Financial challenges standing in the way of Denver-area developers seeking to add to the multifamily stock amid a persistent housing shortage go deeper than elevated interest rates.

A multifamily supply glut, complex capital stacks and local regulations are also problems developers face, according to panelists at Bisnow's Multifamily Annual Conference Rockies Sept. 12 at the Denver Arts Complex Studio Loft.

“We went from probably doing two or three deals a year to hopefully getting one off a year,” Hines Managing Director of Multifamily Elliot Marks said. “We won’t have a start this year, maybe we’ll have one next year, and hopefully the following year might be two.”

Marks said it is “incredibly hard” to find the type of capital needed.

“We know construction costs went up, rents flatlined a little bit,” he said. “But really, the goalposts moved, from an underwriting perspective.”

To get that math to work, developers need to target potential development sites for the highest probability of success and work with the local municipality, Marks added.

“But most municipalities in the Denver area are reticent to work with developers, and it’s incredibly challenging,” he said.

While financing has become more difficult to secure in the last two years, costs have gone up, due in part to a pent-up flood of projects that all began at once after pandemic lockdowns lifted.

“Coming out of the pandemic, you had a lot of projects stalled, and they all hit go at the same time,” according to Aubry Teeters, construction manager at Shaw Construction. “So it flooded the market. We saw a lot of escalation come out of that. We saw a lot of labor shortages. It’s had a really big strain on subs, and it’s heavily impacted pricing.”

Panelists also examined the challenges facing their projects, brought on by new federal, state and local regulations, such as ensuring compliance with the Energize Denver program.

“When you come out of Covid and you go right into all these drastic code changes … I think that’s been one of our biggest challenges from a pricing standpoint, and trying to find some level of stability and some level of predictability,” Teeters said.

Along with the need to retrofit older properties, many of the technologies required by the new regulatory programs aren't yet fully available, she added. That adds to the cost issues.

“The equipment is not quite there yet,” she said. “From manufacturers to the subs to the [general contractors], everyone is just scrambling, trying to catch up. When you have equipment that’s not there, when you have manufacturers that don’t even quite know how to price what we’re looking at, they’re trying to get their equipment to that level, so you have a lot of volatility from a pricing standpoint.”

Denver Housing Authority Chief Real Estate Investment Officer Erin Clark said affordable housing development has unique challenges, particularly the work to redevelop obsolete public housing and replace it with higher-density, higher-quality, larger units that can serve more families and income levels.

“We’re facing a lot of really critical challenges in the financing space,” Clark said. “Currently, the biggest of those being the demand is so high. We’re all putting forward really important, intensely needed housing developments. But we are all seeking the same scarce resources, the same pool of low-income housing tax credits. The credits are there, but there’s more projects coming forward.”

The same scramble is happening for private activity bonds, which are becoming more and more competitive, she added.

“One of the really unfortunate aspects of building affordable housing is we can have a capital stack that is 12 sources deep, and many of those are various public sources,” Clark said.

But with financing from the state, local and federal levels, all those regulations “have their own sets of strings attached as well, so a lot of the funding sources themselves are dictating what we build.”

As a result, Clark's organization is trying to address all the different covenant requirements in a way that will allow a project to go forward while addressing the community’s needs, she said.

“But it adds complexity and ultimately adds a lot of administrative costs for long-term compliance throughout the life of the project,” she said.