admittedly designed to be expensive enough to try to motivate developers to build the required affordable units rather than buy their way out . The end goal of this well-intentioned policy was to create more affordable housing units by piggybacking on Denver ’ s recent development boom .
To be clear , we are not developers , and , as such , we have no “ skin in the game ” with regard to this policy . And while we recognize the vital need for more affordable housing , as appraisers and market analysts , we are committed to calling balls and strikes . From the beginning , we were concerned about the negative impact this policy would likely have on development in Denver because it fundamentally requires market rate renters to subsidize rents for their neighbors . Prior to the approval of the ordinance , we shared our concerns regarding the likely unintended consequences of enacting such a policy with planning staff and Denver City Council members , but to no avail .
Specifically , we predicted that the policy , as enacted , would have a significant negative impact on the financial feasibility of most , if not all , market rate apartment development within Denver and that many fewer units would be proposed in Denver over the next few years . Put another way , we were concerned that the policy would effectively turn off the spigot of development in Denver moving forward . This is because the model required by the EHA simply doesn ’ t work as it requires ( a ) the majority of renters to pay above-market rents in order to subsidize the units with below market rents , or ( b ) developers to lower their targeted rates of return - in reality , likely both . Neither of these scenarios works because renters , by definition , will not pay above market rents , and developers barely achieve financial feasibility in the current market without these new affordability requirements .
A significant reduction in the Denver pipeline would be especially problematic because , since 2010 , nearly 50 % of
" If we disincentivize development of apartments in the most prolific county in the metro area , there will be significantly fewer units delivered after the current under construction pipeline is completed ." all new apartments in the 7-county metro area were built in the City and County of Denver . If we disincentivize development of apartments in the most prolific county in the metro area , there will be significantly fewer units delivered after the current under construction pipeline is completed . If demand remains strong and supply is reduced significantly , Economics 101 teaches us that rents will again begin to rise quickly , much as they have for the past 10 years .
In order to avoid the requirements of the EHA , many developers scrambled to get applications into Denver ’ s planning department before the EHA took effect . As shown on the graph on the previous page , developers applied for 3,726 conventional units in Denver in the 4th quarter of 2021 , ramping up to 8,562 conventional units in the 1st quarter of 2022 , then nearly doubling to 16,408 conventional units in the 2nd quarter of 2022 leading up to the June 30th cut-off . Then , as predicted , the number of conventional unit applications fell precipitously .
To simplify this analysis , we have assumed that all new market rate developments in Denver would include 10 % of their units at 60 % AMI . As illustrated , unit applications in Denver plummeted to 1,524 units ( including an estimated 1,370 market rent units and 154 affordable EHA units ) during the 3rd quarter 2022 . Applications fell further to 833 units ( 749 market rent and 84 affordable EHA units ) and 1,258 units ( 1,133 market rent and 125 affordable EHA units ) in the 4th quarter 2022 and
1st quarter 2023 , respectively . Finally , applications bottomed out at 450 units ( 405 market rent and 45 affordable EHA units ) in the 2nd quarter 2023 . This was again followed by 464 units ( 418 market rent and 46 affordable EHA units ) in the 3rd quarter 2023 , compared to more than 16,400 units applied for 5 quarters prior ( 2nd quarter of 2022 ). during the same quarter the year prior . Although the EHA was intended to significantly increase the number of affordable apartments , it is , in reality , set to add a disappointing total of approximately 454 affordable units to date , while at the same time decimating future apartment development in Denver .
To be fair , the unit applications in the quarters leading up to the EHA deadline were inflated . As the deadline approached , developers rushed into planning before the EHA took effect . As a result , many were not funded and are not likely to be built . The subsequent decline in applications is therefore exaggerated because many of the projects that were rushed into planning may have otherwise applied in the subsequent quarters . Nonetheless , the very small number of applications over the past five quarters compared to historical applications is clearly related to the impact of the EHA .
When presented with this information , defenders of the EHA say that the results shown above are not due to the inclusionary housing policy , but are instead the result of macroeconomic and other factors , such as increasing construction costs , lack of labor , supply www . aamdhq . org JANUARY 2024 TRENDS | 25