Community developers adapt to the housing market’s torpor.
Members of ULI’s Community Development Council speak about the impact of the slow economy, the increased appeal of smaller sites in denser locations, consumers’ current amenity preferences, the impact of ethnic and demographic changes, and the rising demand for housing that can accommodate multiple generations.
Contributing their insights are John Burns, chief executive officer of John Burns Real Estate Consulting LLC in Irvine, California, and assistant chair of the Community Development Council (Green Flight); Adrian Foley, president of Brookfield Homes Southland in Costa Mesa, California, and a member of the Green Flight; Teri Frankiewicz, vice president at Crown Community Development in Naperville, Illinois, and chair of the Silver Flight; Randal Jackson, principal of design at The Planning Center in Santa Ana, California, and chair of the Blue Flight; and Terry Russell, CEO of FrontDoor Communities in Atlanta and chair of the Gold Flight.
Given the sluggish housing market, what are community developers focusing on?
Terry Russell: In the Southeast, business is still very slow. Some developers have been working on entitlements, but the next 24 months will mostly be spent continuing to absorb the inventory that’s out there. Once lots are absorbed in A locations, developers will turn next to acquiring undeveloped land in A locations before they start absorbing lots in B and C locations. Being in an A location is more important than buying lots cheaply.
Teri Frankiewicz: In Arizona, Chicago, and Tampa, where we have been actively constructing and selling communities, we will have no new land developments in the next two or three years. We have plenty of lot inventory. What we are focusing on is land acquisitions; we made three in the last quarter of last year. As we go into the first six months of this year, there are very good opportunities for straight land acquisition in the right places. The banks are starting to knock down prices to the point where it makes sense to buy. We are filling our pipeline at a nice basis point so that when the market does start turning around, maybe toward the end of next year, we’ll be in some very good land positions in markets that have long-term stamina.
John Burns: Master-planned community developers have recognized that the consumer profile is very different than it was five or six years ago, so they are going back to the drawing boards and really talking to local consumers to find out what they want and what they’re willing to pay for. Our consumer research business is up probably fivefold over the last two years. The other trend I see forming is a shift away from for-sale homes to rental homes, so parcels that were initially intended for condominiums are now going to be apartments. The good news for master-planned communities is that apartment land is appreciating pretty rapidly.
Randal Jackson: There are 20 years of baby boomers who are living in homes that are much too large for them or not suitable for aging in place. But those homes may not be selling readily on the market at the moment, so that’s one of the big marketing and financing challenges for the next ten years. There are some creative strategies happening. Community developers are targeting neighborhoods where people want to move and finding sales teams that can help them sell their homes—perhaps even help them retrofit their homes—and then buy a new home in the master-planned community.
Adrian Foley: Higher-density urban master-planned communities aren’t showing signs of working in the short run, which I define as the next three to five years. It’s very challenging to underwrite home prices and revenues in high-rise locations. Costs haven’t come down nearly as significantly as revenues have, and expectations for investment returns haven’t shifted enough. So in the next three to five years, urban master plans are going to become low- or medium-density products, perhaps with the exception of apartments.
How significant is the shift toward smaller urban and suburban infill locations?
Frankiewicz: We have traditionally focused on 1,000- to 3,000-acre [400 to 1,200 ha] master-planned communities with a high level of amenities, but we are getting away from that model and developing more small infill projects and mixed-use environments. We look at sites as small as 25 acres [10 ha]. We are trending into smaller infill projects because there is no way you can make sense of the infrastructure that’s required for larger master-planned communities. Developers don’t have the capital anymore to put into it, and counties and municipalities are tapped out as far as their taxing capacity goes. So that’s forcing us into taking a look at infill sites where the market growth is and where a lot of the infrastructure is already in place.
Burns: There’s a strong trend toward more urban master-planned communities. Municipalities are pushing it, and consumers are telling us loud and clear that they prefer not to commute and that they are willing to sacrifice yard size to do that. But they want some sort of yard. The challenge is that the cost of urban development is very expensive, so it’s difficult to provide affordable housing in that sort of environment without a subsidy from the public sector.
Russell: In this next business cycle, new buyers are probably not going to pursue a "drive until you qualify" strategy. People starting to move into their prime purchasing years are going to look for locations close to jobs and quality schools. They will care more about their time than the square footage of their home or their lot. So they will be more interested in urban and suburban infill. If it’s in an A location, chances are it’s a relatively small tract of land. So in metro Atlanta, what little development is happening is in very small tracts, 50 lots and under.
How are amenities changing?
Jackson: I usually have three or four golf courses in design, but now I don’t have a single one planned for the future. But I do have quite a bit of agriculture: agriculture is the new golf course. We are looking at communities with recreational space, edible landscapes, community-supported agriculture, possibilities for volunteerism. There’s a whole new vision for how communities might mature—more like the way a small community might have developed into a small town on its own in the past.
Frankiewicz: Early on, we have to invest capital in amenities within the first half mile [0.8 km] of the entrance to the community. Developers have to show that they are in the game, that they have the money, in order to bring a doubting public back into their communities. We are not making a lot of new capital investments, but we are building a new clubhouse or sprucing up the entrance.
Russell: Buyers entering their prime purchasing years want to be close to recreation, whether that’s entertainment, parks, or educational or cultural opportunities. They want to be able to weave these things into the fabric of their lives. They are not as concerned as buyers used to be about having a golf course or a swimming pool or tennis courts within the community, because today there are plenty of those things already available in any municipality. Instead, they are looking for lifestyle amenities that may be outside the front door of the community.
Foley: The amenity packages in urban master-planned communities can be scaled down. In urban settings, if a buyer is paying $250 or $300 a square foot [$2,700 to $3,200 per sq m], they are less likely to expect a luxury sports amenity package than in the past. Keeping association dues low is important, too, because the total cost of homeownership is very much a factor in people’s buying decisions. In the suburban master plans, we have looked more aggressively at sharing costs on amenity packages, whether that’s access to passive amenities such as open space or parkland, or privately managed fitness facilities. One idea we’ve been exploring is having the YMCA run the recreational facility. Homeowners can pay a low monthly fee to use it or opt out. We don’t have to maintain the facility, and the YMCA is happy to get a complimentary building to operate from.
How are community developers adapting to meet the needs of different ethnic groups?
Burns: Developers are really getting to know the ethnic groups inside and outside the master plan so they can build social programs to target those groups. Different ethnic groups look for different things, and it’s not even fair to say that a certain ethnic group prefers one amenity over another, because within that group, the younger people may want an active park and the older people may want walking trails.
Jackson: At least in California, what we’re finding is that ethnic groups tend to want to be together in areas that they’re accustomed to. For example, in Little Saigon in Westminster, California, a planned community is providing housing along with services that include restaurants and gathering places that the Vietnamese Americans living there are accustomed to. The community doesn’t come alive until after 10 p.m. and doesn’t shut down until after 2 a.m., and that’s probably different from anyplace else in Orange County.
What else are buyers looking for?
Foley: There is a trend toward smaller homes that make more efficient use of square footage. As a consequence, homes are becoming more informal, with square footage reallocated to things that consumers are interested in today, like informal spaces, larger master bedrooms, more storage space. People are concerned about how much their home is going to cost them from the standpoint of energy consumption and maintenance. Segmentation has become more significant in urban master plans, as it has in suburban master plans. Developers need to have distinct segmentation that’s not based solely on price. Because mortgage rates are so low, the spread between a 1,900-square-foot [177 sq m] home and a 2,200-square-foot [204 sq m] home is not that much from a monthly payment standpoint, so people are basing their choices more on lifestyle offerings.
Russell: People don’t have as much of a sense of security about their jobs or may not be as dedicated to keeping one job long term, so when they buy a home, they want to make sure that it has great opportunities for resale in the event they have to move for a new job. Families still want the best schools available and might be willing to accept a smaller home in exchange for proximity to a school.
Jackson: On the one hand, young college graduates are returning home because they can’t find a job or because it’s tough to make a living. On the other hand, baby boomers are more often taking care of their parents at home. Buyers are looking for spaces within the house that are flexible enough to serve as a separate unit for now, and perhaps could be rented to nonfamily members in the future to help subsidize the mortgage payments.
Burns: Approximately 17 percent of households have multiple generations of adults right now, and their existing homes are often in communities which were never designed with that in mind. Developers are coming up with creative land plans to address the demand for multigenerational housing. Lennar has developed floor plans that give homes separate entries and garages, while enabling people to open a door and bring the generations together.
Frankiewicz: Those who are buying a new home—and it’s a much smaller subset of the population than it used to be—look for quality and a good location, and they consider the reputation and financial strength of the developer. Those factors are more important to buyers now than ever.