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Condo Market Finally Loosening, but Why?

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Why is the condo market finally easing up?

Condo construction in the Denver metro area is finally happening on a larger scale, but what has taken so long? A number of factors needed to align to make it a viable option for developers.

First, the biggest driver for condo construction has been Denver’s economic environment. The continued influx of people moving to the area — a positive note for the construction industry, but let’s not talk about the traffic — has fueled our strong housing market.

As a result, the price of land, lots and properties has made condos a more workable option from a numbers standpoint. As prices have escalated and margins continue to be tight, high-density solutions like condos make the most sense. If you can build vertically and produce 20 condo units versus six to eight townhome units, what would you do?

In the past, high unit density and HOAs helped make condo projects attractive targets for defect litigators, and as a result, developers took a wait-and-see approach to building condos. The Colorado Supreme Court ruling in Vallagio vs. Metropolitan Homes in favor of arbitration clauses has certainly laid a more visible path forward for what in the past was a litigious trap door for condo construction.

Related: Colorado Affordable Housing Concerns

Lastly, over the past few years, the insurance marketplace has seen an increase in competition. This competition hasn’t made for less expensive rates, specifically in the wrap insurance arena, but it has led to a tapering off of or plateau in rates. Since lenders typically require wrap insurance policies on multifamily construction, a leveling off of fees for that type of policy could move the needle on that kind of construction.

Another interesting progression that is happening, certainly due to the past pains of construction defect litigation, is a change in construction practices on larger, more expensive projects. The move to concrete and steel buildings over typical wood-frame stick-built projects makes more sense. Water penetrations typically result in excessive and expensive damage, including mold issues in stick-built wood construction. Last time I checked, dams, spillways and much sewer infrastructure are made of concrete, so water is not an issue.

In addition, the incorporation of concrete helps mitigate noise transmission between units, which is, of course, a selling point. Keep your seat belts on and your eyes wide open for the wild ride that continues to characterize our market.

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