Construction Defects Law Amendment - Effects on CO Rental Market

[Tyler Howell]

http://www.constructiondive.com/news/co-constructi...

• A new construction defects law that could revive condominium development has passed the Colorado House unanimously and is expected to gain Senate approval as well, according to CBS Denver.
• The new legislation would reverse new-development obstacles contained in the existing law, such as a homeowners association's (HOA) ability to sue condominium developers without first obtaining homeowner approval.
• Developers say the current law has led to "frivolous" lawsuits that have all but halted condominium development in the state. Since 2005, condominiums' share of the new housing market has dropped from 20% to 2%.

With a shift from rental apartment development to condos, downward pressure on rental prices in Denver could be lessened with a slowdown in the increase of new supply. Additionally, recent Freddie Mac research shows that less renters in the West are actively looking to purchase a home, and more intend to keep renting for the foreseeable future, than in any other US region.

This supports our stance that the greater Denver area continues to be a strong market for rental property investment.

Your thoughts on the new bill and effects on CO's market?

[Bill S.]

So I saw this post a few days ago and have been digesting it. From what I have heard, most current apartments can not be converted to condos because the insurance policy would become void if the units were sold as condos. Now I don't know as I haven't read any of the policies nor am I an insurance agent selling those builders risk policies. It makes sense, and I do know that the person who told me is an active developer. I'm sure that they might be some wiggle room that current builders might be able to cut a deal with their insurance and certain ones not currently under construction could get a different policy. I know building of apartments has slowed down and the Feds squeezed the money supply and only the best sites are being built on. 

I don't really see any direct impact to retail buyers for the next 2 years as it takes that long to trickle down. Rents appear to have topped out and there will be some downward pressure (how much depends on your property class).

Overall my crystal ball for the Denver market is a bit foggy with how the oversupply in the luxury/Class A apartment market will impact the rest of the market. If the legislation does what it is supposed to do then it should increase supply in the bottom of the market (price point wise) as condos are cheaper to build on a per unit basis than SFRs are. Still site and building costs are around $300/sqft I'm told. That puts the break even price of a small 600 sq ft 1 bd condo around $180,000 . I'm sure they can squeeze the price down with smaller units as well.  That puts the price to own at around $1,000-$1,200 per month which is well below the current rent rates for similar space (more rent pressure).

It will take a while to shake out, but it looks like we should see housing prices level off and rents as well. The good thing is that it probably won't be something that happens over night and we should have time to prepare and act accordingly. The other wild card would be interest rates. The rate of the interest rate increase will impact affordability as well. If we see a 2% increase in rates over the next two years, the number of people who can afford the purchase will decrease which makes for more renters but at lower rates.