Condo construction in metro Denver has been hampered in recent years for several reasons, many of which are dissipating as the economy bounces back. But the one factor that continues to spook builders is the fear of being sued for construction defects. Such lawsuits can be so costly that many builders are steering clear of condos altogether.
That's the conclusion of a report issued by the Denver Regional Council of Governments. It echoes concerns expressed in our recent cover story, "Design Flaw."
Our cover story highlighted some startlingly lopsided statistics: As of July, a whopping 7,148 apartments were planned or under construction in Denver, according to the Downtown Denver Partnership, while the number of condos being built was just 145 units.
The DRCOG report contained similar statistics. Entitled "Denver Metro Area Housing Diversity Study," the report found the outlook for new housing in the metro area isn't very diverse at all. For instance, in 2006, for-sale attached housing (read: condos and townhomes) accounted for 30 percent of all new housing in the Denver metro area. In 2012, that number was just 11 percent. And most of that 11 percent was higher-priced units.
"The volume of construction at the lower-priced portion of the attached market has dropped off," the report notes. "In other words, the new attached product sold at the traditional price points (below those of single-family averages) is no longer being built."
Why not? The report identifies five factors: lending, foreclosures, economic and market factors, demographics and construction defect lawsuits. Whereas the housing crisis and subsequent recession caused banks to tighten their loan standards and the number of foreclosures to skyrocket, both of those factors appear to be calming down, the report notes. And though many people's wages have remained stagnant, Generation Y seems just as interested in home ownership as previous generations, it concludes.
That leaves construction defect lawsuits. Here's what the report has to say:
Since 2010, the costs attributed to construction defects liability have grown. Based on the assumptions modeled in this study, developers are estimated to need to pay an average of $15,000 of additional cost per unit due to construction defects.
According to an industry source, insurance premiums are 25 to 45 percent higher in Colorado than other states for comparable products. Developers are unlikely to absorb this cost as a reduction in profit margin, unless the margins are sizeable. These additional costs appear to be disproportionately impacting the feasibility of entry-level housing.
Additionally, the national builders interviewed for this project are not currently building for-sale condominium projects in Colorado and have no plans to do so in the near future. The identified reasons were the real and/or perceived costs and risks associated with construction defects, insurance costs, and the potential for construction defects lawsuits.
What can be done about it? Last year, lawmakers killed a bill that would have made it harder for homeowners who lived in condo projects built around light-rail stations to sue builders for construction defects. Those who backed the bill told Westword they plan to try again in 2014, possibly using the report to help shape their strategy.
"God love DRCOG," Tom Clark, of the Metro Denver Economic Development Corporation and the Denver Metro Chamber of Commerce, joked.
But attorney Jesse Witt thinks the report only tells part of the story. "I didn't think it was necessarily bad," he says. "It's just very limited." Even the report's authors note that they mostly spoke with attorneys who represent builders -- and not attorneys who represent homeowners, known in the construction defect litigation world as plaintiffs attorneys.
"While there was a concerted effort to reach out to both plaintiff and defense attorneys, very few plaintiffs made themselves available for interviews," the report says. "As a result, the perspectives summarized below reflect more of the development industry and should be recognized as one side of the discussion."
Witt says there's no question there's a perception that nearly every condo project gets sued, but he's not sure that's the reality. The way he sees it, the real problems are an oversupply of condos due overbuilding in the early 2000s and more recent foreclosures, coupled with low-quality construction that causes damage to the units.
"If you do it right and there's no damage, you're not going to get sued," he says. "No decent lawyer is going to take the case.... I don't know if we should change the law because of the perception that (builders) will be sued, which may or may not be true."
Continue to read the full report.
More from our Follow That Story archive: "Apartment boom: Will the 15,000 apartments being built in metro area convert to condos?"
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