There is no denying that Colorado is in the midst of a housing affordability crisis. Mile High CRE sat down with Charlie Smith, a real estate attorney and shareholder at Polsinelli law firm in Denver, to discuss what has contributed to the crisis and its impact on Colorado.
The housing affordability crisis is clearly hurting Colorado. What is the extent of the problem?
Absolutely. Housing affordability is being discussed at the State Capitol and in city council chambers across the state, and for good reason. Not only is housing affordability a major problem in Colorado, but it is actually getting worse and there aren’t many signs of it improving anytime soon without major changes.
People can say it is an oversimplification, but the problem truly is basic supply and demand. According to a study by Up for Growth that analyzed housing availability, Colorado has a shortfall of more than 100,000 homes. Only California has a larger shortfall, an ignoble distinction. With inadequate supply, not only do prices rise, but markets freeze up due to a lack of inventory, furthering price acceleration as buyers compete for the limited stock of homes for sale. It also hampers what housing economists refer to as “filtering,” the process of homebuyers moving up in price so that buyer who are first entering the market can acquire starter homes. And wouldn’t you know it, with near record numbers of new apartments coming online in many communities,
Unfortunately, there is no chance of making up our housing deficit if current trends continue. Nationally, new construction starts seem to have peaked in 2022 at around 150,000 units per month. While deliveries are approaching highs we haven’t seen for more than 10 years, new starts have fallen off a cliff, and we should expect that deliveries in 2025 and 2026 will be very low. Put another way, after a blip in new construction, we’re reverting to the levels seen in 2020, which simply aren’t enough to close the gap in how much housing we need. We need to change our approach in Colorado, starting with the legislature and city councils.
What has contributed to the lack of supply?
Housing construction last peaked nationally in 2006 and then cratered during the Great Recession. Unfortunately, new starts have never recovered to 2006 levels, and after 2007, didn’t cross 100,000 new starts per month again until 2016. While people driving around town might think that Colorado went through a construction boom, they forget that we underbuilt our housing supply for 10-15 years after the Great Recession and we have to make that up before prices will come down.
Demand for more housing persists, but it has become much harder and more expensive to develop housing in Colorado. Some of this is clearly related to higher interest rates and higher construction costs. Projects have become too expensive to underwrite. Fortunately, the tide is starting to turn with the Federal Reserve cutting interest rates, but it will be some time before that impact filters into the market in the form of new deals, and at least a few years until that results in more construction starts.
An arguably bigger problem is regulatory risk. Developers and investors can adjust to higher interest rates and costs, but regulatory risk presents a materially higher level of uncertainty and can prove fatal to otherwise financeable projects and investments. Unfortunately, regulatory risk is starting to have a deterrent effect to investment in new housing in Colorado due to the rapid pace at which the legislature and city councils are adopting new laws that increase the costs and risks to develop or own property in our state. While there have been a few wins for housing – some would point to the new Middle-Income Housing Tax Credit – many would argue they have been substantially outweighed by the losses, such as the high costs of compliance with Regulation 28 and Energize Denver, cities adopting inclusionary housing policies, and the recent HB 24-1175, which grants every city and county in the state a right of first refusal or a right of first offer on multifamily properties in their jurisdiction with limited exceptions. All of these new laws contribute to regulatory risk, higher costs, and lower potential returns on investment, which disincentivizes the creation of new housing or reinvestment in existing housing stock at the time our state needs it most. Layer ever-increasing impact fees on top of this and it is enough to kill many projects before they get off the ground.
Fortunately, our legislature has resisted calls to enact or enable rent control. Economists the world over had dismissed rent control as a failed policy of the past, but it continues to rear its ugly head as a solution to affordability, including in Colorado. Jason Furman, former Chairman of the Council of Economic Advisers under President Barack Obama, has said of rent control, “Rent control has been about as disgraced as any economic policy in the tool kit. The idea we’d be reviving and expanding it will ultimately make our housing supply problems worse, not better.” And Governor Polis rightly commented on President Biden’s recent proposal to cap rental increases on some properties at 5%, that doing so would “lead to less affordable housing being built and substantially increase hosting costs.” Someday we will finally be able to lay this policy idea to rest, but that day still hasn’t come despite rent control’s failures everywhere from New York City to San Francisco.
How have NIMBYism, zoning, and the permitting and entitlements process affected housing supply?
NIMBYism and burdensome entitlements processes have killed many otherwise viable projects.
I completely understand the sentiment of wanting to protect what has made Colorado, or specific cities or neighborhoods, special after a lot of change over the past 20 to 30 years. But the bottom line is that our state is an attractive place to live, and we can’t pull the ladder up behind us after we’ve all climbed up. People will continue to move here for as long as we have mountains and sunshine, and we either need to build enough houses to accommodate them, and build them where people want to live and where developers can underwrite projects, or we need to accept that our quality of life here will slowly deteriorate as affordability worsens, taxes rise, and schools close.
Unfortunately, I have seen far too many multifamily and single-family developments killed at the last minute by city councils and county commissions who come under siege from upset neighbors and anti-growth activists. Sometimes real estate projects fail, but when they fail after the developer has invested six or seven figures just to have the project killed at the last stage, that makes all of their subsequent projects more expensive. And sometimes it causes developers to leave markets entirely. This hurts our communities and state for the perceived benefit of a few activists who, fortunate for them, bought or rented the first homes constructed in the area. We turn to our elected officials to make difficult decisions, and in this time of a housing affordability crisis, we need them to make decisions that lead to more housing, not less.
I have heard from many developer clients that there simply isn’t enough land zoned for the type of density we need to climb out of this undersupply of housing. If we serious about solving the housing crisis, we need to rezone land to allow for more housing as a use by right. Solving the affordability crisis will require development of more housing of all types, and yes, in many places that means more density, especially around transit hubs where infrastructure can support it.
Relatedly, we need to streamline and simplify entitlement and permitting processes. I have advised many developer clients who are stuck in seemingly endless review cycles, and worse, who have new material issues pop up after multiple rounds of review. Everyone expects city staff to perform thorough reviews for compliance with code, but the process needs to be efficient and devoid of surprises late in the game that can kill projects.
How is the housing affordability crisis affecting Colorado outside of the housing market?
Affordable housing is fundamental to the health of any community. It is one of the top things employers look for when relocating their business or opening a new office. A lack of affordable housing in Colorado has contributed to our fall in rankings as a place to do business. CNBC recently dropped Colorado from its 11th best state for business to 16th and gave Colorado an “F” for cost of living, which was good enough for 46th in that category.
A lack of affordable housing has also contributed to homelessness. The Colorado Coalition for the Homeless notes that the median sale cost of a home in Colorado roughly doubled over the last ten years, and that homes are increasingly less available to our state’s most vulnerable populations. Clearly, homelessness has been a problem in many communities around our state. Resolving the affordability crisis means more access to housing for lower-income individuals and families.
It may sound like hyperbole, but the future of our state is at stake. We need to solve the affordability crisis for Colorado to remain competitive in the American economy. Otherwise, we risk a declining population and everything that comes with that – school closures, higher taxes, and failed businesses who can’t find employees and don’t have enough customers to be a going concern.
The good news is that we can solve the housing crisis — we largely just have to get out of the way.
Charlie Smith is an experienced commercial real estate attorney who provides forward-thinking legal advice to advance clients’ strategic interests. Charlie’s practice includes acquisitions, dispositions, leasing, land use, and public-private partnerships (including negotiation of Tax Increment Financing and Public Improvement Fees) for large-scale development, redevelopment, infill, mixed-use, planned community and transit-oriented projects. With his background in business and politics, his unique perspective allows him to identify potential pitfalls and opportunities for clients that result from the complex interplay between developers and their tenants, lenders, equity investors and public sector partners.
