"The rent is too damn high!" was cemented into our vernacular by Jimmy McMillan during his New York gubernatorial debate in 2010. Well, rent is much higher now, especially here in Colorado. This week, a couple in Aspen who are both doctors, cannot find housing after their rent doubled to $25,000 a month.
This amount is an outlier, but it is a real example of how rent prices in areas like Aspen, Crested Butte, Steamboat Springs, and Summit County are motivating people to live in the next town down the road instead. To combat the lack of affordability, Colorado state legislators are trying to pass a slew of housing related bills, some with unintended consequences.
The State Capitol is busy at work with a focus on housing
Jared Polis, Colorado’s Governor, stated that housing affordability is a top priority in 2023. In November, Colorado voters passed Proposition 123, which dedicates $300M annually to create more affordable housing. In conjunction, legislators have been trying to pave the way with bills and amendments.
Recently passed, local governments now receive a first right of refusal to purchase multifamily developments when they come up for sale, and local governments can no longer have laws restricting the growth of residential housing. Some introduced bills have been even more contentious and have not passed.
Notably, a bill enabling rent control and another bill unrestricting land use did not make it through the legislature. The latter made it through the House and caused a lot of concern amongst towns. The bill would have paved the way for higher density housing by banning municipalities from using zoning rules to limit development.
The bills mention that they are targeting affordable housing, stating that Colorado needs to add roughly 162,000 affordable housing units by 2027. In this context, "affordable" is being defined as essentially everything other than luxury housing. Our entire portfolio of newly built housing (801 units) is only .005% of the proposed need.
Interestingly, the land use bill had no guidance on mandating affordability, only holding faith that easing building restrictions will automatically lead to more affordable housing by easing the supply and demand imbalance. Opposition votes were predominantly by mountain town representatives.
Colorado Senator Dylan Roberts, an Avon Democrat who represents mountain communities, cast a decisive vote to kill the bill. “The problem in our mountain towns is that [the bill] didn’t ensure development was for affordable housing,” Roberts said. “So I believe that it would have incentivized a lot of developments that would have been short-term rentals, luxury vacation homes — not the kind of housing we need.”
The demand to live in Colorado’s emerging communities has grown exponentially, so the desire to eliminate growth restrictions all together may make sense at surface level. However, the more specific bills can be, especially when addressing affordability, the more likely mountain town representatives will be in favor. It is likely that more bills will be introduced in the next legislative session. Colorado has continued to be a business-friendly state and we have confidence that our legislators will create policy that supports the needs of our state.
Why rental demand is expected to continue to remain at record levels
Even with new Colorado legislation in the works to help buyers and renters, demand continues to outpace supply. The median home price in our target markets has nearly doubled in the last five years, and has doubled nationwide in the last decade.
The average U.S. homebuyer’s monthly payment hit an all-time high of $2,538 in April, 2023. According to Gallup, only 21% of Americans say it's a good time to buy a home in 2023, the lowest on record (the poll began in 1978). This is driving more people to continue to rent who would otherwise typically be purchasing a home.
Eventually, “when rates come down, we’re going to be in store for another hot housing market where there are more buyers than sellers jacking up prices because we haven’t solved the problem” of low inventory, says Daryl Fairweather, chief economist at Redfin. “It’s still that affordability problem. That’s going to stay with us.”
Homebuilder confidence has plummeted recently, approaching Great Recession lows. Perhaps more importantly, housing starts have never recovered to pre-recession levels, are now declining, and are expected to stay low. Over the last 15 years, when the country needed above-average housing starts to increase supply and affordability, we witnessed record historical lows.
The continued lower than average new construction has led to price increases across the spectrum for housing. For rentals, July of 2022 brought a record high for the 17th month in a row at $1,879 a month national average. Since, rents have plateaued, but remain near or at record amounts.
As other home builders have gotten weary and are even halting projects, we remain optimistic, especially as long-term owners. With our long-term strategy, we have been able to tolerate short-term volatility in rates as we remain prudently leveraged. Furthermore, we are currently focusing on only one new project at a time. Whereas before, we were originating two to four developments at once. This focus has allowed us to hedge risk by making very selective investments.
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