DENVER | Main Development Thread #6

[Brainpathology]

Originally Posted by Wizened Variations

There are only two ways in representative democracy to get elected: buy votes or sell votes. That describes the difference between the two parties at this time.

Neither is particularly honorable.

Neither is.. but neither are they equal in the damage they are doing right now.

[Brainpathology]

Originally Posted by trace™

There will be something that passes, everyone is behind it and everyone agrees that the imbalance is going to be a problem.


My guess: apartment prices will plummet once all these (what, 20-30k?) come on line in the next few years. As they do, competition will force rent everywhere down, as rents go down all those investors that bought up homes for rent income will start to sell as their rent return drops (they'll reap a hansom reward for having held the home through the rise, so won't be that painful to liquidate). That'll drive overall prices down, or at least bring some logical stability until more condos can be built.


I just don't see how apartments can make any sense at the rates going on.

I don't remember universal agreement that there is an imbalance problem with condos. To the average voter this issue is probably one of the most irrelevant and esoteric things you could possibly present to them. I wouldn't blame anyone outside of the kind of people who post here thinking they couldn't care less one way or the other if a bill is passed. They could actually be forgiven for being annoyed that larger problems aren't being addressed with the time the legislature has. This problem may not be solved for a very long time. And all of us here are making a large assumption that it's a "problem". The city could be just as vibrant, beautiful, and functional if no one but the wealthy owned their homes downtown (or no one at all). Besides pretty new condo towers for the skyline I don't see any advantage to more condos from a functional city center point of view. For individuals wanting to grow wealth by owning a home I definitely understand. But from the point of view of downtown Denver who cares as long as residents still come to live there?

If the anecdotal data on this board is any indication what we need is WAY more apartments to do just what you're predicting. Not a crash, necessarily, but an influx of many many units to push rents down or hold them steady until incomes catch up. (I don't actually see a rental rate crash unless people just all of a sudden decide to stop signing leases...we haven't shown any impending event that would trigger that)

In any case fixing this "problem" and pinning down exactly how it's contributing to the city getting too expensive to live in is complex. And this is a city which can't figure out a way to cover train stations from the rain or use the centerpiece of that train station AS a train station - so my breath isn't being held at all - nor do I really care one way or another.

[trace™]

The consensus on the imbalance is just my empirical knowledge (architects, developers, consultants, articles). No one knows for sure, they just see that it is a bubble. All of these developers were using the same pro forma to get the financing, which becomes irrelevant the more units that are built.

The problem is two fold - 1, why would people pay so much for apartments when you could/should get a comparable condo for the same price? $2+ rent ain't exactly cheap and makes my mortgage look like a bargain (I could rent for waaay more in this market, but as soon as the boom settles there will be so much choice, it'll all go down as managers scramble to attract renters). 2, there is no equity being built with renters, so little incentives to actually care about where they live.

The sf home buyers are different than those that want condos. Many want density, walking proximity and nothing to maintain.



We'll see, but something will happen, just too much imbalance for it not to. I remain optimistic that we'll see a surge in for-sale projects in the not too distant future.





As for the politics, I won't pretend to have a grasp of the nuances but completely agree that if you eliminate the extremes in the GOP you'd have many more interested, but the same could be said for the D's. I'd certainly like the focus to be on real issues and not extremes, but I guess that doesn't get you headlines.

[Brainpathology]

There most definitely IS an imbalance. Only an imbecile (in the fields you mention) could look at the numbers in Denver and not SEE the imbalance. I'm saying I don't think there is consensus at all about whether it's a "problem".

There are no condos available for the equivalent of rent and there doesn't look like there will be for the foreseeable future. Even if 100 Spires were built the people renting now aren't going to be the ones buying there. Those units are still more expensive than rent for most people. Nothing about solving the litigation problem simultaneously solves the affordability problem. They aren't at all connected. If rent is high, that's a reflection of property values. It just means any new for sale condos are also going to be high.

I don't buy the incentive to care about where you live either. You're not going to all of a sudden learn, and care, about dusting, vacuuming and fixing holes in the wall when you own. I don't see many people saying "I'll be perfectly happy with a sh*thole since I won't own it... hell if it starts out nice I'll make it my business to turn it into a sh*thole since I won't own it".

All the advantages of density, low maintenance, and walkability are available to those who rent just as much as to those who would buy. If they want those things more than building equity in their home they will rent to get it. Those that think they HAVE to invest through home equity will go elsewhere. As soon as the city center starts dying because no one wants to lose out on equity something should happen. I don't see that, does anyone else? Downtown Denver is still improving faster than most cities. What it COULD use is a diversity of rental price points so that so many aren't forced out. People like Ryan aren't leaving downtown because they can't buy a cheap condo.. they're leaving because they can't afford the rent. To those people a condo they can't afford is small solace and no different from an apartment they can't afford either.

Actually, we should be taking advantage of the unintended experiment downtown Denver is becoming and see just how crucial to the survival of a city home-ownership is. It seems like urban planning and design classes in the area could have some interesting things to say about what motivates people to live somewhere and it may be time to ratchet down the perceived importance of owning one's home to the health of the city. Maybe the mortgage interest deduction isn't as much help as it should be. Maybe people should be actually saving/investing in other ways besides just the walls around them. Based on my observations of Denver the last few times I've been there I'm definitely beginning to change my own views on these things.

[bcp]

A point on this topic...unless heavily subsidized, fixing the DL issue for condo towers will NOT help w affordability..they are really expensive to build. Its the small and.medium condo bldgs that will blossom to support some level of market rate affordability.

[TakeFive]

Originally Posted by trace™

There will be something that passes, everyone is behind it and everyone agrees that the imbalance is going to be a problem.


My guess: apartment prices will plummet once all these (what, 20-30k?) come on line in the next few years. As they do, competition will force rent everywhere down, as rents go down all those investors that bought up homes for rent income will start to sell as their rent return drops . That'll drive overall prices down, or at least bring some logical stability until more condos can be built.

I just don't see how apartments can make any sense at the rates going on.

Any thoughts on whether some of these will be converted to condos? My guess is not, as most (if not all) the financing is coming from entities that want long term cash flow, not immediate returns.

Real estate is historically and notoriously cyclical. There are a lot of rental units still to come online.

OTOH, downtown (and nearby neighborhoods) could continue to experience a virtuous circle for a number of years meaning if the office towers recently discussed get built and create more jobs then that would be supportive of rental units.

I would expect significant moderation in apartment construction downtown. Neighborhoods to the south and SE of downtown are likely still ripe for more units though.

[TakeFive]

Originally Posted by DownhomeDenver

So I'm not sure if this means anything but...see below from the Landmark Preservation Commission. Maybe it doesnt mean anything at all but "Owner has Withdrawn Application" seems rather negative to me.

While towers are cool and great for adding density, I wouldn't be disappointed if Country Club Gardens is left as is for a very long time.

[Wizened Variations]

IMO, the risks to the Denver real estate market boil down primarily to two crucial interconnected variables: the prime rate and real inflation.

While the Denver is now one of the faster growing US metro areas, the city is not immune from national issues, such as both the price and the availability of money.

These issues are more important, IMO, than local supply and demand considerations. If, for example, reducing QE funds raises bond yields and increases the cost of money (lender barrowing costs + risk factor + profit margin) interest rates could rise at least 2 percent quickly. Equally worth considering, would be the effects of the increased cost of money on the corporate junk bond market, where 6-7% bonds might now cost 9 or more percent. The increase in loan rate to consumers on house mortgages would be directly reflected in lower prices. The rise in junk bond costs would affect employment on a national level.

In each case, new and existing home sales would drop.

Inflation, too, is key here (and not the unrealistic CPI index). Inflation works wonders in increasing home sales IF the cost of money remains low, as the home is viewed as a rapidly appreciating asset. The side bar to this asset appreciation is that the accessed value of the home and taxes paid also increases, which becomes a market breaker if wages and other income fail to keep up with the inflation. The result is that the market segments into cost slices whose sales rate, and price appreciation are directly proportional to the increase of income of a particular segment, nominal or real. In today's economy, with the upper 5% percent or so of the population having income increase faster than real inflation, we see a booming middle high to high end real estate market, and, stagnation at the lower and middle end. (What appreciation we see in the lower segments has been caused in large part by the large number of individual low end homes bought by partnerships and rented out.)

There are two rules about buying a home. The first is that if you plan to stay in the home for 10 years or so, have money set aside to cover costs when (and if) the property goes upside down. The second, whether you are going to flip a house, or live in the house for a long or short time, is to invest smartly. Take the time and energy to investigate thoroughly the property in question. Know that if the deal sounds too good to be true, it likely is not.

[mhays]

I don't see rents every "plummeting" in value in a growing, prosperous city like Denver. If the DL issue is solved and a wave of condos starts to break ground a year later, they won't open for 2-3+ years from the solution. Also, new condo supply per year would likely be in the low four figures, drawing from both the house market and the apartment market, which are each in the six figures in terms of supply. That would compare to annual population growth of maybe 20,000 households or whatever. Further, depending on local rules, excessive apartment supply can be addressed by condo conversions. And finally, while apartment developers will overbuild, they're collectively nimble enough that price drops are pretty minor, or more like flattenings.

[Wizened Variations]

Originally Posted by mhays

I don't see rents every "plummeting" in value in a growing, prosperous city like Denver. If the DL issue is solved and a wave of condos starts to break ground a year later, they won't open for 2-3+ years from the solution. Also, new condo supply per year would likely be in the low four figures, drawing from both the house market and the apartment market, which are each in the six figures in terms of supply. That would compare to annual population growth of maybe 20,000 households or whatever. Further, depending on local rules, excessive apartment supply can be addressed by condo conversions. And finally, while apartment developers will overbuild, they're collectively nimble enough that price drops are pretty minor, or more like flattenings.

Values do not need to plummet. All that the market has to do is to drop 5 to 10%. At the very least, sales rates would rapidly decline short term, and, time on the market would lengthen. I would guess that sales would drop sharply at first, and, bargain hunters would swoop in and drive the price to a higher than the dip, but, lower than the peak, floor.

The apartment market is a totally different market than the residential or condo market, because rents can rise and fall based upon supply and demand on a lease to lease basis.

Right now, obviously, high end single home and apartment construction is where the money is going. While the high end single home end is directly related to increased wealth of that group, the increased number of apartments being built points to an aversion to the risks involved in building medium to low end condos and housing (this is true even in states with more realistic liability laws for those who build condos and single family homes.)

[denconyny]

Originally Posted by DownhomeDenver

So I'm not sure if this means anything but...see below from the Landmark Preservation Commission. Maybe it doesnt mean anything at all but "Owner has Withdrawn Application" seems rather negative to me.


MEETING AGENDA

Landmark Preservation Commission

1:00 p.m., Tuesday, July 1, 2014 at 201 W. Colfax Ave., room 4.F.6


.............


Update Item - City Staff

Development Agreement Amendment for Country Club Gardens

Description: Update on proposed amendment to Country Club Gardens development agreement. (Relates to #314-14 and #536-14 below.)


Demolition Public Hearings - Barbara Stocklin-Steely

#314-14 33 S. Downing Street (also known as 16-23 S. Downing St.; Legal Address: 15 S. Downing St. & 14 S. Ogden St.)

Description: Hold continued public hearing for demolition of front 6’ of Buildings CCG 1B and 2B, Contributing Buildings to the Country Club Gardens Historic District. Owner has withdrawn application.


Design Review Projects - Barbara Stocklin-Steely

#536-14 33 S. Downing Street (also known as 16-23 S. Downing St.; Legal Address: 15 S. Downing St. & 14 S. Ogden St.)

Description: Continued Conceptual Mass & Scale of Infill Construction. Owner has withdrawn application.

STAFF RECOMMENDATION: No action

This is from the July 1, 2014 meeting. However, from the next meeting that will be held on July 15, 2014, here is the entry concerning this.

http://www.denvergov.org/Portals/646/documents/landmark/lpc/agendas/071514_LPC_agenda.FINAL.pdf

Discussion Items

Barbara Stocklin-Steely Discussion Item on Conceptual Mass and Scale Proposal for Country Club Gardens, 33 S. Downing
Street (locally known as 16-23 S. Downing Street)

Also, from what appears to be going on here (if this project is going forward, it is filed in the latest Denver Developments Services Project Report dated May 14, 2014 - https://www.denvergov.org/Portals/696/documents/SitePlanReview/MajorProjectsStatusReport.pdf - p4, 20th item down "Country Club Towers") a couple of the buildings in Country Club Gardens would need to be demolished if the two 28 story (or so) towers are to be constructed, as per the pix below:

http://www.wwpna.org/files/Country%20Clu...pdf%20-%20Adobe%20Acrobat%20Standard.pdf









However, the discussion of massing here seems to already have been solved, as per the 2007 article below:

http://www.westword.com/2007-07-19/culture/summertime-blues/

Unfortunately, by the time the plan hit the city council last week, all but token opposition had folded. The preservationists had backed off, with some even testifying in favor of Broe's change. Critics backed down because there was an explicit threat that if Broe was denied the change, he'd put up the three towers he already had permission to build. This was obviously not a credible threat, but that fact was never understood by the opponents of development. Let's see, a developer is allowed to build three buildings but opts to build only two. Why? I've got an idea: The numbers won't crunch, and only two towers will sell.

And as for the Broe Group needing funds, they recently sold a DT tower:

http://insiderealestatenews.com/2013/07/01/broe-hits-it-out-of-the-park-with-downtown-office-sale/

Maybe these towers will be going up soon? Is the issue the demolishment of the two existing buildings, which already may be landmarks? Here is one more link from 2001 (revised 2006) that gives more info on this.

https://www.denvergov.org/Portals/646/do...untry_Club_Gardens_Design_Guidelines.pdf

[TakeFive]

Originally Posted by denconyny

And as for the Broe Group needing funds, they recently sold a DT tower:
http://insiderealestatenews.com/2013/07/01/broe-hits-it-out-of-the-park-with-downtown-office-sale/

Maybe these towers will be going up soon? Is the issue the demolishment of the two existing buildings, which already may be landmarks? Here is one more link from 2001 (revised 2006) that gives more info on this. https://www.denvergov.org/Portals/646/do...untry_Club_Gardens_Design_Guidelines.pdf

Wow... awesome info on the topic. Thanks for the link to Inside Real Estate as I no longer find the time. Great read! I enjoyed it partly as I had a chunk of Whiting stock for over 18 months before I cashed the gain and moved on. I'm also aware of Broe (generally). Looks like a quality project that should be moving forward to me. Thanks for your effort.

[TakeFive]

Originally Posted by Wizened Variations

IMO, the risks to the Denver real estate market boil down primarily to two crucial interconnected variables: the prime rate and real inflation.

I don't see interest rates on U.S.Treasury Bonds appreciably rising so long as the rates on German Bunds remains so pea picking low given the increasing global flows of liquidity.

I see no reason for any appreciable or prolonged inflation for the rest of this decade. In fact many are still more concerned with deflation than inflation.

With the bloom off the China manufacturing rose as they move to more of a consumer driven economy, the demand for commodities is calm just as significant new capacity is scheduled to come online. Fracking is making it LESS expensive to domestically manufacture stuff; especially of a chemical nature. This also applies to Mexico as Foxconn (Apple phones etc.) and others add manufacturing capacity just across the border.

Furthermore, the increasing move to "open source" and "cloud" computing should dramatically reduce corporate budgets for hardware purchases and IT personnel.

Skies look to remain sunny.

[Stonemans_rowJ]

Rents will no doubt come down overall with all these new units or at least stabilize. I see rents coming down more in the buildings that were built more "on the cheap," as they have more trouble leasing up and retaining tenants, especially buildings that are in a slightly less desirable location (Rockmount, Brighton Blvd, etc. comes to mind) These types of buildings are not equal in quality and amenities offered yet they are all seemingly trying to charge comparable rents to the higher quality new projects.

Millennials (aged 22-35) like Denver and are not opposed to buying- it's just not possible with down payment requirements, college loans, etc. compounded with lack of inventory in the core, which is where these people would want to live. Once you factor in down payment, closing costs, possible PMI, HOA, taxes, insurance, etc. it is NOT cheaper to own currently in the core neighborhoods. Unless you are putting down 20% or more which is hard to come up with for millenials unless you have help from outside sources.

Even if construction defect changes, is it really going to blow the lid off current condo prices in Denver proper? Land costs and construction costs are way up.

[Stonemans_rowJ]

Originally Posted by mhays

Further, depending on local rules, excessive apartment supply can be addressed by condo conversions.

The vast majority of these buildings are stick built EIFS with predominantly 1 bed units.

[mhays]

Those can be converted too, subject to local laws.

The only way prices will drop is if population growth shuts off or developers severely mistake the market. The current boom is happening despite a lot of people in roommate and extended family situations.

You say land prices and construction costs have risen. All true. How do you reconcile that with falling rents? In a growing market, rents will stay close to replacement costs. If rents go too high, supply will be added. If rents get too low, supply will slow, and since Denver is growing quickly, the gap will fill up pretty quickly.

Did Denver see falling rents in 2008? My city sure didn't, despite similar economic conditions. Instead they flattened, plus some moderate lease concessions. Condos were the problem. In both cities, rental construction picked up a couple years later.

I haven't heard any predictions that condos would really boom in either city, even if the defect legislation improves in Denver's case. You'd still have condo values that might not be high enough to justify construction, a general lack of buyer desire (much of the industry believes this is a mindset reset), and high hurdles for financing. Absent some changes across that board, it doesn't suggest a ton of condo construction. Construction will probably continue to be only cases that can finance without presales, who get the added benefit of building at today's prices but selling after the recovery is further along.

[Stonemans_rowJ]

Originally Posted by mhays

Those can be converted too, subject to local laws.

The only way prices will drop is if population growth shuts off or developers severely mistake the market. The current boom is happening despite a lot of people in roommate and extended family situations.

You say land prices and construction costs have risen. All true. How do you reconcile that with falling rents? In a growing market, rents will stay close to replacement costs. If rents go too high, supply will be added. If rents get too low, supply will slow, and since Denver is growing quickly, the gap will fill up pretty quickly.

Did Denver see falling rents in 2008? My city sure didn't, despite similar economic conditions. Instead they flattened, plus some moderate lease concessions. Condos were the problem. In both cities, rental construction picked up a couple years later.

I haven't heard any predictions that condos would really boom in either city, even if the defect legislation improves in Denver's case. You'd still have condo values that might not be high enough to justify construction, a general lack of buyer desire (much of the industry believes this is a mindset reset), and high hurdles for financing. Absent some changes across that board, it doesn't suggest a ton of condo construction. Construction will probably continue to be only cases that can finance without presales, who get the added benefit of building at today's prices but selling after the recovery is further along.

I was making the point that 500-700'sq units are fine for a year or two as a rental, but really aren't the product that the majority of people want to buy as a 5+ year investment. This could be an obstacle in conversion for many of these buildings which are predominantly studio and 1 bed.

Average rents probably will come down overall across Denver, but in the most desirable neighborhoods I do not think they will. Just as condo prices will not in these same neighborhoods. Rents will come down more for the older, less amenitized buildings, and the single individual landlord who cannot carry several months of 2 mortgages so drops the rent on his condo rental to just get someone in there.

[bunt_q]

Originally Posted by mhays

The only way prices will drop is if population growth shuts off or developers severely mistake the market. The current boom is happening despite a lot of people in roommate and extended family situations.

Population growth doesn't have to shut off generally, though. It only needs to shut off in the demographic that wants to live in that sort of product. And I think that is very possible. I simply do not believe that today's wealthy little popped collar 20- and early 30-somethings, who are flooding central Denver rentals now, will still want to live there when they un-pop their collars in their mid-40s, get a sore knee, realize their parents are sapping social security dry, and want to start building some equity. There is not an endless supply of these people. But right now, their only purchase option is in the burbs. In the city, there is very little in the gap between rentals and a majorly expensive single family home. Denver doesn't have a great stock of multi-family for sale housing to begin with.

Originally Posted by mhays

You say land prices and construction costs have risen. ... In a growing market, rents will stay close to replacement costs. If rents go too high, supply will be added. If rents get too low, supply will slow, and since Denver is growing quickly, the gap will fill up pretty quickly.

Except that it takes a very long time to increase supply. It takes no time at all to increase rents. What you are saying does not square with your contention that prices can't drop, when you consider that in the short term rental rates can quickly and greatly outstrip replacement costs.

Originally Posted by mhays

a general lack of buyer desire (much of the industry believes this is a mindset reset), and high hurdles for financing. Absent some changes across that board, it doesn't suggest a ton of condo construction. Construction will probably continue to be only cases that can finance without presales, who get the added benefit of building at today's prices but selling after the recovery is further along.

Seems that mindset is inevitable, unless the general appeal for urban living also wanes. Lack of buyer desire is based in unreasonable expectations of what a person can afford. Until they go shopping, that is. What you are describing means one of three things are inevitable - (i) a precipitous drop in homeownership rates over time, (ii) a mindset reset toward condos, or (iii) further suburbanization. Personally, I think it's probably (iii). The deck is stacked too heavily (both economically and culturally) in favor of desiring ownership; people won't rent forever. Which means, if condos aren't an option, we sprawl.

(And incidentally, the sprawl machine is BOOMING here in Denver, even if core-minded folks don't notice it. I had a client call on Wednesday and wanted to process 550 single family lots in BFE by Monday. And we're doing it, and they're selling. Central Denver is doing well, but in raw numbers, the sprawl machine is winning. My general lack of sleep these days is evidence of it.)

[Wizened Variations]

Originally Posted by TakeFive

I don't see interest rates on U.S.Treasury Bonds appreciably rising so long as the rates on German Bunds remains so pea picking low given the increasing global flows of liquidity.

I see no reason for any appreciable or prolonged inflation for the rest of this decade. In fact many are still more concerned with deflation than inflation.

With the bloom off the China manufacturing rose as they move to more of a consumer driven economy, the demand for commodities is calm just as significant new capacity is scheduled to come online. Fracking is making it LESS expensive to domestically manufacture stuff; especially of a chemical nature. This also applies to Mexico as Foxconn (Apple phones etc.) and others add manufacturing capacity just across the border.

Furthermore, the increasing move to "open source" and "cloud" computing should dramatically reduce corporate budgets for hardware purchases and IT personnel.

Skies look to remain sunny.

Disagree over the short to medium term on inflation.

Take the fear of deflation. This is a moniker used, today, to describe the effect of the fear of going upside down on paper. Deflation, today, as seems to be used by the mass financial medium, refers to the fear of the reduction of value of financial instruments, where the real mark to market price is less than the value of the note. This also is known as the destruction of capital.

This process is occurring while real inflation- price of housing, medical expenses (Obama care or not), college, food, petroleum, automobiles and entertainment is increasing far faster than the reported CPI (the CPI must be kept as low as possible due to Cost of Living Adjustments or COLA).

However, deflation, traditionally, refers to scenarios where the worth of physical assets remain at a near constant value or decreases in value slower than the drop in income. This tends to occur when the supply of money is reduced, rather than when vast amounts of money are printed. The issue, as always, is how to amortize, repay, or destroy debt.*

The interest rates being near zero at central banks reflects huge amounts of money being added into the system, which in the US at least, primarily serves to support stock equity (borrow money short term for stock buy backs), large, private equity LLC firms that buy corporations, and, large scale currency traders. The low interest rates are short term paper- as the maturity date lengthens, the interest rate is higher. Consequently, this very low interest money has to paid back quickly, or refinanced at a higher interest rate. This difference is shown in the huge spread between 90 day paper and the US junk bond market interest rate.

I am putting my own money on the likelihood of a "small" storm that will start before the midterm elections. I can see no period of sunny weather; rather I see economic instability slowly increasing, and, the odds of an unpredictable Black Swan increasing over the next few years.


*The price of the destruction of debt is the transfer of wealth up the food chain and the lowering of the standard of living of the bottom 90% of the working population. The continuing concentration of wealth inevitably results in economic decline long term.

EDIT: You should not compare the German Central Bank's monetary policies with the US Fed's policies because the German government and, the German people, tend to be far less in debt. It's like comparing Apples and Corn.

[EngiNerd]

Sprawl machine was pretty much shut down during the recession, but yes it's definitely back in full force again...and will especially be so if the Airport City plans move forward.