Every time I turn around there is yet another proposal to implement rent control. The…
Denver passes affordable housing law, 88% decline in Apartment permits.
Last year Denver passed an “affordable housing program” that requires multifamily developments to pay linkage fees and/or reserve a percentage of units for low income housing. What has happened to apartment construction since passage? Were my original predictions correct? What is in the initiative and how much will it cost all property owners? Will the new affordable housing initiative have the opposite effect where Denver becomes less affordable?
What is in the Denver affordable housing initiative and how will property owners be impacted?
The new initiative is broken into three primary focus areas:
- 10 unit or greater multifamily: Below is a chart that outlines the impact on multifamily. The two key items are a requirement to build between 10-15% of units for low income residents either on the sale side or on the rental side. Furthermore the linkage fee if you want to “buy out” the affordable requirements is prohibitive starting at $250,000
- 9 units or fewer multifamily/single family: Even for small properties, there will be low-income requirements via a linkage fee based on number of units and square footage
- All other properties pay a linkage fee: Even office and industrial properties are included in the proposal with office/Sales/Service/repair paying the highest linkage fee of $8/ft. For example, a 30k foot office building will pay a fee of $24,000 for low-income housing.
More details about Linkage fees: Every property type will pay large sums
Below is a schedule of linkage fees for every build type. Note it will be nearly impossible to build 10+ unit complex without affordable housing as the linkage fee would be between $250,000 – $478,000 making it nearly impossible to pencil out a new development without affordable housing.
Furthermore, let’s look at the impact on some other property types. Let’s assume that a builder was going to build a new office building downtown that was 150k feet, the linkage fee would be 8/ft in a few years (if they haven’t started already, it would take a few years by the time you get through zoning, planning, break ground on a large development), the increased cost would add $1.2 million to the cost of the project.
The end user and/or buyer will pay as these increased build costs will be passed on either through higher rents or increased sale costs. This in turn will lead to higher prices for residential single family, office, retail, etc… along with higher rents for tenants from a duplex to an industrial building.
Single family building becomes more expensive in Denver
Single family homes are included in the linkage fee. Assume that someone is going to build a 4k foot infill single family home, the linkage fee would be 7/ft leading to a cost of 28k. Most new houses are greater than 1600 feet as it is difficult to justify the lot prices and development costs for very small homes which means substantial fees for new construction and the end of middle income construction as it is no profitable to build with all the additional fees. Essentially the affordable housing legislation will hollow out the middle in housing where builders now focus on the higher end properties or subsidized low income housing.
Prices increase for all property types
It is ironic that one of the primary outcomes of the new initiative is that prices will increase in multifamily and single-family homes. As build costs increase existing prices will increase as well. A good example is what we are seeing in the various ski towns in Colorado. As build costs in Steamboat have approached 800/ft, house prices have increased close to that amount as there are no other alternatives. The affordable housing initiative in Denver will artificially create the same scenario where prices increase immediately due to the linkage fees and affordable housing unit requirements that ultimately impact the profitability of a project.
Major difference between affordable and low-income housing
Let’s define affordable housing and low-income housing. There is a radically big difference.
Affordable housing: Affordable means that starting teachers, firefighters, nurses, and other critical functions within the city can afford to live in the city. Unfortunately, how the current initiative is written, all these professions are excluded from affordable housing. The starting salary for a teacher in Denver Public schools is 47,000 but eliminated from affordable housing. As stated above the requirements for rental housing is 60% of the Average median income which is 44,016 for a single person so not even a first-year teacher for Denver Public Schools would qualify for a rental property under the proposed guidelines.
Low-income housing: Denver’s guidelines at 60% of the Average Median Income price out basically any young professional that is unable to live in the area and essentially eliminates affordable housing for most young professions. The initiative needs to be titled low income housing as many who need affordable housing are not allowed to rent these units as they make too much
Here is what I predicted when the ordinance originally passed.
Denver’s initiative eliminates affordable housing.
It is a bit ironic that an initiative titled affordable housing does just the opposite. Let’s look at three possible scenarios builders will take because of the new initiatives:
- Builders incorporate low-income housing. With build costs continuing to escalate, the project cost will have to be recouped over fewer market rate units. To make the numbers work, the remaining units will become more expensive so the builder/owner can recoup the below market units, this will eliminate more traditional market rate apartments as the complex will be low income or high income so that the project makes financial sense. This is not just a theory, look at any mountain town that has this requirement. This is exactly what happens with deed restricted low-income units and million-dollar condos.
- Builders who go this route will likely provide substantially smaller units that are considered affordable vs rest of the project. For example, instead of building a 2-bedroom affordable unit, they are better off building a one-unit affordable unit and making the market rate units larger, thereby eliminating a substantial amount of “low income” housing for families.
- Builders pay a linkage fee: In lieu of providing low income housing a builder can opt for a linkage fee on smaller projects (9 units or less), let’s say they are building a townhome project, each 1600 feet that has 4 units, the builder would have to pay a fee of 11,200 a unit in 2024 (7/ft) or almost $45,000 just in linkage fees for the project. This is a new fee on top of all the other fees/costs for building. The builder will be forced to focus on high end properties as there is more margin for higher cost properties to absorb the cost.
- For example the linkage fee is 6% of a 200k build as opposed to 3% of a 350,000 property. The linkage fees will further push the market towards higher income building pricing out affordable housing buyers/renters
- Builders decide to build elsewhere: As prices continue to increase for building, there will be a tipping point where builders decide to pursue other opportunities outside of Denver as the numbers no longer work. This will further reduce the supply of properties and in turn drive up prices even further for existing properties.
What does recent data show from the Apartment association?
In the three months before the effective date of the new ordinance, April, May and June of 2022, there were 12,800 applications for new multi-family units.
In the three months after it took effect on July 1, including July, August and September, applications for new development dropped to 1,500.
“It’s 88% in terms of the decline,” Hamrick said. “It’s almost immeasurable it’s so dramatic. It is even greater than I think most of us predicted.”
What the new figures suggest is that new apartments – like the Jayne in Denver’s Baker neighborhood – got in just in the nick of time, but you will now likely see less of this kind of construction and housing in the future. The linkage fees and affordable housing requirements are pushing builders out of Denver into other markets as the costs to build no longer work their projects.
It is not surprising this initiative passed, but it is very ironic that the initiative is named “affordable housing” when it does just the opposite. The Denver initiative has made living/working in Denver less affordable for teachers, firefighters, nurses, and other critical workers as they do not qualify for any of this new housing.
The Denver initiative forces builders to construct low-income housing and in turn high income housing to compensate for the loss of revenue. Furthermore prices will increase on single family homes due to increased build costs. With an 88% decline in permit applications, the market has spoken that they will bring less supply online due to the huge expenses of the new affordable housing initiative.
The real solution is to do the opposite of the affordable housing initiative by providing incentives to builders to build more housing at various price points thereby creating more supply. This is especially true for large multifamily construction as it is one of the only ways to increase supply at the right price points for the working middle. Unfortunately, Denver’s affordable housing initiative clearly shows decreased supply which will further eliminate any affordable housing coming onlinefor Denver’s workers.
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Written by Glen Weinberg, Owner 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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