Eric Entlich

Navigating the Future of Middle-Income Housing

The 2023 MWM Denver Multifamily Summit, hosted at IMA Financial Group in Denver on September 7th, brought together local industry experts to discuss the challenges and opportunities facing the middle-income housing sector. The discussion shed light on critical topics such as affordable housing, government programs, construction costs, and the future outlook of the multifamily industry in Denver.

Moderated by Ashley Combs with MBH Architects, panelists included Ellen Hafer with Panorama Commercial Group, Eric Entlich with Continuum Partners, Darren Kerfoot with Brinkmann Constructors and Tyler Elick with Brikwell.

TYLER ELICK: “In Denver County in a 1-person to 4-person household, 100% AMI is $85-$125k year – so you’re talking first responders, public employees – a large cohort. What we’re seeing, especially since Denver has grown into a Tier I city since the great financial crisis and has had this boom for development, is market rate rents go from barely breaking $2/ft to $3.50/ft ... and increasing 6-7% year over year. Then you have 60% AMI below being addressed through government subsidies, tax credits, etc. You have this strata that is going unaddressed. In many instances, this is the backbone of society – your teachers, your firefighters, your police. All of these events have created that missing middle-income housing, attainable housing need and we see this growing,” said Elick.

Panelists discussed the middle-income housing Senate Bill enacted by CO Senate Bill 22-232, and what it means to the middle-income housing market.

The newly created *Middle-Income Housing Authority (MIHA) will acquire, construct, rehabilitate, own, operate, and finance affordable rental housing projects for middle-incoming workforce housing and aims to address the housing gap by awarding opportunities to build middle-income housing projects. It operates differently from market-rate housing and focuses on fast-tracking construction to reduce project timelines.

These programs offer tax incentives and financing options to encourage developers to build affordable and middle-income housing units.

ERIC ENTLICH: “So what MIHA does is take applications, they sift through and then they're awarding you the opportunity – not the money- to build a middle-income housing project. This will be a state-owned project at the end of the day. So it's different than the market rate. It's a it's a different model. But as a developer, I believe we bring the capital stack to the table. It's not something MIHA is going to put a bunch of money in… It’s all up to us to bring the deal together. The cost of constriction is the cost of construction. The cost of design is the cost of design.”

“One of the nice things is an AHRT program that's supposed to fast-track entitlement, so instead of 16, 18, 20 months, maybe it takes 12 months. So when you look at a project 12 months of time is much better than 16-18 (months) – that’s an advantage. Has an MIHA project gone into that? No, because there is not one that exists — but it will exist soon. But when you factor all of that in – construction, design, land, entitlements, and the cost of money. The only thing that's really a variable really is the cost of money. So that's the secret sauce to middle-income housing,” said Entlich.

ASHLEY COMBS: What are potentially some of the challenges you see with this program? Every governmental program subsidy or anything of the kind has its challenges and constraints around it. What do you think will be the biggest one or two with MIHA?

ERIC ENTLICH: “My guess is going to be getting this capital stack into the first few projects. And once we see that happen,  people will start to learn because, in the end, it's going to help our entire world of Denver out and then it will start to grow and then will solve the problem that all of us have because it’s not sustainable.”

TYLER ELICK:  “The legislation technically created a special purpose authority who can issue bonds and exempt taxes. The tax exception is to support the deal economics and supplement revenue, as opposed to traditional market rate, ownership will qualify renters and restrict rents. You’re essentially signing up that you’re not going to ride market rents.”

“So there’s a trade-off there. This pilot program has been created, enacted through legislation, and is now in the administration stage, there’s still a free market that has to buy these bonds. So there is the testing ground of the pilot that’s happening right now.  There’s a clear path. What we’re seeing now is an attainable housing problem is emerging — the challenge has been emerging for a decade. There are financial instruments and government initiatives in place that can help and now it’s the free markets job to step up and provide the 3500 units that this pilot has enabled,” Elick said.

ELLEN HAFER: “I do think in our brokerage we see a lot of challenges that can bubble up, some of them come through as reasons to not move forward or reasons to put something on the back burner and wait a little while and see what happens. But I think the majority of those challenges start with uncertainty — and that’s uncertainty with construction costs, that's uncertainty with timelines, that's uncertainty with their own money — money is very expensive right now and how are they going to be able to get to the finish line? So the challenges have been around can we present a solid playbook to help move this forward?”

“We are seeing a very big gap between our sellers and our buyers when it comes to pricing – we do have a pretty significant gap and that conversation is something that we are having daily.  There is not a lot of negotiation space. So being able to provide additional options and opportunities is really important right now,” Hafer said.

DARREN KERFOOT: “We’ve all had the hard convo about costs going up, there's not enough labor, etc, everyone knows that story. But I think what I've seen in the last year, we can go back before 2019, historically, pricing can go up 5% every year so I'd say now in reality at this point, we're about 30% increase. I think we're like halfway to being at a normal price, you know, going back to 2018 to where we are right now. With that, you know, yes, there's a shortage of labor which everyone knows. But as jobs are starting to slow down, people are getting hungry to work in sub-contractors pools.”

“Wood has been through the roof, but it has gone down. Steel is just about where it was supposed to be a couple of years ago. Steel was insane years ago, but now we're seeing more reasonable rates and you develop those relationships with steel guys and those numbers will start to come down…People are very hungry for work right now.”

“One thing I will say that has been encouraging that I see is across the street is Adams 12 (Five Star Schools), a beautiful facility for trade school workers. They do welding, electrical work, and plumbing work. It is encouraging to see that kind of investment in the marketplace so that people can be excited about the trade school instead of maybe going to college,” Kerfoot said.

ASHLEY COMBS: How do we overcome challenges with subs/labor shortages which are 60-70% full for next year?

ERIC ENTLICH: “If you look at some of the subs, they have been behind on every project the last decade. They have a D-plus team, maybe a C-minus team on all 12 projects they’re doing. Their best bet is to call in a couple of B teams and go crush some projects. If you talk to the subs that's what they want. They want to go back to 2004, 2005, and 2006 and all of those projects. They were on schedule. They were on budget within a day or two, but they were good projects.  Today. If a project finishes two to three months late, that's a great project, that’s the best project we’ve had in years.  That’s not how it should be.”

“From the finish trades on - drywall crews on, those guys need to pull their crews together and create some A and B teams and finish those projects and finish them well because nobody rents the concrete and framing in a building — they rent tile, drywall, flooring. That’s what they rent.”

“I think we're going to see some relief in some of the concrete trades, from drywall on. And even if they go up a little bit (in price) and they finish the job on time… three months of rent, six months of rent is a lot of money,” Entlich said.

ELLEN HAFER: “I would add that timing has been a big issue for a lot of our investors and developers.  They can't even get to the point of getting started. They’re holding this property for a very long time before they can get anyone out there legally and that costs quite a bit of money and it’s something that people are really looking at,” said Hafer.

DARREN KERFOOT: “We’ve been a victim of our own success. We’re getting to the point of homeostasis. If we have new assumptions we can rely on instead of uncertainties, we can at least start to balance out the new normal.”

ERIC ENTLICH: “Maybe our pricing is leveling out. Maybe we can get products. It's a good thing. Maybe our lead times aren't 55 weeks for switchgear. So there are some good things that will hopefully start to come out. We'll get back to reasonable lead times only, no ridiculous escalation clauses, and then build projects and not have to deal with things that aren't simple construction-related items.”

Panelists emphasized the importance of creative financing solutions, including leveraging government programs, to make multifamily deals financially viable. They also discussed the potential benefits of modular construction and the need for standardized, replicable building designs to reduce costs.

TYLER ELICK: “It’s about getting creative and utilizing sources that are emerging. We have had some success by looking at some of these government programs. (It’s about) being creative and utilizing sources and structures that are emerging such as the Mid-Income Housing Authority as well as established low-income housing tax credits, etc.

ERIC ENTLICH: “We need to start to look at what can we do better. Modular is very clever. Maybe we are able to come up with prototypes that you can build and repeat and not fight each other for the newest design that no one’s ever built before. So the more we can start to figure out how to build things and replicate things (the better). Even subs can build the same thing over and over again.”

ASHLEY COMBS: “Modular is one of those options that we're definitely seeing and it took us a while to find our efficiencies. We need to be very hand-holding with the inspectors and keep them in their jurisdiction. You have to pull two permits for modular – offsite and onsite. There are efficiencies to be found within modular just like with anything. You need to do it a few times, you need to find your team and then stick with the game plan,” Combs said.

ELLEN HAFER “I would extend this further into just actual financing. Everyone's promising creative financing but the fact is, at the end of the day it can only be so creative. If you can find the tools, find the people, find the partners that can work with you, and go on repeat and try new things but also go back and try again and see what you can change is really the only way we are going to be able to keep moving deals forward.

ERIC ENTLICH: “With the modular, it’s also educating contractors of what you need to have and what the modular (contact) says. That’s the magic, that’s the secret sauce… because the hard costs are the hard costs. You may get it quicker, that’s the advantage. But you’re also spending money well before the permit and that’s a little scary. So that's the trade-off of the two. In six to eight months before you get a permit, you're spending money —and a lot of money— but you get the product delivered quicker.”

“When (the modular) shows up, you're not going to have to deal with the drywall guy, the tile guy, the cabinet guy, and everyone else who struggles here. It’s kind of done. So it's a brilliant, brilliant model,” Entlich said.

Kerfoot added that early communication and team selection is key.

“Getting GCs like us involved early on in the process, you know working through some design issues, setting up some allowances, creating details and geo-tech reports to understand implications better now instead of later so you can really understand where your dollars are moving forward,” Kerfoot said.

The Future of Multifamily Housing:

Looking ahead, panelists expressed optimism about the future of multifamily housing in Denver. They anticipated continued growth in the middle-income housing sector, increased collaboration among industry stakeholders, and ongoing innovation to address the challenges of construction costs and labor shortages.

ELLEN HAFER:  “Going back to highlighting the demand we’re seeing in the middle market… demand brings opportunities. It’s finding the right investors, the right developers, and the right team that’s going to help move us forward.

ERIC ENTLICH: “I think this middle-income family is going to be a great tool to deliver products. It’s going to involve a lot of people, a lot of sub-contractors, design teams. I think it's a platform that's going to catch some wheels probably in the next six months and really move. I know we have a lot invested in it and it will keep and it will happen. I think there is a lot of opportunity here.”

TYLER ELICK: “Looking back ten years, I would’ve never guessed Denver would be the city it is today.  It’s an incredibly vibrant place with an amazing level of talent and quality of life. RiNo (trendy River North Art District) was nothing ten years ago, LoHi (Lower Highland, a hip neighborhood known for its cocktail lounges, craft beer spots, and stylish restaurants) was emerging and (Denver) Union Station was dirt. 

“We have so much tailwind to be very, very grateful for and I think we will continue to attract talent at all levels. I think we'll continue to see neighborhoods emerge, grow, and shift. I think we'll continue to see programs and product types emerge. Whether that’s Airbnbs, short-term rentals, etc. that create its own economy and challenges.”

“There will always be a progressive change in innovation. I’m excited about the ecosystem that we have and the community that we have. Overall, I’d say the real estate community in our state and in our city is very collaborative, open, and transparent and for that reason, I am optimistic,” Elick said.

Q&A and Hidden Costs:

The Q&A session delved into various topics, including the hidden costs associated with construction projects. Panelists highlighted the importance of understanding and managing costs, even before obtaining permits, to ensure successful project outcomes.

In summary, the 2023 Denver Multifamily Summit highlighted the critical need for middle-income housing in Denver and the challenges and opportunities that come with it. Government programs like MIHA and creative financing solutions were discussed as key tools to bridge the affordability gap and facilitate the construction of middle-income housing projects. The industry remains optimistic about the future and continues to seek innovative solutions to address the challenges in the multifamily housing sector.

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*Colorado Middle Income Housing Authority (MIHA) Pilot

Enacted by CO Senate Bill 22-232, the newly created Middle-Income Housing Authority (MIHA) will acquire, construct, rehabilitate, own, operate, and finance affordable rental housing projects for middle-incoming workforce housing. This mechanism was created in order to solve the accurate shortage of affordable middle-income housing, and is intended to increase the supply of housing by raising large amounts of private sector capital to finance projects that can be placed into service quickly and efficiently. 

MIHA is governed by a board of directors composed of appointees by the Governor with the consent of the Senate. The Authority will ensure that rental units in affordable rental housing projects will provide middle-incoming housing with stable rents. Its primary vehicles include but are not limited to issuing bonds, entering into public-private partnerships, and providing assistance to tenants in order to develop housing projects and enable a transition to home ownership.

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View the event's Facebook photo album HERE.