Developers who plan to erect apartments in Denver must add a year to that process to account for a bureaucratic step — a delay in building permitting they say is costing them money and exacerbating the city's housing woes.
On top of that, they also fear that an ordinance requiring builders to set aside certain units for affordable housing will do just the opposite — fewer units and more expensive residential and rental prices.
Aware of the problem, city officials said they're prepared to wade through the permitting backlog and added those efforts have begun to bear fruit.
The city's permitting woes are occurring at a time that Denver is adding thousands of new residents. One study says the city absorbed 162,000 new residents since 2005, as the average-priced home increased 138% from $260,600 to $619,500. The analysis from the Common Sense Institute says Denver is short between 13,000 and 31,000 housing units today and will need to build between 31,000 and 49,000 more to accommodate expected population growth by 2028. Denver needs more than 50,000 units of affordable housing, according to the Denver Housing Authority.
The situation has frustrated the construction industry.
Scott Rathbun, president of Apartment Appraisers & Consultants, Inc., said in 2010, it took an average of just under 21 months to build an apartment community with about 200 or more units. That has increased to 29.1 months by the end of 2022.
In Denver County, the situation is much worse: He said it took 19.4 months to build apartments in 2010. By 2022, that extended to 32.3 months, more than a full year.
“Half of the pipeline is in the city and county of Denver because people like to build close to the ... core areas of the city,” Rathbun said. “That’s way, way more projects and way, way more units than the city staff is equipped to handle and so the process is taking longer simply because they don’t have the bandwidth.”
A perfect storm
Developers say building permits is just one of the complicated challenges they face. New building codes, affordable housing ordinances, design requirements from the fire department — to name a few — have also driven up the cost of construction, they add.
In Denver, specifically, they also need to contend with the entitlement process, finding a skilled workforce and supply chain issues.
These issues alone are enough to cause delays, but put together, they have strained the industry, developers say.
Rodger Hara, principal and owner of Community Builders Realty Services who teaches a six-month course on building permits, told The Denver Gazette the permitting challenge barely scratches the surface of the complications in metro Denver.
“It doesn’t matter whether you’re building affordable housing for the homeless or a mansion in Cherry Hills Village, you've got to pay the same price for lumber and drywall and plumbing and components at Home Depot,” Hara said.
Many factors contributed to the situation in which Denver finds itself. Among the biggest is the COVID-19 pandemic, which caused shut-downs of entire industries and sent shockwaves through the economy. And as revenues fell, the city responded by cutting its agencies' budgets. Denver's City Planning and Development reduced staff and froze hiring.
The department said it is now “aggressively hiring” and is using third-party plan review services to assist with backlogged applications. In 2022, the department hired more than 100 people, equal to one-third of the entire agency, and contracted a third-party review firm to help conduct residential plan reviews, according to Swartz.
"We understand this is a frustrating situation for our customers, and we are working hard to resolve it” Swartz said in an email. “While we’ve recently had a perfect storm of increasing application volumes coupled with a challenging labor market, we’ve taken a number of steps in the past year to reduce timeframes, particularly on residential, and those efforts are beginning to bear fruit."
Swartz added: "Review times are already starting to come down, and we expect that to continue as our new staff build capacity.”
The agency is also trying to find “process improvements to reduce resubmittals,” which means that rather than having one staff member work on a specific project, it will be reviewed by the next available staffer. Currently, the average review time for major residential projects takes nearly 13 weeks and a resubmitted review takes nearly 10 weeks, according to the department's 30-day average data.
“We’ve taken a number of steps in the past year to reduce timeframes, particularly on residential, and those efforts are beginning to bear fruit,” Swartz said in an email.
Rent or buy?
The current landscape of permitting, lending and the challenges facing contractors, in addition to the construction defects law, means potential first-time homebuyers continue to rent, according to Hara of Community Builders Realty Services.
“What that has done is force a lot of people into renting because they can’t afford to buy because it’s so expensive to build,” Hara said. “With interest rates where they are right now, Denver is one of the least affordable cities in the country.”
Affordable housing that is covered under the Housing and Economic Recovery Act (HERA) is, in theory, available to individuals who make up to 60% of the average median income of the county where the property is located.
For Denver County, that means that an individual has to make $49,500 per year or less, according to the Colorado Housing and Finance Authority. If more than one person is living in the unit, that changes the numbers: Two people would have to collect a combined income of $56,580 a year or less, three people would need to make $63,660 a year or less, and so on.
That limits the price of these units to $1,237 for a studio, $1,326 for one bedroom, $1,591 for two bedrooms, $1,838 for three bedrooms, and $2,050 for four bedrooms.
Since developers are required to include a certain amount of units as affordable housing, the other units have to make up for the loss in earnings. While general developers build for the market rate rent, affordable housing developers build for people whose “rent is a function of their income,” Hara said.
Developers describe Denver's ordinance, which requires residential developments of at least 10 units to earmark 8% to 12% as "affordable," as "all stick, no carrot."
Already, it caused a short-term spike in applications as developers rushed to get theirs in before its effective date in July, but that the numbers have since fallen off the cliff.
The Apartment Association of Metro Denver noted that, in the three months before the ordinance's effective date, the city saw 12,800 applications for new multifamily units. But, in the three months after, applications fell to 1,500.
Sustainable Design Build, a design company, said the sharp decrease in applications — roughly a 88% — is "shocking Denver’s goals for new development." Swartz said there was an increase of 191% in multifamily permit applications from the second quarter of 2021 to the second quarter of 2022.
"The leveling-off that occurred in Q3 2022 was fully expected, since projects applied in June 2022 instead of in July 2022," Swartz said in an email.
She suggests that it is not possible to draw conclusions of a decline based on an all-time record high month.
It remains to be seen if the trend persists.
“The long story short," Rathbun said, "is that developers knew that this was coming, there was a magic date of June 30, 2022, and if you got your application into planning on or before June 30th of 2022, you were exempted from the requirements of the inclusionary housing ordinance.”
The ordinance allows an option to pay a fee in lieu of the affordable units. The fee ranges from $250,000 to $478,000, depending on the type of unit and market area. Much of that fee money goes to Denver's Affordable Housing Fund, according to the ordinance.
The city said it engaged with partners and others for more than a year to develop the policy, which is meant to ensure that, as new homes are built, affordable unites are built, as well. The approach, the city underscored, is to deploy market-based solutions to arrive at an "equitable" and "predictable" policy that facilitates housing access to Denverites with low or moderate income.
“There was a huge number of units that were applied for in the second quarter of 2022 and leading up to the second quarter of 2022,” Rathbun said. “And then the number of applications fell off a cliff in the third quarter and the fourth quarter of 2022 largely because the inclusionary housing ordinance is all stick, no carrot.”
The ordinance does not have a financial incentive to offset the subsidies of the affordable rents, so it sacrifices the financial feasibility of market-rate developments, Rathbun argued, adding developers can't make the numbers work in Denver under these requirements — so applications have fallen.
David Zucker, president of Zocalo Community Development, has worked worked to provide affordable housing in developments before it was required. The ordinance has just added on another cost for developers to deal with, he said.
“It will have a negative impact on housing production in Denver. I just don’t know how much of a negative impact,” Zucker said. “It remains to be seen how much of a negative impact there is.”
The city and industry face pressure pressure to provide affordable housing, Zucker said, noting that more than 50% of Colorado renters are cost burdened — meaning more than 30% of their household income is spent on rent.
“If you are an elected official, you are absolutely hearing about affordable housing from your constituents,” Zucker said. “And the voices are only growing louder and the need, factually, is only getting greater.”
An incentive package that provides density bonuses, commitments of accelerated review and approval processes, property tax exemption and cash incentives would support efforts to deliver affordable housing, Zucker said.
“That’s hard,” Zucker said. “The easier thing to do is just say, ‘Were going to tax the developer,’ and that’s what they did.”
Zucker acknowledged the difficulty of offering developers incentives.
“Probably a vote of the people,” Zucker said when asked how the city would fund such incentives. “I think that providing cash incentives for private developers to build affordable housing, that’s not in many people’s minds a winning sales pitch at the voting booth.”
However, Denver's City Planning and Development spokesperson Laura Swartz said these already exist.
"The incentives were developed through a public advisory committee and in a public process that lasted over a year. They include permit fee reductions, parking space reductions, and building height incentives to allow taller buildings," Swartz wrote in an email. "These exist and they allow developers to create more developable area, which are zoning entitlements that have financial value for the developer."
Trouble in big-little city
What's clear to developers is that the long-term effects of the lack of building permit applications will lead to less units in the pipeline. In the immediate term, units will continue to be delivered to the market over the next few years as they exit the current pipeline, which will keep supply up and try to keep up with the demand for housing.
At the end of the three year window, Rathbun expects a supply and demand “mismatch” as no new units come online — even as demand continues to grow.
“If you have more demand than you have supply, prices go up,” Rathbun said. “We have an affordability crisis right now both in the rental market and in the single-family purchase market, so, long term, I think what this is going to do is its going to cause rental prices to go up significantly once we get through the existing construction pipeline.
"We’re going to end up with an even worse affordability crisis than we have currently.”
Chris Lonigro, president at Generation Development, which works largely in the multi-family housing arena, said the biggest issue he's seen is the lack of ability to plan due to the inconsistencies and delays. These challenges make it difficult to tell when projects can get to the market and delays mean higher costs, he said.
“Challenges by development type are very different,” Lonigro said. “A challenge for maybe a single family home developer faces is very different than what a multi-family or even maybe a larger major project would face because they all kind of go through different processes."
He added: "It’s not one brushstroke for everybody.”
These issues with timing have increasingly worsened since the pandemic, according to Matt Metcalf, owner and managing broker for Simply Denver.
“It’s a big hang-up,” Metcalf said.
There’s still pent-up demand for housing inventory in Denver, which is down again, according to Metcalf. Bidding wars are coming back on some houses, although its specific to certain price ranges and neighborhoods.
“The hardest part is cost of construction has just gone up in general,” Metcalf said. “It’s just kind of what comes with a more developed city."
He added: "Denver ... I call it a big-little city.”