Denver Multifamily Housing Boom – What it Means for Construction Risk

As the Denver-Boulder-Colorado Springs market continues to be flooded with multifamily housing (both new and value-add), the demand for construction, construction finance and supporting services has grown right along with it. This has given rise to talk of when this run will end, and whether the Denver multifamily market is getting overheated. Well we’re not economists, but it is worth noting that the multifamily market on a national level is probably more mature, in part because it was not constrained by the “High Volatility Commercial Real Estate” or HVCRE rule that did constrain other types of construction lending in recent years. Whether you call it “hot” or “overheated” there are some additional construction risks that come into play with any booming market as we’ve seen firsthand in our construction risk management practice.

For one, labor constraints and particularly a shortage of qualified labor, can present multiple challenges. If a General Contractor really only has capacity for 4 jobs at any given time, but he’s taken on 6 jobs, is yours the 6^th project? Are you getting the A team or the C or F team? Will they be able to keep up with the project and cash flow? And how will this affect quality of the project? How do you find out? You should do an independent Contractor Evaluation ahead of time to assess the team’s capacity and qualifications. If your project is already in progress, then it behooves you to have regular and thorough construction progress monitoring inspections and documentation to detect early warning signs.

We’ve also been observing pricing “gauge effects” in hot market – and not just due to the inability of supply to meet demand, but also to keep qualified subcontractors from getting poached to more attractive project! This sort of gauge event may not always be reflected in price data like Marshall & Swift, so a healthy budget contingency is needed. To help prevent subs from walking, it is wise to have a solid funds control and disbursement process in place where the subcontractors are getting paid directly and on-time, rather than relying on the GC to distribute the funds.

Lastly, due to these and other factors, the risk of project delays or standstills is increased. This is the last place anyone wants to be as it only compounds the problem. Of course time is money, but also having to replace a sub or GC only gets more expensive the further into a project you are.

This may sound a bit doom and gloom, but many of these issues can be avoided with a solid construction risk management program in place starting from the pre-closing due diligence and continuing through project completion. Armed with that, you can keep gettin’ while the gettin’s good in Denver or elsewhere.