Though small mixed-use infill projects do not fit most institutional investor business models, there is a market for compact, mixed-use design and smaller housing space. Identifying better uses for properties—such as adapting underused or vacant spaces, strip malls, and parking lots for use as mixed-use buildings—can diminish blight, strengthen a community, and activate a new tax base, thereby increasing migration back to cities. As cities continue to show support for infill projects, developers are following suit.
Members of ULI’s three Small-Scale Development councils are finding the best deals in the $3 million to $8 million range. Now is the time, some say, to purchase existing product at very low prices. Some projects can get quite large if one partners with institutional players, who might not know local markets and municipalities as well or see trends coming as quickly as local developers. But joint ventures with one or more partners can make projects much more complicated. Smaller deals are usually shopped through word of mouth because projects below $10 million do not compete with institutional money, they say. Projects in the $1 million to $5 million range make sense to redevelop where one can add value, thus creating a fair profit. Underwriting requirements are still stringent, though, with 50 percent or more in equity required.
Small-scale infill can be classified as projects comprising fewer than 100 housing units and less than 10,000 square feet (930 sq m) of commercial space. With some 3 million acres (1.2 million ha) of greyfield sites becoming available for redevelopment and some 20 million attached housing units needed by 2025, this project type is being increasingly favored by the planning and development industry for its scale and innovative design. Contemporary urban infill housing can weave new units into existing urban environments, with street-level uses ranging from retail space and offices to clinics, and even a Walgreens store. More retail tenants are expanding into infill markets, including such big-box giants as Walmart. A number of municipalities are turning their focus toward redevelopment and infill and partnering with smaller lenders and borrowers.
Surpassing the baby boomers to become America’s largest generation in 2010, members of generation Y age 15 to 32 were the subject of a recent national online survey commissioned by ULI. Their lifestyles and housing preferences will dominate residential demand for years to come. Though some still live at home, many others are moving into apartments and buying homes. Singles will likely remain in cities while married/partnered households will settle in the suburbs or small towns.
Improvements in supply/demand fundamentals are jump-starting a few apartment developments in several major markets, such as the Washington, D.C., metropolitan area, Phoenix, the San Francisco Bay Area, and Denver, with total new units expected to surpass 120,000 this year. The latest projects tend to be smaller, focusing on stick construction rather than high rises, and include affordable housing projects as well as housing for seniors and students.
Also, housing in new master-planned communities will need to include a greater variety of housing types, while existing communities will have to meet the needs of a changing population. The rise in the number of older households and single-person/childless households—as well as the fact that minorities are expected to account for 70 percent of net household growth between 2010 and 2020—will affect the location and design of new communities. According to a panel convened at the ULI Fall Meeting, business models will change, with possibly more global players entering the market. Expect more ethnic diversity. Developments will need to be better connected to public transit. There will be more renters, niche marketing, greater density, and a merging of housing and services. Environmental issues also will become more important. As ULI president Patrick Phillips mentions in his article, most future growth will be in the suburbs—but that will not necessarily mean sprawl.