Construction Costs, Entitlements Hampering Ambitions For Master-Planned, Build-To-Rent Projects

Master-planned communities and build-to-rent properties have become important tools for developers in Denver and other high-cost areas to build so-called missing middle housing options, or homes that are sold at a price point that is affordable for the average homebuyer. 

But with an uncertain year ahead and a tumultuous one on its way out, developers in metro Denver say they worry that rising construction costs and lengthening entitlement processes will hinder these product types’ feasibility.

Economic conditions and spotty support from local jurisdictions have made it much more difficult for developers to get these projects off the ground despite growing demand for the properties, RedT Homes CEO Vincent Deorio said during Bisnow’s Denver Single-Family Rental and Master-Planned Communities Summit Dec. 12 at the Four Seasons Denver. 

“There’s definitely a need for what we’re providing as an affordable home or rental property,” Deorio said. “To me, homeownership is still part of the American Dream, but a lot of people simply can’t afford to own a home right now and need another option.”

The median home price in Denver County was $653K as of November, a 15% climb in the last three years, according to the latest data from the Colorado Association of Realtors. That increase has outpaced wage growth for many workers in the metro area, BMC Investments Chief Investment Officer Jeffrey Stonger said. 

Master-planned communities and build-to-rent properties are two ways for Denver metro communities to address the pressing concerns about housing affordability and supply.

One example is Erie Commons, a 336-acre master-planned community being developed by Boulder-based Community Development Group. The community includes single-family homes and townhomes priced from $240K up to about $650K, according to its website. 

But developments like Erie Commons have become increasingly tough to get off the ground because of lengthy entitlement processes and the high cost of borrowing money and purchasing construction equipment, NexMetro Communities Development Manager Greyson Konkel said. For instance, a project that has an 18-month entitlement phase could see a low six-figure cost increase over the course of that 18 months, he said. 

Stonger said he expects these impacts to moderate some next year as interest rates come back to earth, but there needs to be more price adjustment from contractors and material suppliers. Until these kinks are ironed out, it seems like the runway for these developments is dwindling, Stonger added. 

There are also a lot of places in the metro area with building codes that simply don’t contemplate master-planned communities or build-to-rent construction, Konkel said. These two building types seemingly live in a gray area between residential and commercial construction in terms of zoning, which makes it difficult for some permit reviewers because they include an array of use types. 

The pandemic also increased demand for these two development types as high- earning renters found it difficult to buy their first home. A lot of homeowners also found the carrying costs of homeownership to be too expensive as property taxes and maintenance costs increased, Stonger said.

In turn, he said a lot of would-be homeowners started looking outside of Denver in places like Broomfield, Thornton and Erie for new homes, and build-to-rent developments have helped these cities capture some of that demand. 

Despite the demand, Konkel said developers have received some pushback against the developments from local governments. Anecdotally, Konkel said one of the most common arguments that cities have against build-to-rent developments is that they are bringing more renters to town than homeowners. 

Renters often bring a perception of issues like noisier behavior, a greater number of cars per residence or overall lack of concern for the long-term atmosphere of a place because they do not own property.

Konkel said his firm had been skeptical about getting into the build-to-rent space, but the demographics of people who moved into its communities proved its investment thesis wrong. Konkel said build-to-rent communities have become attractive to a wide range of renters, from those earning six-figures or more to empty-nesters looking to downsize. 

“They really cater to people who are prioritizing flexibility and don’t want to pay all of the maintenance and upkeep expenses of owning a home,” Konkel said.