Denver eliminates affordable housing: Building costs increase 20-30% with new legislation

I tell my kids frequently that actions speak louder than words.  Denver’s actions signal an end to affordable new construction affordable housing and further elimination of the middle class. Denver County is set to adopt a “net zero” building code that would require new residential construction in the county to be among the most energy efficient in the nation and all electric, net zero, by 2024. How will this impact real estate prices and build costs? What does this mean for affordable housing?

What is in the proposal

Denver county has ratified a timeline to require all new homes by 2024 to be net zero homes and all electric, with all new buildings (including commercial) by 2027.  These updated requirements will substantially change how homes are built and their costs.

What are in the new requirements: (here is more reading on the topic: At Denver.gov)

1. Increased efficiency for doors and window: triple pane windows
2. 100% electric (no gas appliances by 2024)
3. Tighter building envelope with air sealing
4. Need for Heat Recovery Ventilation due to tightness of house to ensure clean air (new appliance that brings in fresh air, heats it disburses in the house, and exhausts air to ensure proper ventilation)
5. Increased insulation
6. Increased efficiency for appliances including heating
7. Wired for alternative energy (solar)
8. Independent verification that requirements have been met

What is the impact on building costs?

I would absolutely agree that it is important to increase energy efficiency standards to reduce electricity and increase the comfort of the occupants.  However, there is a cost to each item that will add thousands of dollars to each house. Not only will material costs increase (triple pane vs double pane) but also labor costs will increase as the new building methods require higher skillsets.  For example, framing will change to reduce thermal bridging, house wrap will be eliminated for other more efficient systems. These changes will greatly increase the costs of a house especially on the lower end.

When building a million dollar plus house the percentage added to the ultimate price is likely not huge, but when looking at a 300k house, it would increase the costs 30-40% if not more.  Let’s take for example a boiler, a standard one might cost 3.5k for a smaller house, as the efficiency requirements increase the new high efficiency sealed combustion boiler is now 10-12k with cost increases for the boiler and installation.  The new boiler would be about the same for the million dollar house (albeit a bit larger) versus the 300k house.  On the 300k house, the boiler would increase the cost around 2% while for the 1 million house the cost would increase by .7%.  In real life Summit county passed an ordinance that was not as strict as Denver; costs increased 15-20% (the median home price is 900k).  With the median price in Denver much lower, the percentage increase will be substantially higher for lower priced properties.

Impossible to build lower cost houses in Denver.

As costs continue to increase on both materials and labor it is impossible to build lower cost houses.  For example, the median home price in Denver is over $600,000.  How can a service worker afford a 600k home; they can’t; How will they afford a 650k house due to the new requirements, the answer is the same, they cant!  These new requirements further raise the price point that is required to actually make a profit.  A builder is going to focus on a higher margin product that can absorb all the new costs leading to an even higher build cost and entry point into the single-family market. 

Further Raise real estate prices

The increased building costs will further raise real estate prices throughout the county.  As building costs increase substantially existing homes will also increase in price as they will cost less than building a new home.  For example, if the build costs for a 3k foot home are now 300/ft due to the new requirements, this essentially puts a floor under prices as lower priced homes look like a bargain compared to new construction.   This will put further upward pressure on existing home stock especially under 1 million dollars.

What is the solution?

There needs to be a tiered approach to building regulations to allow lower cost building.  For example, the county could allow double pane windows in a house under 750k or an 85% efficient boiler as opposed to a 94% boiler to help reduce costs.  The county could also allow more density so a builder might be able to build a triplex on a lot as opposed to a single-family home and disburse the costs over three properties.

Summary

Although it is critical to increase the efficiency of houses, there is a real cost to the community, the hollowing out of the middle class. With the large increase in costs on the lower priced house, it will be impossible to build houses under 500k eliminating any chance for the middle class to step into home ownership. Families will be forced to either live in subsidized housing, continue to rent with absolutely no possibility of moving up in the market, or most likely commute in from a more affordable area.  It is ironic that Denver county continues talking about affordable housing, but their actions clearly show something quite different as they continue to eliminate any possibly of market rate affordable housing.

Furthermore, I have a burning question; will the net zero house improve the environment if many service workers that have to report in person are no longer able to afford Denver and therefore have to commute in?  Will the impact of their commutes not far outweigh the net zero benefits?

Additional Reading/Resources

• https://www.denvergov.org/Government/Departments/Climate-Action-Sustainability-Resiliency/Initiatives/High-Performance-Buildings-and-Homes/Net-Zero-New-Buildings-Homes
• https://www.summitdaily.com/news/summit-county-set-to-adopt-new-sustainable-building-code-to-prepare-for-net-zero-future/
• https://www.energy.gov/eere/buildings/zero-energy-ready-homes
• https://www.summitdaily.com/news/local/summit-county-officials-look-to-extend-training-on-sustainable-building-codes-as-builders-struggle-to-adapt-to-changes/

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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, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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