Lately it seems as though no matter which direction you turn you’re bound to bump into a tower crane feverishly erecting Denver’s next skyline addition. Yet surprisingly, of all the buildings recently completed or currently under construction, few offer a condominium component. Last year 11,500 re-sale condo units sold but how many new condos were sold in 2015? Only 187.
So where have all the condos gone?
The answer to the seemingly innocuous question is a complex, politically-charged Venn-diagram perpetuated by countless economic cause-and-effect relationships stemming from Denver’s Construction Defect Law.
Tom Clark, member of the Homeownership Opportunity Alliance and his team have spent the past three years trying to uncover the crux of the issue involving the current Construction Defect Law. Their discovery yielded two realizations:
- Typically, when a competed project is transferred to the HOA by the developer there is a clause in the Declaration stating that if there is to be a claim of construction defects, 2/3 of the homeowners must approve litigation. Instead, lawyers representing the HOA boards interpreted the clause to require approval from only 2/3 of the board thus significantly reducing the number of individuals required to approve class-action litigation. For example, if an HOA board consisting of 6 individuals represents a building comprised of 500 units, only 4 individuals would need to approve the motion instead of 330.
- HOA boards figured out how to remove the aforementioned clause within the Declaration without receiving prior consent or consulting with the builder and/or developer before doing so.
As a result, HOA boards were granted the authority to navigate freely in seeking legal counsel and damages for construction defects sometimes without the knowledge or approval of the homeowners or the builder/developer.
Increased litigation against developers has had a devastating impact for the condominium market. Research conducted by the Homeownership Opportunity Alliance revealed that between 2003 and 2013 the probability of a builder being sued by a condominium HOA was 40%. Additionally, another 40% had been involved in litigation proceedings but had settled. In essence, 80% of all the condominium projects built within the past decade had entered legal proceedings.
The result is a strained market in which new construction is disproportionately skewed toward single-family residences and townhomes. In urban sectors which would normally see healthy condominium construction, apartment dwellings have become prominent. Coupled with a rapidly expanding population and a renewed interest in urban living, apartment rent has increased 42.5% in the past three years. Meanwhile, the median income has only increased 2.6% in the same timeframe yielding a remarkable disparity. Today, 40% of working Coloradan renters spend more than a third of their income on housing.
If we step back and look at the market as a whole, the issue of inventory persists at a macro level, as well. Earlier this week the Denver Post released an article highlighting the difficulty buyers are facing in Denver’s developing market. In May 2006 there were 30,457 homes available in Denver. In contrast, this past month there were only 5,463 residences available.
On a local level, in Riverfront Park and Union Station, we are witnessing first-hand the shift in building practices. Touching on an article we wrote last fall, apartment dwellings far outnumber condominium units. Today there are approximately 1,100 for-purchase units in the two neighborhoods combined. By our count, there are just over 5,000 apartment dwelling units currently available or in some phase of planning/construction. Even with the completion of the 342-unit Coloradan, apartment dwellings outnumber for-purchase units roughly 3.5:1 which is staggering. The Coloradan will be a landmark build and may be the catalyst policymakers and developers need to reach resolution and dive back in. For consumers, the Coloradan presents incredible opportunity.
The issue of policy and the current Construction Defect Law is both contentious and complex; something that could not possibly be distilled into a one-page blog post; however, from an economic standpoint we constantly strive to understand how decisions within our community and external pressures impact our local markets and the consumer. Should you have questions regarding today’s market landscape and its effect on the sale of your residence or your opportunity to buy, feel free to contact us directly.
Click here for access to the full-length video of Tom Clark’s presentation.
Mile Hi Modern
LIV | Sotheby’s International Realty
255 Clayton Street, Unit 100
Denver, CO 80206