High construction costs and low inventories are driving home prices ever higher in some of America’s fastest-growing cities, said panelists speaking at a recent ULI Colorado event. This combination is causing a crunch in housing for middle-income households, particularly in the Denver metropolitan region.

Developers, builders, and others presented solutions—from new mixed-income apartment and condominium projects in the urban core to conversion of assisted-living apartments, to smaller clustered townhouses with standardized construction—that could keep the region’s teachers, emergency responders, and service workers in housing that is attainable and close to their jobs.

“The missing middle is pertinent to millennials and everyone who falls into the 75 to 120 percent” average median income (AMI) segment of the housing market, said Michele Decker, principal of Denver’s 4240 Architecture and co-chair of the event sponsored by ULI Colorado’s Young Leaders Discovery Committee. She said that millennials and others who want to buy their first homes are “stymied by the high cost of entry.”

“There are supply-side and cost-side issues,” said John Covert, regional director of Metrostudy. Fewer than 4,000 existing homes were for sale in the metro area, the lowest number in 20 years of tracking the market, he said. “Our buying pyramid is inverted,” with only 1 percent of listed homes costing under $300,000. “We have no product for the first-time homebuyer, and it gets more difficult when you look at the average cost of a home.”

Last year, the average cost of a single-family detached home in the Denver area jumped 13 percent, to $485,000, said Covert, while the average cost of a townhouse or condominium rose 11 percent to $343,000. New home starts declined in all price categories up to about $450,000, he noted. Buying a new home with an average sales price of $541,000, with a 5 percent downpayment and 4.5 percent interest rate required a household income of $140,000, he said. The region’s AMI, however, is $73,271, according to the Metro Denver Economic Development Corporation.

“First-time buyers are gravitating to townhouse and duplex product,” which represent about 25 percent of the new home market, said Covert. Only 800 condominiums were built last year in the region, mostly more expensive ones in the urban core, compared with the 3,000 built annually before condominium defect liability legislation was passed by the state legislature during the Great Recession. Legislative relief in 2017 has restarted the condo market, and some projects that were converted to apartments are being converted back to condos to fill the void for first-time homebuyers.

Patty Gage, executive vice president of Colorado Business Bank, a $4 billion financier of homebuilders in Colorado and Arizona, noted that over the past ten years construction costs have gone up 10 percent while incomes have increased only 1 percent in the region. The bank’s least expensive financed project was a $350,000 townhouse unit in northern Colorado, she said. A family earning 80 percent of AMI, with a 31 percent downpayment and a 30-year interest rate of 4.5 percent could buy a 1,468-square-foot (136 sq m) home for $213,000, said Gage. A family earning 65 percent of AMI under the same conditions could afford a home measuring only 979 square feet (91 sq m). Gage said that some missing-middle solutions for the region were to subsidize water tap fees, spread lot costs across big master-planned communities or community land trusts, retain the existing housing stock through low-income loans, build smaller houses, and use innovative construction methods to reduce costs. “The pipeline for market-driven affordable housing is quite thin,” she said. “Few builders can deliver homes under $400,000 with any hope of making a margin on the sale.”

“About 25 percent of people coming to us for affordable homes are making above 80 percent of AMI, and five years ago we didn’t see that,” said Heather Lafferty, executive director and CEO of Habitat for Humanity of Metro Denver. “This reflects the need of the missing middle.”

Habitat has been building new homes, renovating old homes, and partnering to develop mixed-income housing in the region for 40 years, said Lafferty. Typical Habitat households earn an average of $44,000 per annum, work in the service industry, have an average credit score of 761, and buy a three- or four-bedroom home for $315,000. Most low-income families do not qualify for a 4.5 percent mortgage, so lowering the mortgage rate by even one-half of a percent helps more people afford homes, she said. Habitat typically offers no-downpayment, 30-year, fixed-rate mortgages with monthly payments that do not exceed 30 percent of a family’s gross monthly income. Habitat offers options to purchase affordable homes through second mortgages, shared equity, and deed restrictions, as well as land leases to create permanent affordability.

“If we as a city don’t continue to prioritize housing for millennials, for folks who want to stay in their homes, and for many working families,” said Lafferty, “we are going to miss this middle and lose out on an essential part of the workforce and the fabric of our community.”

Lafferty, committee vice chair of Denver’s Housing Advisory Committee, said that goals of the city’s new “Housing an Inclusive Denver” plan include creating 3,000 housing units by 2023, preserving affordability for 1,000 homes, and promoting housing access for and preventing displacement of 20,000 additional households. Up to 30 percent of housing resources will be directed to residents earning 31 to 80 percent of AMI who want to become homeowners or remain in homes they already own.

“Our industry is ready for pretty significant disruption,” said Kelly Leid, executive vice president of operations for Oakwood Homes, a master-planned-community developer recently acquired by Clayton Homes and owned by Berkshire Hathaway. Oakwood has been building for-sale homes at 80 percent of AMI for years, he said, and is now broadening its range of homes priced at $250,000 to $350,000 with its “American Dream” product, featuring five floor plans measuring 1,000 to 1,500 square feet (93 to 139 sq m), a garage, and a small yard.

“The target market is teachers and first responders,” said Leid. “When teachers teach in the communities in which they live, overall performance of kids go up, and teachers tend to stay in the field longer. We’re making sure teachers actually can live in the community in which they teach.”

Colfax & Vrain, the renovation of a 43,400-square-foot (4,000 sq m), circa-1962 former hotel and assisted-living facility on West Colfax Avenue in Denver’s Sloan’s Lake neighborhood, will provide 64 attainably priced condominiums.

To lower construction costs, he said, Oakwood has simplified the design and reduced the number of cabinets and the appliance package. At 12 units per acre (30 units per ha), the homes are built using an efficient wall-panel system. They feature standardized layouts with stairs located in the same place, with windows and porch size varied to give homes a different look and feel. Another popular choice is a carriage home in the mid-$300,000s, clustered with three others around a shared driveway.

“We’re disrupting our own industry with off-site solutions, assembly mentality, and a fierce urgency to respond to the affordability crisis and sustainability,” said Leid. Addressing the biggest issues of labor and material costs, he said, Oakwood builds trusses and wall panels in its own indoor facility, with little waste.

Colfax & Vrain, the renovation of a 43,400-square-foot (4,000 sq m), circa-1962 former hotel and assisted-living facility on West Colfax Avenue in Denver’s Sloan’s Lake neighborhood, will provide 64 attainably priced condominiums, said Ben Hrouda, managing partner of Flywheel Capital investors and developers. The units have an average 457 square feet (42 sq m) of living space with a kitchen, bathroom, and large patio. Flywheel decided to renovate the buildings for condominiums because only 7 percent of the housing inventory available in the city was condos priced less than $300,000, and the company wanted to provide more entry-level homeownership opportunities. The project reuses an existing commercial kitchen as a restaurant and includes parking and retail that will activate West Colfax.

Tim Walsh, president and founder of Confluence Companies, detailed the development costs of providing workforce housing at Zia, a new project rising next to the new Fox light-rail station at 41st Avenue and Inca Street in Denver’s Sunnyside neighborhood.

Due to be completed in 2020, Zia includes 312 apartments and 119 condos in two connected buildings with a gym, a shared rooftop deck, a pool, a turf dog area, and 396 structured parking spaces. A total of 91 workforce units include 66 for-rent apartments and 25 for-sale condos. One-bedroom apartments will rent for $1,575 at market rate and $1,230 at 80 percent of AMI. One-bedroom condos will cost $331,000 at market rate and $176,328 at 80 percent AMI.

Due to be completed in 2020, Zia includes 312 apartments and 119 condos in two connected buildings with a gym, a shared rooftop deck, a pool, a turf dog area, and 396 structured parking spaces

At an all-in construction cost of $240,000 per apartment and $294,000 per condo, said Walsh, the financial bottom line for building the workforce units was $7.1 million. Confluence could have paid Denver’s new affordable housing linkage fee of $1.50 per square foot ($16.14 per sq m) for the 588,000-square-foot (54,600 sq m) project, or a total of $882,000 in lieu of building the affordable housing on site. The “opportunity costs,” he said, amounted to $6.2 million to house workforce households.

“The city is directing linkage fees to very low-income housing, so there’s nothing left for the missing middle,” said Walsh. “Most of our projects are now doing 80 to 120 percent AMI to fill that need.”