The Affordable Housing Shortage In Denver And Opportunities It Presents

It may be called the Mile High City, but sky-high rents and a limited affordable housing stock are proving problematic for Denver. Luckily, Econ 101 taught us that strong demand and limited supply provide a lucrative opportunity for forward-looking developers.

Walker & Dunlop’s Ralph Lowen implicates the glut in high-end development, especially in the last cycle. Since 2010, new market rate development has outpaced affordable ones 9:1. This trend demonstrates that many developers continue to ignore the needs of low and middle-income residents, who find themselves priced out of the market.

According to the US Department of Housing and Urban Development, effective rents in Denver have grown by 65%, while median family incomes have only grown by 5%, which has created a desperate need for moderate and affordable housing options.

Affordable multifamily construction has stagnated because the institutional money that has recently driven development shows a clear preference for Class-A products. These are perceived as safer, more reliable investments with steady returns. High construction costs coupled with stationary wages have also exacerbated the relative scarcity of affordable multifamily properties.

Now, however, as Class-A begins to feel the downward market pressure exerted by overbuilding and slower absorption, moderate and affordable multifamily development re-emerges as a promising opportunity. These deals require a change in approach aimed at driving down cost. To achieve this, Ralph encourages developers to consider suburban locations outside the prime central business district. He also advocates for smaller units, and even micro-units, which have become increasingly popular.

An emphasis on providing the basic necessities of living in an appealing way, rather than advertising cushy amenities, is actually appreciated by price-sensitive tenants. Opting for traditional garden-style walk-up construction instead of elevator-serviced units, and surface parking rather than structured, are just two examples of decisions aligned with this idea.

Financing these projects will be facilitated by the low interest rates touted by Freddie Mac, Fannie Mae, HUD and banks, all of which want to increase lending on workforce and affordable housing.

Other incentives, like up to 90% loan-to-value, 35- and 40-year amortizations, construction rates as low as 2% and permanent rates in the 3% to 4% range, are extremely favorable for developers. Low-income housing tax credits are now going for upwards of $1 per credit.

Residents hope these trends will make Denver’s housing cost resemble the oxygen concentration—not the elevation.