Builder groups oppose Denvers new mandate to grow affordable housing, warn plan could backfire

More expensive housing and less new housing overall; that’s what some trade groups and market analysts say Denver’s proposed affordable housing mandate would lead to in the city if adopted.

“I’m really disappointed that Denver is going down this path,” said Cary Bruteig, who has been tracking the metro area’s apartment market since 2004 through his company Apartment Insights. “I think their solution is going to make the problem worse.”

City Councilwoman Robin Kniech has been working on housing policy for two decades. In that time, she’s heard the same arguments from the development industry over and over again.

“Every policy and every housing agreement I have ever done I have been told will kill development,” Kniech said this week. “I still stand here today and look out my window and see the cranes. Ultimately, the market is the evidence.”

Denver housing and community development officials rolled out the proposed mandate last week. Members of the public are invited to submit comments online through March 14. From there it could be headed to the planning board, the City Council and the municipal code.

It’s the second iteration of a policy proposal created through the city’s expanding housing affordability initiative. A new state law last year made it possible as Colorado as a whole grapples with a housing crisis.

The policy would shape development in the city in several ways including increasing “linkage fees” on commercial and small-scale housing development to feed the city’s affordable housing fund.

The most ambitious element would make it mandatory for developers of any project of more than 10 apartments or condos to set aside between 8% and 15% of the project as affordable housing or pay substantial fees. The cost of not providing affordable housing in a new building would start at $250,000 per unit, according to a summary document the city released last week. The affordability requirements would remain in place for 99 years, a considerable amount of time in a place where median rents rose 77% and median home prices shot up 79% between 2010 and 2019, according to city data.

In accordance with the state law, the policy includes incentives for building affordable units including cheaper permits and reductions to the number of parking spaces required on a property.

Those are negligible carrots compared to the big stick the city would wield should this policy become law, said Drew Hamrick, the senior vice president of government affairs for the Apartment Association of Metro Denver.

“Affordable housing programs can work if the incentive you give to the developer creating the community roughly matches the amount of lost rent,” Hamrick said.

When there is an imbalance in the cost vs. the value, the burden will be passed on in the form of higher rents, he said.

“Even if you buy the concept that higher-income tenants ought to pay more rent so that lower-income tenants pay less, it completely removes any material funding by the city itself,” Hamrick said. “They’re not paying for the affordable housing and it completely removes all the rest of us that don’t live in the (apartment) community from paying our fair share for affordable housing too.”

Higher market-rate rents is one of Bruteig’s concerns. His other worry is that fewer apartments will be built period as more developers, already struggling with scarce labor and expensive materials, decide they can’t make the necessary profits to make projects worthwhile.

Any drag on new supply could deepen the housing crisis.

“Here’s what going to happen as it gets more expensive to build in Denver: Developers will go elsewhere. They will build in the surrounding counties,” Bruteig said. “And Denver will have less housing until the rents move up high enough to make it worth it to build in Denver. That has happened over and over and over again in cities across the country.”

Bruteig surveys the seven-county Denver metro area through Apartment Insights counting every building of 50 more apartment homes including subsidized and income-restricted buildings. His surveys cover roughly three-fourths of all apartments in the market, he said.

Developer interest has never been higher. There are roughly 38,000 apartments under construction now in metro Denver and another 57,000 in the planning stages, Bruteig said. In Denver, those numbers are 17,000 and 28,000, respectively. That’s a record high.

Last year saw a huge surge in new apartment starts, Bruteig said. That pushed what he calls “developer success rate” (the percentage of units in planning that actually moved into the construction phase) to 46% up from 28% in 2021. In 2011, that success rate was over 80%, he said. But he worries that could quickly be undone in Denver under the city’s proposal.

The costs of an affordability mandate don’t stop at capping rents on some units. Managing a building where some residents have to be qualified based on their income levels requires oversight and paperwork, Bruteig said.

“All of these costs have to be pushed through at the property level,” he said. “Forcing every market rent project in Denver to cope with also managing rent and income restrictions is counterproductive and very inefficient.”

The federally funded low-income house tax credit program has been successful in metro Denver, according to Bruteig’s surveys. In 2005, projects built with the federal tax incentive made up 7.2% of the market. Now they’re closer to 10%. His data shows that since 2005 the number of conventional apartments in the market has risen by 68% while the number of affordable apartments has gone up 144%.

Whatever the speed at which affordable apartments are being built today, it’s not enough to offset skyrocketing cost of living in the eyes of some city leaders.

Kniech, who represents the city at-large seat on the City Council, is a member of the advisory committee that worked with city staff on the affordability policy.

“It’s a strong proposal,” she said. “This policy will produce a modest but steady supply of housing for our service workforce that is struggling to afford to stay in the city that they help run.”

Kniech is fed up with the sky-is-falling reaction trade groups have to affordable housing policies. The scenarios she is hearing from the Apartment Association of Metro Denver and others suggest landlords aren’t already charging the maximum rents the market will bear now.

She pointed to a recent study of more than 1,000 so-called inclusionary housing policies across the U.S. as evidence that the industry is crying wolf. A report from Grounded Solutions Network, a national organization that supports inclusive housing, found that affordability policies have little or no impact on the cost of new market-rate housing (increases never exceed 3%) and that there is no credible evidence housing production is limited by them.

“Denver has higher housing requirements even today than other cities in our region,” Kniech said, referencing the city’s existing linkage fee that has been in place since 2016. “But rent increases have been higher in many suburbs. It proves that market demand and many other factors influence rent increases as much or more than housing policy requirements.”

The Home Builders Association of Metro Denver, a trade group that represents 17 builders in the city among its almost 500 members, sent a letter to city staff and the advisory committee in December opposing the affordability mandate.

Morgan Cullen, the organization’s director of government affairs, credited the city in working with the industry on a “robust stakeholder process” and reducing the percentage of affordable units that would be required in some for-sale condo projects. Still, the home builders remain flatly opposed to the concept of zoning rules that mandate affordable housing in general.

Hamrick, meanwhile, said the city’s proposal has not materially changed since the outset. He said if the city really wants to make a dent in affordability it should embrace an idea popular with the YIMBY, or Yes In My Backyard, movement: change zoning in neighborhoods full of single-family housing to make it easier to build more apartments and condos there.

“What the city ought to be analyzing is how do we make more of our space available for denser, taller, more compact development?” he said. “That would be a game-changer.”

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