.  There is a trend of not in my backyard (NIMBY) that has gained traction in Lakewood and throughout the front range.  If Lakewood is an indication of how the metro will vote, I think the new growth amendment has a good shot at passing.

What is the impact?

Prices will increase!  According to the nonpartisan Director of Research of the Colorado Legislative Council, the initial fiscal impact of Initiative #4 will be that the “value of existing housing units may increase in communities where there are binding growth limits, impacting homeowners and landlords. For Colorado residents that would like to move into communities with binding housing limits, this measure may make it more expensive to find homes to buy or rent.  Limits on housing permits will also impact the distribution of construction employment, retail trade, and population within Colorado.” (source CO director of research)

Realtors, Contractors, etc… will feel the pinch.  The proposed growth ordinance across the metro will substantially limit new construction.  Builders will not be able to build as man units leading to considerable supply constraints.  Furthermore, many land owners will be left with basically “worthless” real estate as the properties are no longer developable due to the quotas from the initiative.  The lack of supply will further decrease the number of properties sold annually.

Boulder has a similar ordinance limiting growth to 1% which has led to skyrocketing prices and elimination of any housing for middle class workers.  Either housing is over 1m or it is considered affordable housing.  With land costs and building costs so high now due to the restriction on growth it is impossible to build a middle-class property.

What does it really mean?

I’m always amazed at human psychology.  On one hand voters overwhelmingly passed initiatives throughout the state to fund affordable housing initiatives.  While at the same time voters are entertaining initiatives to further limit growth (aka supply).  This is quite counterintuitive!

With the passing of this anti growth initiative, there is no doubt that residential construction will be substantially reduced.  If there is a cap on growth of 1%, where do you think builders will focus?  Builders will focus on the projects with the higher margins.  For example, if a builder could only build one house due to the cap, would they build a 300k house or a 2m house?  Let’s assume the builder has a 20% profit margin; on the 300k house the profit would be 60k, on the 2m house the profit would be 400k?  It is not difficult to see which one the builder will choose and that this will further erode affordable housing.  This is exactly how the growth initiative has played out in Boulder.

Summary

The proposed anti growth initiative will reshape real estate throughout the front range.  Along with the increases in prices, taxes will also go up for existing residents.  The amount of taxes paid is based on the value of the property (in every odd year in Colorado).  As prices increase so do property taxes. This new initiative will have far reaching impacts beyond just taxes including real estate values, realtors, contractors, lenders, and countless others throughout the Denver metro and the entire front range corridor along with surrounding counties.

Resources

1. https://www.denverpost.com/2019/11/16/boulder-1-percent-growth-limit-front-range-controversy/
2. https://www.courts.state.co.us/userfiles/file/Court_Probation/Supreme_Court/initiatives/2019-2020/19SA224/12-05-19%20Order%20-%20Affirmed.pdf
3. https://www.denverpost.com/2019/12/18/lakewood-slow-growth-housing-cap/

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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