Escalating construction costs hampering new construction

FORT COLLINS —  Developers are hesitant to take on large residential projects in Northern Colorado despite there being an increasing demand for them, citing deterrents of higher construction costs and water-tap fees, and the lengthening of the entitlement process.

Realtors and developers on Tuesday at BizWest’s CEO Roundtable on Real Estate said that the short supply of homes coupled with the growing population is driving up home costs in Northern Colorado, impacting companies trying to recruit workers and putting a damper on economic development for the area.

“A homeowner is in good shape, because equity is at an all-time high,” said Brandon Wells, president of real estate brokerage The Group Inc. “Current conditions —  being undersupplied with costs that are too high — is driving home value appreciation,” he said. “We are approaching double-digit appreciation.”

Wells and Nathan Klein, a partner with LC Real Estate Group, said homebuyers entering the Northern Colorado market from the Bay Area are bringing “a lot of cash” and the prices here don’t bother them. But people coming from the Midwest are concerned about prices here. In the meantime, the high prices are creating a generation of renters.

“We’ve no product to fill that gap,” Wells said. “The entitlement process is now up to three years before a developer can bring a project to market.”

Kris Pickett, manager of consulting firm Olsson Associates, said it is difficult to find lots on which to build; plus, there isn’t a new wave of developers to take on the challenges.

“There’s no money to be made as a developer,” Klein said. “Every input is costing more — water, asphalt, wood … and water is a significant undertone here … there needs to be more efficient water-distribution systems.”

Kevin Brinkman, chief executive of real estate development firm Brinkman, is concerned over President Trump imposing tariffs on imported steel and aluminum.

“It’s amazing how much steel is used in constructing a building,” Brinkman pointed out.

Stu MacMillan, owner of MacMillan Development, said right now is a difficult time to develop, because of water driving up costs. He also said in Fort Collins, there is an abundance of requests to develop student housing.

Connie Dohn, co-owner of Dohn Construction Inc., said a shortage of skilled construction labor force adds to the length of time it takes to complete a project, increasing costs.

“There aren’t a lot of young people entering the building trades, and we have to pay more than what they (inexperienced) are worth,” she said.

Dohn believes there are opportunities in the condominium market, but because of the state’s construction-defects laws, it is difficult for a developer to get insurance to cover a project.

“There is a greater risk at this lower end of the market,” she said.

The CEOs in the room agreed that a reform of construction-defects laws passed last year to help spur condominium development fell short of its goal.

Wells is fearful that proposed slow-growth initiatives will exacerbate the problems of high housing prices. “We need to solve the condo market problem, he said.

Commercial insights

The hottest sector for commercial construction has been in industrial and warehouse buildings.

Steve Kawulok, managing director of SVN/Denver Commercial LLC, said industrial lots are selling in the region, being termed as “spillover from Denver,” as land costs increase in and around that city.

Kittie Hook, a broker with Newmark Knight Frank in Denver, predicted development sprawl from Denver “has already begun to move north” and will continue.

Kawulok observed that a lot of commercial property is being snapped up more and more by outside capital.

“One out of four buyers are bringing in fresh money, and one-third of the dollars being spent is by outside buyers, adding a new dimension,” Kawulok said.

Klein said larger investment groups, such as real estate investment trusts, are more apt to invest and build here, because they don’t require the same return on investment as a local developer.

Lease rates

Josh Guernsey, a principal at Waypoint Real Estate, said the office market is tight, but lease rates haven’t been going up that much. He also said companies are downsizing space to keep rates lower.

Guernsey believes technology is allowing companies to work with less space.

“Now, a person’s office can be in their  iPad.”

Guernsey said companies in the past may have leased space to provide 225 square feet of space per worker, but when they rework their lease, they drop that to 175 square feet per worker. “It’s a substantial cost-savings,” he said.

Mark Bradley, owner of Realtec Commercial  Real Estate Services in Greeley, said as companies recovered from the recession, “they squeezed space and created open office concepts to save money.”

New construction of office space in Northern Colorado is almost nonexistent, Klein said, because construction costs are up and lease rates are not keeping pace.
“Current lease rates don’t warrant new construction,” he said.

Steve Schroyer, director of real estate for Blue Ocean Enterprises Inc., said buying dilapidated buildings and repurposing them is becoming harder to do.

“It’s a tough environment. With increasing construction costs, it’s hard to complete a project and hold down rents.”

Participants

Mark Bradley, principal, Realtec Commercial Real Estate; Kevin Brinkman, chief executive, Brinkman; Connie Dohn, co-owner, Dohn Construction; Josh Guernsey, principal, Waypoint Real Estate; Kittie Hook, broker, Newmark Knight Frank; Steve Kawulok, managing director, SVN/Denver Commercial LLC; Nathan Klein, partner, LC Real Estate Group; Stu MacMillan, MacMillan Development; Kris Pickett, manager, Olsson Associates; Steve Schroyer, director of real estate, Blue Ocean Enterprises Inc.; David Shigekane, chief executive, The Neenan Co.; Will Welch, chief executive, Wm. T. Welch Co. LLC; Brandon Wells, president, The Group Inc.

Sponsors

EKS&H: Josh Billiard and Kristin Turner; Hub International: Dan Mills, Nikki Mosbrucker and Eric Slinger; Elevations Credit Union: Kari Coover, Nadine Trujillo-Rogers and Bryan Watkins.

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