Condos make a cautious comeback in Denver metro area

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Condos make a cautious comeback in Denver metro area

By Aldo Svaldi

The Denver post01/18/2015

Ever so slowly, developers are moving forward on a new wave of condo construction in the metro area — but they are treading like soldiers crossing a minefield. The developers say they are going in with the assumption they will be sued under the state's current construction-defects law and are incurring heavy costs to avoid that fate.

"We are being ultra-careful about everything," said Roy Kline, a managing director at Western Development Group in Denver, which is behind a development called 250 Columbine.

The mixed-use project under construction in Cherry Creek, consists of 71 condos, 90,000 square feet of office space and 30,000 square feet of retail.

The condos, expected to be ready by early summer, start at $450,000 and move up from there. The high prices reflect the address but also numerous quality-control measures put in place line by line, Western Development managing director David Steel said.

The company is photographing or filming every step of construction. Carefully vetted contractors are adding in their costs to test materials and systems. Peer reviews ensure the best practices are in place.

For example, Western Development is stress-testing every window, trying to catch the one out of 100 that might hide a manufacturing defect they wouldn't otherwise know about, Kline said.

Such measures are expensive, but Kline and Steel said that is what is needed to get a condo built in Colorado's litigious environment.

Brian Levitt and Trevor Hines of NAVA Real Estate Development are planning 198 condos and 26 townhomes on a former parking lot at the former St. Anthony's Hospital site off of West Colfax Avenue.

The pair have spent the past year crafting a detailed three-page, 18-point action plan to deal with any contingency they could think of arising from the state's constructions-defects law.

Levitt estimates all the safeguards being put in place will add 5 percent to 10 percent to the costs of the units at NAVA Sloan Lake, whose final price points are being determined.

A big chunk comes in the higher insurance premiums developers say they must pay to build condos in Colorado. Hines estimates those premiums will run about 2.5 to 3 percent of their project cost versus the 0.5 percent that apartment developers are levied.

Unlike a safe driver who gets rewarded with a discount on her auto insurance, "safe" builders aren't getting any breaks from the half dozen insurers still willing to underwrite multifamily construction policies, Levitt said.

That could change as more condo projects get built without triggering legal action or if the state's law is changed to require arbitration before litigation. But for now, Levitt and Hines said they are doing everything they can to reduce the margin of error.

That includes building with concrete and steel, where tolerances are tighter than wood frames, and letting structural engineers, not architects, drive the process.

Other developers also are including a strong legal defense as part of their overall strategy from Day One.

In Denver's River North neighborhood, Tom and Brooke Gordon are planning DriveTrain, with approximately 100 condos and 23 townhomes and destination retail north of 31st Street on Brighton Boulevard.

Like Western Development, the Gordons said they plan to document every step of the construction process. They will maintain reserves to quickly fix problems that come up and have retained counsel to mount a strong defense if necessary.

"If we built it right, they will be in for a fight," Tom Gordon said of anyone challenging the project. "This is our own money on the line. If it goes bad, it hurts us personally."

The townhomes and condos they are planning in the River North neighborhood will be on the higher end, starting at about $400 a square foot for entry-level units.

Given higher insurance premiums and added safeguards, many of the developers interviewed said they don't see how a condo could get built in the $200,000 range, which is more affordable to a first-time buyer.

Phoenix developer Myles Bruckal is giving it a run with Cottage Grove, a project near the Fitzsimons Medical Campus in Aurora. The development will include 47 new multifamily units, as well as conversions of existing apartments.

Cottage Grove will test the middle of the market, with prices from $200,000 to $250,000. Bruckal said he can price in that range because he is picking up land and existing design plans at a big discount from a "broken" condo project launched last decade.

"Doing this from scratch would be a challenge," he said.

He is staying small in scale and limiting buildings to fewer than four units apiece, which should reduce potential problems. Bruckal also is banking that the large coalition of builders, affordable-housing advocates and municipal governments will succeed in changing the state's construction defects law this session.

"I'm gambling on the next round of legislation passing," he said.

Build Our Homes Right, an advocacy group defending the state's construction-defects law, argues that builders should take extra steps to avoid defects on the front end.

Somebody has to pay when homes are built poorly, and weakening the state law without implementing other safeguards will only burden consumers, the coalition of homeowners and attorneys argues.

"It doesn't fix the problem, it just shifts who pays for it," said Boulder economist Pat Pacey.

Continued Below

 

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Continued from above

Pacey conducted a study for Build Our Homes Right that pins the reduction in new condo construction on a lack of demand for that kind of housing versus apartments.

Today's potential buyers, especially those in their 20s, face a long row of hurdles — from high student-loan debts to lower incomes and depressed marriage rates — that make renting more probable.

REColorado shows about 215 online listing for new multifamily units in the metro area. Many are row homes, paired homes or townhomes, which have lower exposure to construction-defects litigation than condos. Of the condos listed, most are at higher price points, above $400,000, or still in progress.

A few condos are left at the East Village Flats at Vantage Pointe, a holdover from the last cycle, when several big condo projects such as Spire and Four Seasons Denver came online.

The platform for East Village Flats was laid down in 2007, but the project stalled and the condos weren't completed until October 2013, said Kevin Garrett, real estate broker with Kentwood City Properties, which is listing the units.

Despite a commuter-friendly Broomfield location — north of FlatIron Crossing mall on U.S. 36 — and prices in the low to mid-$200,000 range, three of the 60 units at East Village Flats remain available 14 months later.

Garrett said the units have sold as planned. But defenders of the current law argue that demand, especially on the lower end of the market, just hasn't been there.

"You can't build it until there is demand," Pacey said.

Developers of the new wave of condos counter that demand is far ahead of supply, one reason they are willing to take a risk that competitors still focused on apartments won't.

Kline said that with only a few months to go until completion, 80 percent of the inventory at 250 Columbine is under contract and the remainder shouldn't be hard to move.

And while it is too soon for presales at NAVA Sloan Lake or DriveTrain, the expectation is buyers won't be in short supply.

"If Brooke and I wanted to buy a new condo, there is zero availability," said Tom Gordon.

Levitt, citing research from Metrostudy, said the metro area saw 3,587 condos closing in the 12 months through the first quarter of 2006.

There were only 414 condo closings between the first quarters of 2013 and 2014.

Many other projects remain in limbo. Bill Swalling, president of Actual Communities Inc. in Littleton, said he hasn't been able to find any builders willing to touch condos at Water's Edge, a mixed-housing development in Fort Collins.

He has shifted his focus to Mountain Villages, a higher-end project south of Morrison designed to provide 320 condos for seniors.

"When you get into that higher price range, the project can withstand the incremental insurance costs," Swalling said.

Given his choice, Swalling said he would prefer to develop more affordable units, but he doesn't see that happening unless something changes on construction defects.

That could change as more condo projects get built without triggering legal action or if the state's law is changed to require arbitration before litigation. But for now, Levitt and Hines said they are doing everything they can to reduce the margin of error.

That includes building with concrete and steel, where tolerances are tighter than wood frames, and letting structural engineers, not architects, drive the process.

Other developers also are including a strong legal defense as part of their overall strategy from Day One.

In Denver's River North neighborhood, Tom and Brooke Gordon are planning DriveTrain, with approximately 100 condos and 23 townhomes and destination retail north of 31st Street on Brighton Boulevard.

Like Western Development, the Gordons said they plan to document every step of the construction process. They will maintain reserves to quickly fix problems that come up and have retained counsel to mount a strong defense if necessary.

"If we built it right, they will be in for a fight," Tom Gordon said of anyone challenging the project. "This is our own money on the line. If it goes bad, it hurts us personally."

The townhomes and condos they are planning in the River North neighborhood will be on the higher end, starting at about $400 a square foot for entry-level units.

Given higher insurance premiums and added safeguards, many of the developers interviewed said they don't see how a condo could get built in the $200,000 range, which is more affordable to a first-time buyer.

Phoenix developer Myles Bruckal is giving it a run with Cottage Grove, a project near the Fitzsimons Medical Campus in Aurora. The development will include 47 new multifamily units, as well as conversions of existing apartments.

Cottage Grove will test the middle of the market, with prices from $200,000 to $250,000. Bruckal said he can price in that range because he is picking up land and existing design plans at a big discount from a "broken" condo project launched last decade.

"Doing this from scratch would be a challenge," he said.

He is staying small in scale and limiting buildings to fewer than four units apiece, which should reduce potential problems. Bruckal also is banking that the large coalition of builders, affordable-housing advocates and municipal governments will succeed in changing the state's construction defects law this session.

"I'm gambling on the next round of legislation passing," he said.

Build Our Homes Right, an advocacy group defending the state's construction-defects law, argues that builders should take extra steps to avoid defects on the front end.

Somebody has to pay when homes are built poorly, and weakening the state law without implementing other safeguards will only burden consumers, the coalition of homeowners and attorneys argues.

"It doesn't fix the problem, it just shifts who pays for it," said Boulder economist Pat Pacey.

Pacey conducted a study for Build Our Homes Right that pins the reduction in new condo construction on a lack of demand for that kind of housing versus apartments.

Today's potential buyers, especially those in their 20s, face a long row of hurdles — from high student-loan debts to lower incomes and depressed marriage rates — that make renting more probable.

REColorado shows about 215 online listing for new multifamily units in the metro area. Many are row homes, paired homes or townhomes, which have lower exposure to construction-defects litigation than condos. Of the condos listed, most are at higher price points, above $400,000, or still in progress.

A few condos are left at the East Village Flats at Vantage Pointe, a holdover from the last cycle, when several big condo projects such as Spire and Four Seasons Denver came online.

The platform for East Village Flats was laid down in 2007, but the project stalled and the condos weren't completed until October 2013, said Kevin Garrett, real estate broker with Kentwood City Properties, which is listing the units.

Despite a commuter-friendly Broomfield location — north of FlatIron Crossing mall on U.S. 36 — and prices in the low to mid-$200,000 range, three of the 60 units at East Village Flats remain available 14 months later.

Garrett said the units have sold as planned. But defenders of the current law argue that demand, especially on the lower end of the market, just hasn't been there.

"You can't build it until there is demand," Pacey said.

Developers of the new wave of condos counter that demand is far ahead of supply, one reason they are willing to take a risk that competitors still focused on apartments won't.

Kline said that with only a few months to go until completion, 80 percent of the inventory at 250 Columbine is under contract and the remainder shouldn't be hard to move.

And while it is too soon for presales at NAVA Sloan Lake or DriveTrain, the expectation is buyers won't be in short supply.

"If Brooke and I wanted to buy a new condo, there is zero availability," said Tom Gordon.

Levitt, citing research from Metrostudy, said the metro area saw 3,587 condos closing in the 12 months through the first quarter of 2006.

There were only 414 condo closings between the first quarters of 2013 and 2014.

Many other projects remain in limbo. Bill Swalling, president of Actual Communities Inc. in Littleton, said he hasn't been able to find any builders willing to touch condos at Water's Edge, a mixed-housing development in Fort Collins.

He has shifted his focus to Mountain Villages, a higher-end project south of Morrison designed to provide 320 condos for seniors.

"When you get into that higher price range, the project can withstand the incremental insurance costs," Swalling said.

Given his choice, Swalling said he would prefer to develop more affordable units, but he doesn't see that happening unless something changes on construction defects.

"We want something that permits good homebuilders to build good homes without a fear of litigation," he said.

He said no reputable builder wants to see customers have their lives ruined by poor construction, and he acknowledges that those who put out a shoddy product should face legal consequences.

"Why can't we get our heads together and get this resolved," he said.

"We want something that permits good homebuilders to build good homes without a fear of litigation," he said.

He said no reputable builder wants to see customers have their lives ruined by poor construction, and he acknowledges that those who put out a shoddy product should face legal consequences.

"Why can't we get our heads together and get this resolved," he said.

 

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State law causing Fort Collins condo crunch

http://www.coloradoan.com/story/money/2015/01/29/state-law-causing-fort-collins-condo-crunch/22510963/

A decade-old state law is choking off construction of one of the city's most affordable housing options and creating a bottleneck for first-time home buyers, say Fort Collins housing advocates, developers and Realtors, who hope to see the law changed.

Colorado's construction defects law — which allows as few as two condo owners to bring a class-action lawsuit against a builder — was passed to protect consumers from unscrupulous builders and shoddy construction during the nation's pre-recession building boom. While supporters say those protections are still needed, opponents say the law fails to find middle ground.

The ease with which homeowners can sue and the threat of litigation has made it prohibitively expensive for developers to insure, build and sell condominiums, say critics who want to see the law changed. That means many builders shy away from condos, oftentimes the least expensive product to build and the most affordable entry point into home ownership.

One bill that would decrease the amount of time homeowners have to sue a builder is working its way through the state Legislature. Opponents say it's a start but doesn't mitigate the risk builders face. They would like to see a bill that increases the number of homeowners it takes to file a lawsuit for construction defects and one that gives builders time to fix problems without litigation.

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"One of the steps up for young families is to buy a condo, which then enables them to step into a house," said Bruce Hendee, Fort Collins chief sustainability officer. "The defects law has made it untenable for builders ... so they have stopped building them." People who might otherwise be able to buy a condo are stuck renting, he said. "It leaves a fairly big hole in our long-term strategy to develop attainable housing."

As Fort Collins housing rental vacancy rates shrink and average rents top $1,100, many renters might be tempted to buy if they could find and afford an entry-level home.

The dearth of condos is also stalling the city's plan to encourage high-density transit-oriented development such as multistory condos along the MAX bus rapid transit line on Mason Street.

Clint Skutchan, chief executive officer of the Fort Collins Board of Realtors, said the lack of condos is contributing to "the swift gain" in home prices. Without homes for sale at a lower price point, the average price of housing has soared to record levels throughout the city.

While construction prices vary, condos are considered less costly to build because most are multistory, and building up is less expensive than building out.

Developer and City Councilman Gino Campana said it is between 15 percent and 20 percent less expensive to build up. Campana finished 60 condos at Sidehill at the corner of Drake and Timberline in 2012 that sold for between $135,000 and $155,000. Those same condos are now selling for $200,000 to $205,000, he said.

"The lack of availability is heavily influencing the price point in Fort Collins," Skutchan said. "There needs to be a balance between protecting these folks (homeowners) but it's also a tradeoff with cost options."

Last year the average sales price of single-family attached and detached homes in northern Larimer County closed in on $300,000. Fort Collins does not differentiate between condos and apartments in the building permit process, making it difficult to quantify the decline in condo construction in Fort Collins.

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Many in the Fort Collins development community are hard-pressed to name any large condo projects built in the last five years.

Statewide in published reports, Denver-based market research firm Metrostudy estimated condos made up more than 20 percent of housing starts in late 2005 but only 3 percent through September of last year.

Last year, Larry Kendall, founder of The Group Real Estate, estimated condo construction dropped from about 20 to 25 percent of new housing stock to 2 percent.

The decline has less to do with the construction defects law and more to do with the economic recession, a drop in demand and millennials who aren't jumping into the housing market as early as their older counterparts did, said Boulder consulting firm Pacey Economics in a housing market analysis released earlier this month.

Millennials are "five years behind," said Patricia Pacey, founder of Pacey Economics. "The lack of demand resulted in low condominium sales prices, making apartment construction more profitable in the Denver urban centers," stated the report, paid for by a coalition of homeowners called Build Our Homes Right.

The good news, Pacey said, is that condo construction is rebounding in and around Denver. She recommended "letting the market work" rather than changing the law.

Creating housing that is affordable for most Fort Collins residents has become a top priority for the city as well as Fort Collins Board of Realtors, which has launched an "affordable equals achievable" campaign.

But in Fort Collins, the city's Housing Affordability Policy Study suggested the city work with its elected officials and state representatives to remedy the issues surround construction defects.

Dan Weinheimer, the city's legislative policy manager, said he is tracking the legislation, watching for a bill that protects homeowner rights and protects builders from being sued for minor errors that can happen during construction.

Changing the law

A bill aimed at amending the construction defects law to soften its impact for builders is moving through the state's legislative process.

Senate Bill 91, introduced by Sen. Ray Scott, R-Grand Junction, would decrease the window for filing a lawssuit from six years to three years after a project is completed. The bill has been assigned to the Senate State, Veterans & Military Affairs committee.

Molly Foley-Healey, legislative liaison for Community Associations Institute, said her group opposes shortening the window to file suits because some defects don't show up for several years. "It would make it impossible for homeowners who have latent defects to recover. That's just wrong."

CAI plans to oppose any bill that strips consumer protections. "The bottom line is builders and developers aren't going to be sued for construction defects if they build quality construction," she said. Instead, CAI would like to see a bill that proposes mandatory mediation to get both sides to the table in an attempt to settle defect claims. "We think that's a fair approach that doesn't favor either the homeowners'' association of the builders and developers."

Whether CAI can convince a legislator to carry such a bill is still up in the air. "We having been having conversations," Foley-Healey said.

Fort Collins Sen. John Kefalas, a Democrat, said the issue is a high priority for the Legislature but it's a "balancing act to address problems with the construction defects law and the consumer protection aspect." He said a bipartisan bill may be introduced as early as next week that addresses the issues. "Ideally it will get much better traction with a bipartisan bill," he said.

SB 91 will help builders, but doesn't go far enough, said Campana, who would like changes to include time for builders to cure or fix any construction defect and require a majority of a project's homeowners to file suit, rather than two.

"The majority of people in the project should engage in action against a building and they should give the builder the right to correct problems," he said. "It's only fair."

 

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Greg Miedema, executive officer of the Home Builders of Northern Colorado, said the construction defects law as it stands "knocks out any multifamily for-sale construction. It's just not going to happen and it's almost entirely attributable to the fact that you have to be a martyr to build for-sale product. There's a one in two chance that you will get sued."

He doesn't dispute that some projects have flaws and defects, "but there has to be a reasonable way to cure them. Every builder wants to build another building so they want to have a good reputation. We just want to bring some sanity back to the process."

"There's no question (the law) impacts affordable housing," said Kevin Brinkman, co-founder of Brinkman Partners, which has built several apartment projects in Fort Collins and Loveland, including Max Flats and Mason Street Flats. "There's been no supply over the last 10 years because of the legal risk so everything in the current supply is getting more expensive."

Brinkman is looking at a small condo project that would carry less risk in Old Town or along Harmony Road, but the company "is hoping for new legislation to make things more balanced."

Fort Collins is carefully watching the city of Lakewood, which passed its own construction defects law that gives builders and developers an opportunity to fix defects before homeowners' associations could sue. It also requires HOA boards to get permission from a majority of homeowners before filing suit.

The city has no intention of pursuing its own legislation, Hendee said, but is working with Colorado Municipal League and the Legislature on modifications that would limit liability. SB 91 doesn't address the problem, he said. "My thinking is, we're not there yet."

Like Fort Collins and its MAX bus rapid-transit line, Lakewood has a rail line along which it wants to encourage transit-oriented development, said senior city planner Ted Shepard. "It's pretty important for Midtown to develop in such a way that we don't have sprawl."

Condos vs. Townhomes

The difference between a condominium and townhome is in ownership. A condo buyer owns the inside of the home, while the unit's exterior and land are typically owned by an association.

A townhome buyer owns the inside and outside of the home, plus the land it sits on