John Rebchook is a former Rocky Mountain News reporter with more than 30 years of experience in writing and communications... A U.S. government report shows that last year building permit activity in Colorado fell by 50.8 percent in 2009 from 2008. The Rocky Mountain region report showed that there were only 9,393 residential building permits – both for housing and apartments – issued last year, compared with 19,086 in 2008. The report showed Colorado had the biggest percent drop of the six states in HUD’s Region VIII. The overall percentage drop for the states – Colorado, Montana, South and North Dakota, Utah and Wyoming – was 27.6%. Utah had more building permits issued – 10,627 – than in Colorado.
The report said the overall drop was “due largely to a cutback in multi-family construction,” although it did not break out the drop in apartment and housing construction. There were 30,334 total permits issued last year in the six Rocky Mountain region states. In the Denver metro area, building permit activity peaked at 28,310. “Now that is a comparison for you,” said economist Patty Silverstein, principal of Littleton-based Development Research Partners.
Silverstein noted that there were 3,408 building permits issued in the Denver metro area last year, the lowest on record. (For a separate report on the Denver metro area’s construction activity, please go to this link.)
“The regional numbers track pretty well with the Denver-area numbers,” Silverstein said.
Jeff Hawks, principal of Apartment Realty Advisors in Denver, said that apartment construction in the Denver area “has come to a screeching halt. There really was no new construction at all.” From about 2005 to 2007, apartment communities in Denver and almost every other major city in the US. were selling for cap rate of 4.5 percent, while cap rates have now risen to 6.5 percent. The cap (short for capitalization) rate is the net operating income divided by the sales price or value of a property expressed as a percentage. The lower the cap rate, the higher the sales price.
“I believe that every apartment building that was sold during the past couple of years at these low cap rates is not worth its debt,” Hawks said. “Because of that, the developers and lenders have pulled in their horns. They have to handle these legacy issues and they are not building anything new. To build anything new today in Denver, you would have to convince your construction lender and your equity partners that you could basically get 20 percent or 30 percent more in rents than you are getting today.”
Raising rents is tough at a time when a lot of new high-paying jobs aren’t available, he said. The HUD report noted that Colorado’s unemployment rate at the end of last year was 7.5 percent, the highest of the six states in the Rocky Mountain region – that had an overall unemployment rate of 6.8 percent. Colorado’s unemployment rate, however, was lower than the U.S. unemployment rate of 10 percent. The report also noted that the population grew 1.7 percent from the 52-week period ending on July 1 for the six-state region, even though the number of non-farm employment fell by 3.7 percent in Colorado. That compared with a 3.6 percent drop for the region and a 3.0 percent drop for the U.S., according to HUD.
If Colorado would see job growth, and it were possible to raise rents by 5 percent annually, it would still be another four years before new apartment buildings would be built, Hawks said. “And we have 180,000 kids turning 20 in Colorado over the next five years, which is going to mean we are heading for a huge shortage of apartments,” Hawks said. “The last time we saw that kind of increase was from 1969 to 1975 and we built 70,000 units. We’re going to face a real push and pull with supply and demand. We’re going to see a real shortage of apartments.”
Jeff Thredgold, corporate economist for Vectra Bank, said that Colorado’s overall housing market still is in better shape than many other places in the country, such as California, Nevada, Arizona and Florida.
“Colorado is in a recession, but Colorado did not get hit as hard in the recession, as some of these other states that had these excesses of housing,” Thredgold said. “Colorado did not see the huge increase in housing prices and then the huge deflation of housing values as some of these other states. Colorado did not get as carried away as some of these other states. Even states like Idaho have been hit hard.”
Still, the drop in construction activity hurts the entire economy, he said. “It hurts everybody,” he said.”We have seen a huge decline in home building across the country from its peak. But of course, you don’t want to keep building when you are already over-built. There are some excesses to still be worked off in Colorado, but we’re not nearly as bad as a lot of other states.”
S. Robert August, a Denver-area housing consultant, said the drop in building activity, “is a bad thing. It is bad for Colorado and it is bad for the country.” August blamed the banks. “The biggest issue is that banks are not lending money,” August said. “Until the banks start lending and circulating money, the permits are going to keep going down. Pent-up demand is not being met, based on the fact of the organic direction of life continues to go on.”
He said that big, national builders, such as Denver-based MDC Holdings, parent of Richmond American Homes and KB Home, are continuing to build because they have lines of credits to finance construction. “It’s the smaller to mid-sized buildings that do not have the ability to get loans,” August said.
| State | 2009 Permits | 2008 Permits | Percentage change |
|---|---|---|---|
| COLORADO | 9,393 | 19,085 | -50.8% |
| Montana | 1,745 | 2,485 | -29.8% |
| North Dakota | 3,065 | 2,485 | 6.8% |
| South Dakota | 3,529 | 4,117 | -14.3% |
| Utah | 10,627 | 10,969 | -3.1% |
| Wyoming | 1,975 | 2,384 | -17.2% |
| Rocky Mountain Region | 30,334 | 41,911 | -27.8% |
Source: HUD
Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.
A shortage in apartments will lead to a shortage in quality entry level home ownership in choice neighborhoods. In addition to unlocking the bank vaults, we need to add modest density to our existing neighborhoods and allow for organic growth. While we struggle to find affordable for rent and for sale opportunities to deal with the incoming wave of Gen Y millennials, we should be encouraging smaller infill housing within the urban and first ring suburban areas. Open the vaults and leave the rest up the entrepreneurs of Denver.
When you look at the drop in permits from 2007 to 2008 and use that as the basis for the 50%-plus percentage drop from 2008 to 2009, you’ll see that residential(including apartments, condos, attatched and SFR) is down over 70% over the past 2 years.
Though the past year (even two) certainly have been down, it will be interesting to see what 2010 will do to these numbers.
Has anyone been tracking sales in the mountain resorts, particularly Winter Park, Vail, and Beaver Creek? I was in Grand County over the weekend, and it seemed like the whole county was for sale. I'd love to see some statistics.
There should be enought housing for every family in the area. Making housing more than the population of the area may cause several over housing!