What is happening with housing in the current economy?

Five leaders in residential real estate development discuss U.S. housing development trends: why smaller unit and lot sizes are becoming more common, which neighborhoods are holding value in the economic downturn, how demographic shifts are likely to influence the buyer and renter markets, how the public sector is working with the private sector to help keep planned developments alive, and how the recession has affected the movement toward incorporating sustainable design.

Contributing their expertise are five ULI full members: Ken Hughes, president of Hughes Development LP in Dallas and a member of ULI’s Urban Development/ Mixed Use Council (Purple Flight); Marty Jones, president of Corcoran Jennison Companies in Boston and member of ULI’s Affordable/Workforce Housing Council; Mary Ann King, president of Chicago-based Moran & Company, working out of the West Coast office in Irvine, California, and incoming chair of ULI’s Multifamily Council (Blue Flight); John Slidell, cofounder and executive vice president of the Bozzuto Group in Greenbelt, Maryland, and a member and immediate past chair of ULI’s Residential Neighborhood Development Council (Blue Flight); and Timothy Sullivan, principal of John Burns Real Estate Consulting in San Diego and national chair of ULI’s Residential Neighborhood Development Council (Blue Flight).

How is residential development changing?

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Timothy Sullivan: In the short run, the most obvious change is that there is pervasive fear among consumers that housing values may erode further. From an operational standpoint, the biggest change we’ll see in the foreseeable future is that the public builders will dominate the markets where they are physically located, such as California’s Inland Empire, Phoenix, Texas, Washington, D.C., and northern Virginia. They have cash, they are not dependent on outside debt like private builders are, and they’ve been making large land plays for the last six months.

 

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 Marty Jones: There is not a significant amount of new residential development happening right now. That has to do with lack of debt and equity financing, the economy in general, and the shrinkage in demand due to households doubling up. Smaller development companies are looking at small-scale infill development, where it is possible to buy a site at a reasonable price and not get overextended because the total costs are low. Most of the larger companies with development deals in the pipeline have put them on the shelf if they weren’t already under construction. They’re waiting to see when job growth and the economy in general are going to turn around.

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Ken Hughes: There is a reasonable chance that the sizes of houses are going to be reduced. Construction costs aren’t likely to reduce significantly. Some pieces of construction are already value priced, but that will change as demand returns, and if land costs get back anywhere near to where they were, then the only way to reduce the cost of housing is to reduce size. The other thing that is likely to happen is a continued movement of the population closer to principal work locations. Placing well-thought-out housing close to employment centers is going to be necessary because of high commute costs.

 

 

Nyren_Slidell John Slidell: We’re going to see smaller single-family lots because they are expensive to produce. Laying out streets and utilities more efficiently than in the past will be crucial as well. And we’re going to see smaller townhouses. Fourteenand 16-foot- [4.3- and 4.9-m-] wide townhouses used to be typical, but over the past nine years or so we got away from all that. A 20-foot or a 22-foot- [6.1- or 6.7-m-] wide townhouse came to be considered small, and 24- to 28-foot- [7.3- to 8.5-m-] wide townhouses were more common. Now the big townhouses aren’t selling, and we are building 16- to 22-foot- [4.9- to 6.7-m-] wide townhouses.

 

Nyren_King Mary Ann King: Ever since World War II, owning a home has been part of the American Dream for an increasing number of Americans. However, in recent years, many new homeowners found themselves owing their mortgage lender more than the value of their homes. Others found themselves unable to sell their home to move someplace with greater job opportunities. Many Americans began to vote with their feet and move back to apartments. The homeownership rate fell dramatically. The focus on sustainability and the awareness of our carbon footprint has also caused a move back to apartments in our urban areas. When gasoline topped $5 a gallon at the pump, you could almost see the moving trucks turn toward downtown. With city officials concerned about sustainability, it became easier to get new housing approved along transit corridors. Both the supply and demand for housing became increasingly focused downtown.

Which neighborhoods are holding value, which are not, and why?

Hughes: In Texas, higher-end neighborhoods gained value, and I expect them to continue to do that. Houses may now take longer to sell in those neighborhoods than they used to, but in general they have done well. Sometimes housing values are determined by the quality of the schools. What we have been building successfully are urban attached townhouses targeted to appeal to empty nesters, either with elevators or with the potential to add an elevator in the future. And in those neighborhoods the price of the housing hasn’t diminished significantly either.

Sullivan: Established neighborhoods that have a sense of place typically hold their value. San Francisco has a strong sense of place. Parts of Summerlin in Las Vegas and the Scottsdale area of Phoenix are other examples. All of these areas have experienced diminished values, but they haven’t been hit as hard as the areas where the supply of housing is greater than the demand and there’s no differentiation in product. Examples include California’s Central Valley or Pinal County in Phoenix—plentiful supply, little differentiation. Also, neighborhoods with a stable job base and a quality of life that is perceived to be desirable have done well.

Slidell: In the Washington, D.C., and Baltimore area, neighborhoods that are holding value are the closer-in ones. Suburbs like McLean, Chevy Chase, Georgetown, the Bethesda area—they’ve seen very little decline in values. Why is open to conjecture, but I think that the cost of gasoline got people’s attention three years ago. And most of the housing in those areas is expensive, and it wasn’t purchased by people with no money down. So foreclosures happened in the farther-out suburbs where people had driven until they could qualify.

How are changing demographics affecting the residential market?

King: The population mix is changing so that it is more heavily weighted toward children of the baby boomers, who are swelling the ranks of the 20- to 30-year-olds. Before, we had been building a lot of apartments for empty nesters—larger apartments for people with a lot more disposable income. Now the focus is going to be on generation Y, who are renting their first apartments. They are very value sensitive because they are getting their first jobs. So the focus is on smaller spaces. As a result, there’s a heightened interest in common areas. Many apartments are offering wi-fi throughout their common areas, pool cabanas with TVs and iPod docking stations, Starbucks and cafés in ground-floor retail spaces, and even Wii rooms.

Jones: The changes in demographics support those areas that are strong now—the downtowns, the close-in suburbs—whether it’s young people who want the dynamic experience of living in the city or whether it’s empty nesters selling homes in the suburbs and moving downtown. Downtown Boston’s condo market has remained fairly strong, especially at the high end. I’ve seen a couple of examples of multifamily housing with smaller-square-footage units, but I’m not sure how much that’s going to take off. I think the biggest impact on square footage is going to be in the single-family sector, where people are not necessarily going to be willing to pay for the annual costs of larger homes, including real estate taxes and the costs of heating/cooling the media room, the family room, the game room, and everything else.

Hughes: The economic downturn has affected the retirement housing market. Before the crash, retirees would generally sell their houses to a younger customer. With that market stymied by the fallout of the economy, however, the food chain is broken. Traditionally, older people living in a two-story house, particularly in small towns, would just build a master bedroom on the ground floor and abandon the rest of the house except to serve as guest quarters for their children or grandchildren. I can see that easily happening again simply because there will be lower demand for starter housing from younger people in the short term. They either haven’t accumulated enough cash or they can’t get financing, or a combination of both.

What successful strategies on the government side— municipal, state, or federal—are helping encourage housing development?

Jones: There doesn’t seem to be much press about this outside of affordable housing circles, but a large number of affordable housing projects that were stuck in the pipeline due to the collapse of the tax credit investor market are now starting construction. That is primarily because federal stimulus money has been made available for these deals. That’s great news for the construction industry and for low- and moderate-income renters. Plus, there continues to be some state and local financial assistance available for new affordable housing developments.

Slidell: Cities, counties, and local governments are having the same economic problems that everyone else is having, so it’s hard for them to give cash incentives or encourage developers by putting in infrastructure. In many instances, they’re trying to remove obstacles to housing development. For instance, site plan approvals usually expire after a couple of years in most jurisdictions, and many are extending those approvals. They are also helping with subdivision bonds. In more developed areas, before builders can get a site plan approved and obtain building permits, they have to post a bond guaranteeing that they’ll put in the streets and utilities. Those bonds are very difficult to get now because the banks don’t want to have them outstanding and at risk. So a lot of jurisdictions are allowing builders to post bonds in several small segments over a period of time to make it easier.

Sullivan: The majority of municipalities have become more flexible during this recession with the homebuilding community. Building permit fees are waived until the close of a home. Governments are extending the life of existing tentative subdivision maps for another year or two to allow developers to catch up. Some cities are trying to encourage businesses to relocate and bring more activity there, which helps increase housing demand. For example, the city of Chandler, Arizona, has developed a major green initiative and is trying to bring solar development to the community. Planting the seeds for future growth is the single most important factor in fighting the recession.

How has the economic downturn affected the movement toward sustainability?

Sullivan: Depending on the perspective you take, the impact has either been highly significant or minimal. California’s new mandatory green building standards are effectively changing the way residential developers look at construction in the state. Houses will be more expensive to build, but they will be more energy efficient. So that’s a significant impact. On the consumer side, consumers generally want sustainability; they just aren’t yet willing to pay additional for it.

Jones: The consumer is very interested in sustainability. The question is whether they perceive the benefits as outweighing the costs. In some climates energy efficiency really makes sense, and in other places it’s hard to see how it pencils out. We certainly see renters asking about green features. Will they pay more for an apartment that has them? Maybe not, but green design is starting to give a project a marketing edge.

King: Green is an important word in our industry. Construction costs have fallen so dramatically in this economy that it’s hard to separate out the cost of building green. We are currently developing a green apartment building for much less money than we could have developed a nongreen building several years ago, because any extra costs have been more than offset by the reduction in construction costs. And there are investment funds that are looking to buy properties that are developed green. So developers are being pulled by consumers on one end and being pushed by capital sources on the other to embrace sustainability.