Developers are adapting to the tough economy by cutting costs and using the flexibility inherent in Transect-based plans.
The housing industry is facing a “perfect storm” — the result of a combination of overbuilding, a credit crisis, and the bursting of a speculative bubble, according to Todd Zimmerman of Zimmerman/Volk Associates.
Bill Tucker, another consultant active in the New Urbanism, says that 2008 could be one of the worst years in history for builders and developers. “We’re in it with everybody else,” says developer John Anderson, based in Chico, California. “If there is a monsoon, everybody’s roof leaks.”
But there is good news as well, according to experts who gathered at the Congress for New Urbanism in Austin:
1) Commercial real estate is doing relatively well — nonresidential investment was up 6.9 percent in the fourth quarter of 2007 — and mixed-use developments offer the flexibility to take advantage of that reality. New urbanist developers report activity in office and retail development even as residential sales diminish. Even in housing, flexibility helps — new urbanist developers are modifying building types, sizes, lot sizes, and product configurations to maintain sales.
2) TND “represents 25 to 30 percent of the market, and only 5 percent of supply — it has more durability” says Tucker. Developers of New Town at St. Charles, Missouri, expected TND competition within 30 months of their launch in 2004. “Today, nobody else has done it and nobody is thinking about it,” says Tim Busse, vice president and director of architecture at Whittaker Builders. “That’s a huge competitive advantage.”
3) The quality of new urban communities stands out in a tough market. Greg Weaver, president of Catellus Development Group, reports that the company’s project in Hercules, California, has more house sales than any other in the Bay Area. “I like to think that is because new urbanist projects look better and feel better,” he says. “I think we will do better than our competitors.”
4) Long-term demographic trends favor urbanism — offering hope to developers that if they survive the next year or two, better times are coming.
CHANGING THE MIX
At New Town at St. Charles, a 755-acre TND, Whittaker Builders has quickly shifted housing away from slower-selling rowhouses while reducing field employees and overhead, Busse says. The developer created four new affordable housing types — mostly aimed at the $110,000 to $225,000 market — in the last 18 months. These include:
• Apartments ranging from 535 to 1,070 square feet, mostly flats. The existing rental units are 98 percent leased. One 22-unit building is 50 feet deep by 220 feet long, with double-loaded parking in the rear.
• Condominiums ranging from 640 to 904 square feet, built as stacked flats in two-story buildings. At 45-50 units/acre net density, the development costs are reduced to $10,000 per unit (excluding vertical construction). Average development costs in New Town are $30,000 per unit. Also in design: one-bedroom studio flats that are expected to sell from $85,000.
• Duplexes targeted at seniors, ranging from 576 to 892 square feet.
• Value-engineered single-family houses on shallow, narrow lots, ranging from 1,268 to 2,779 square feet (the largest of these sell for $275,500). The second floor is built over the garage.
These affordable units feature the same quality of construction as more expensive housing built earlier, Busse notes.
With 2,000 residents three years after the first families moved in, New Town is one of the fastest growing TNDs in the US. Whittaker expects 100 to 150 sales in 2008, substantially reduced from the peak. From March 2005 through February 2006, New Town closed on more than 300 houses. “Momentum is the most important thing that you have — once you lose it you can’t regain it,” says Busse. “Those product types were designed to maintain that momentum.”
CONSERVING CAPITAL
Conserving capital is of the utmost importance, says Bill Gietema, CEO of Arcadia Realty Corp., a TND developer. His firm’s Capella Park, near Dallas, Texas, came on the market at the wrong time, he says. “One thing that we did was not develop all of the parks out,” Gietema says. “It saves interest payments and maintenance, and also focuses attention on a smaller area.”
The willingness to change product types and lot sizes is also important, he says, but the quality of design and construction must be maintained. “Turn up or down the volume, prices, sizes, but don’t ever go and do anything that affects quality,” he says.
In this credit-tight climate, banks will recall or choose not to renew construction loans for minor technical reasons, Gietema warns. Developers should reread every loan agreement and understand their every technical requirement, adding that loans should be paid off ahead of time and technical changes to agreements should be made in advance of renewal requests. “Stay below the radar screen of the loan committee,” he says. “Once the loan gets on their radar screen, it’s off with your head.”
Arcadia Realty has numerous TNDs underway, and Gietema sees advantages in the diversity of product that can be built on smaller pieces of land. On 30 acres in Home Town in North Richland Hills, Texas, he has five market types. A conventional master planned development would require several hundred acres to achieve that, he says.
“We’ve been doing more retail deals in the last year.” Gietema says. “Something goes down and something goes up. It’s a hedge. Multifamily over retail and office over retail kicked up at the right time when single family regressed.”
Although New Urbanism offers flexibility, “many municipalities want to put you in a box,” says Steve Maun, president of Leyland Alliance in Tuxedo, New York. “If you come in with a plan that says 60 percent multifamily, they think it’s gospel. You can get trapped by your plan.” With public-private partnerships, municipalities tend to be more forgiving and flexible, he adds.
PRESCRIBE DESIGN, NOT USE
With a mixed-use development, design should be hard-wired but the market should determine uses, says Weaver. In the Mueller Airport redevelopment in Austin, Texas, Catellus has the choice of multifamily, office space, or retail on certain blocks. “Without getting a rezoning, we have the flexibility to shift things,” he says. It’s important to think ahead of time about infrastructure changes that would be required if the development strategy changes. The ability to add or cap off utility lines without tearing up the street can save money for developers who are switching to different building types, Gietema says.
Tucker advises developers to let projects “hibernate” if they aren’t under construction. Finish getting public approvals but request extensions on the entitlements, he says. As for developments under construction, he advises layoff of nonessential personnel. “Every developer spends too much, especially TND developers,” Tucker says. “They have to have people who do renderings, etc. You are going to have to cut down on that.” He also recommends rebidding all contracts. “You should be able to get 5 percent out of the bids. That includes consultants.”
Developers should do everything possible to defer land and infrastructure costs, Tucker says. “Don’t pay the guy for the land until you sell lots to the builder,” he says. If the land owner gets a share of the profit in return for extra risk, “it’s money well spent.”
It’s also important to keep the site very well maintained to never give buyers the impression that times are hard. Mow the grass, he says, and insist that builders build in sequence. “You don’t want the gap [undeveloped land between buildings]. That will stay there for a long time.”
EFFECT ON PRODUCTION BUILDERS
The housing downturn may be keeping production builders from starting new TNDs, says Lee Sobel, real estate and development finance analyst for the US Environmental Protection Agency. Although at least 14 of the largest builders are doing New Urbanism, corporate heads are putting restrictions on new house plans. “It’s not the market for them to come into a TND,” says Sobel.
He is concerned that when the markets turn around, publicly traded companies will be under pressure to make money quickly. “That means building more conventional stuff,” he says. On the other hand, a growing number of big builders have urban development divisions — some of which are more profitable than the conventional subdivision business. “Of the top 10, six have dedicated urban brands,” he says.
Tucker believes that a recovery of the housing market won’t start until the middle of 2009, with no real momentum until 2010. However, transit-oriented development continues to perform well in many locations, notes Zimmerman.
The long-term trends look very positive for New Urbanism. Two generations, the Baby Boomers and the Millennials (born between 1977 and 1996), “are moving toward urbanism at the same time,” Zimmerman notes. “The convergence is exceptional. … Basic demographics suggest that we are moving toward urbanism at every scale.”
In the meantime, the expertise and finesse required for New Urbanism can work to developers’ advantage if they get in short-term difficulty, Gietema suggests. “At the end of the day, banks do not want to get these deals back. They are tricky deals. Play that card. Tell them ‘you can have it back, but it is really tough.’ Banks don’t want to hold these assets. They don’t want to be accused of diminishing quality.”
This article is available in the April/May 2008 issue of New Urban News, along with images and many more articles not available online. Subscribe or order the individual issue. |
Courtesy of Catellus Development Group