Colorado's Construction-Defects Bill having an impact on developer decisions across Denver and the suburbs

Posted by West + Main Homes on Friday, January 26th, 2018 at 7:36am.

In the nine months since Colorado lawmakers passed a construction-defects bill aimed at reviving the Denver area’s near-dead condominium market, there has been a slight increase in construction but not enough to declare the problem solved.

The numbers so far — a 7.4 percent increase in under-construction condos in metro Denver in 2017, representing just 55 additional units — demonstrate it may be a few years before production begins to meet the state’s considerable demand, if that happens at all. For now, large builders are remaining on the sidelines, leaving the market to smaller developers, and many of the projects underway are aimed at more affluent buyers who aren’t necessarily the ones the new legislation was meant to benefit. But it’s still early and there are signs of movement.

“We knew it was going to take some time to build up confidence again in a marketplace that was frozen for so long,” said Rep. Alec Garnett, D-Denver, who co-sponsored last year’s closely watched bipartisan defects bill. “I am really encouraged by what I am hearing and seeing up and down the Front Range. A lot of people were going to build for-rent — and they changed their plans to build for-purchase products.”

The new law requires that more than half of all residents of a condo complex support legal action before a lawsuit can be brought against a the complex’s builder over construction flaws. That’s a higher threshold than allowing homeowners association boards to initiate legal action, which builders said led to frivolous or predatory lawsuits and scared many out of the condo market. Garnett and Rep. Cole Wist, R-Centennial, also a co-sponsor on the bill, have said they are not expecting new condo-related legislation at the statehouse this session, hoping a year of calm will allow developers to relax and get to work.

“I think we still have concerns about insurance rates being too high for builders. I think we want to let the market adjust to what happened last session and the Vallagio decision, and see if that drives insurance rates down,” Wist said, referring to a Colorado Supreme Court ruling last spring that struck down the ability of homeowners associations to change bylaws without builder consent, giving developers another layer of legal protection. “So we’re monitoring that together. (Alec and I) talk on a regular basis.”

Work either began or continued on 796 condos in the seven-county Denver metro area in 2017, according to national research firm Metrostudy, up from 741 units Metrostudy was tracking at the end of 2016. Both figures are well above the 187 condos launched or under construction in 2015, but John Covert, director of Metrostudy’s Colorado office, pointed out it’s nowhere near the 3,000 starts seen in 2006, the peak of the last housing cycle.

The defects ordinance has created a “relatively open legislative pathway,” Covert said, but large, production-focused builders such as KB Home still are not launching condo projects in the state. That leaves the work to smaller, local companies and specialists. With a maze of state and local regulations to navigate, a tight labor market and often lengthy production schedules, Covert said the metro area may not see a dramatic increase in production for years yet.

“Things being as they are today, it’s a challenging environment,” he said. “I still think we’re a ways off to getting back to the same volume that we saw at the peak of the previous cycle.”

Golden-based Confluence Cos. has been active in the condo market. The company cut the ribbon last week on the Mirador at Tennyson, a 24-unit project housed in the renovated El Jebel Shrine building next to Willis Case Golf Course in northwest Denver. Confluence is building 40 condos in downtown Castle Rock, and its Zia development will create 119 for-sale units to Denver’s Sunnyside neighborhood. Zia is expected to break ground this spring and feature 25 condos reserved for people making 80 percent of area median income, exceeding city requirements for affordable housing in large, for-sale projects.

Confluence CEO Tim Walsh sees why many developers have been slow to embrace condos. Even with construction defects on the books, insurance companies have built higher premiums into condo jobs after years of lawsuits, he said. For-sale projects demand more peer and consultant review to ensure quality than apartments, driving up costs. Once municipal development fees, labor and material costs, and financing are factored in, he said it can be difficult to turn a profit.

But Walsh is paying attention to the same trends many analysts and lawmakers believe will motivate developers to embrace condos: a glut of baby boomers reaching the point where they want to sell their houses and move into something smaller and more manageable, and a mob of millennials now making enough money to move out of apartments and buy entry-level housing. Rents are actually falling in Denver as apartment production catches up with demand, further incentivizing for-sale work.

“I believe we have sort of hit a saturation point on apartments now and some developers are looking to build condos to diversify a little bit,” Walsh said. “The changes to the condo laws have certainly helped more people get comfortable building.”

Garnett and others are hoping that increased production will address another issue with Colorado’s condo market: It’s not affordable.

Condo prices rose 9.8 percent in Denver last year, hitting $335,000, according to Colorado Association of Realtors. The jump came during a year in which for-sale condo inventory rose just 3 percent, association spokeswoman Kelly Moye said, indicating demand was a major driver of prices.

Jump over to the Denver Post to find out about condo projects that are currently under construction.

Ready to search for a Denver area condo? Start here.


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