FEATURED ARTICLE REPRINT FROM SUMMER, 2010 ISSUE OF LAND DEVELOPMENT MAGAZINE
There is good news on the horizon: the long-term potential for housing and residential development in the United States is excellent. Even with the recent declines in immigration resulting from the recession, demographic forecasts support new housing demand returning to 1.5 million units before the end of this decade and rising after that. Still, residential development will remain challenged for the immediate future and the next several years.
Looking at the world with this realistic view, we can begin to form a picture of how the new world of housing may evolve.
The Situation
In the last few years, land values have plummeted, often below the cost of improvements to that land. Acquisition, Development and Construction financing (A D & C financing) is virtually unobtainable, and, when it can be found, the terms are overly restrictive. Also, the impact of what many believe will be a forthcoming commercial real estate debacle falling upon the financial communities may well result in an even scarcer supply of funds for residential development and home building for the next several years. Even when they are able to do so, many small- and medium-sized builders are unwilling to finance the purchase of improved home sites. Although the worst of the housing downturn appears over for most markets, and signs of recovery are showing, the next few years will remain difficult for the homebuilding industry, and the strongest impact of these challenges will fall on the development side of the business.
The Baby Boomers, which have been the major drivers of housing demand in this country for the past 40 years, have pretty much run their course in regards to conventional housing. The nation has more than sufficient amounts of move-up product, and the additional homeownership opportunities for this market segment may be mostly limited to the active-adult (55+) communities. Even given those opportunities, the continuing impact of foreclosures, recent substantial reductions in existing home values across the country and the lasting psychological impact of property value declines will influence the purchasing patterns of these consumers.
Demographics suggest that the “Millennials” (the term they prefer to “Echo-Boomers” or “Generation Y”), which are 75 to 80 million strong, will, in time, more than replace their parents’ generation (in numbers but, more importantly, in size of housing market demand) and become the next major driver of housing demand. These potential purchasers are relatively free from feeling the effects of recent home value declines. However, the current economic conditions and the ever-tightening grip on credit will make it difficult for them to match the home ownership rates of their predecessors by the time they reach their 30s and 40s. Also, these potential buyers are substantially different from their predecessors.
For one thing, Millennials are “experiential”—they are more interested in doing then in having. Their time is important to them, which is evidenced by constant multi-tasking and demand for instant communication. This generation exists to a great extent in a virtual world and are less likely to join structured organizations or require physical facilities. They also are far more socially responsible, and socially and politically liberal. They are far less likely to respond to a “luxury” appeal, and they are careful shoppers, researching extensively before purchasing and delving into details and background.
The impact of the financial realities today coupled with these changes on the demand side requires that we adjust our supply side. Quite simply put, much of what we did in the past to create successful residential developments will not work today.
As most of us in the development industry who are practical know, housing demand cannot be created; all we can do is manage and, hopefully, satisfy the existing demand. To create successful residential developments, we must design communities that are optimized toward satisfying that demand—which remains quantifiable by location, price, lifestyle, product type and uses, and rate of absorption. And we must remember, again, that developments inherently have no value unless and until we can sell the homes to be built there. The final land value, regardless of cost or risk, is only a residual of the sale price of the housing, and that has substantial impact on existing developments as well as on ground already acquired for possible new building. To create value in the land, we must create value for the consumer.
What Will Work
If we build a better mousetrap—a superior community environment that addresses the needs, wants and desires of the viable target home-buying markets—then consumers will purchase homes, and the price of the home site to our customers, the home builders, becomes secondary. In one market in which I am involved, for example, housing prices have declined, and new home sales are down by more than 50%. Yet one community, Ross Bridge in Hoover, has seen its market share increase from 3.6% in 2007 to 5.7% in 2008 to an amazing 14.2% in 2009. They continue to sell new homes and are able to sell home sites to builders while not needing to adjust home-site pricing.
The requirements for successful development today are the same as they always have been, but following some rules becomes even more critical today because there is no longer the near panic rate of home purchasing that occurred in the boom times to cover mistakes.
The key is still professionalism, and that entails a first step of having a marketing strategy in hand—a written document shared with all team members based on research of the site, the market and the players who are potential buyers. This document outlines a logical program for the property based on the research. As always, the market will tell us what course of action provides the best opportunities; all developers have to do is listen to the market, do the research and create an intelligent strategic program from the conclusions of that research.
Whether a new development or one that currently exists is the aim, unless the local market demand is exceptionally strong, those who wish to tap that market must provide something different than what already exists (and “different” translates to “better,” as perceived by the consumer.) Many existing developments are distressed, and depending upon the position of ownership, will offer a pricing advantage we cannot or probably do not wish to challenge. Differentiation is the key to success and that entails full knowledge of the competition based on examination and analysis.
Here are a few suggestions regarding land acquisition, new development strategy and repositioning and/or redevelopment of existing communities that apply under the new terms of today’s buyers. All of these are based on analysis of the local market and competition, the “new” target market requirements and the new realities of residential development:
• Remember that location is paramount as new markets require convenience to services, facilities and activities, and the newer generations value their time (commuting time is an inconvenience). If the property location is remote, facilities must be included within the development. Traditional Neighborhood Developments, at least the village center component, will become increasingly desirable by virtue of the lifestyle provided.
• Create a “Green” community that is as sustainable as possible, but affordable. Also, provide the consumer market with constant visible evidence (actively and aggressively promoted in all advertising, signage, sales displays, web site, Facebook, twitter, blog, etc.) of the environmentally and socially responsible commitment of the developer and builders. One way to create an ongoing socially responsible philosophy effort that is visible is to consider setting aside wildlife sanctuaries and securing designations or approvals from environmental organizations. By adopting and visibly supporting causes such as this, which are relevant to the consumer market, a developer can include a charity cause as a “partner” in the development, which lends credibility to the community.
• Provide superior entranceways to projects and create exceptional driving experiences to the model center. Both highlight the character of the development to enhance the “experiential” presentation of the community, utilizing a community entry that says “wow” and continues to do so through the use of a bridge ({real over waterscape or artificial over a culvert} creating rumbling sounds as driven over; extended drive-throughs with heavy landscaping where the roadway changes surface texture and feel, switching form a divided road with landscaped median to a narrower “throat” with solid landscaping to the sides; use of year’ round color in landscaping, etc. All of that creates an experience that shouts you have left the outside world and arrived someplace special.
• In lieu of golf courses, which are not as important to younger generations, and physical structures that require maintenance and cost of upkeep by residents, concentrate amenities in low-maintenance natural features such as lakes, parks, greenbelts, bike and walking trails and nature preserves. Zone property for maximum density, but build to reasonable usage levels. Donate extra density (and corresponding open space land) as conservation easements to create tax credits, thereby lowering development cost bases, and then pass the savings on in the land prices first to the builders and through to the consumers with stringent builder purchase and performance agreements!
• Design for smaller village parcels, creating phases whereby homes can be absorbed at two-year maximum time frames to create an ongoing visible image of success. This also allows continuous grand openings, which intensify market exposure and appeal.
• Design for 100-percent amenity orientation for all home sites. (i.e., there are no “dog” {interior} homesites which by their very nature are less desirable; every homesite backs to (or fronts on) a water feature, greenspace, golf course, mountain view, etc. or has a view easement thereto ]] This can be accomplished with professional and creative planning—for example, Enviroscape accomplished this 20+ years ago at Worthington, creating a community wherein each homesite backed to water and/or the golf course and each homesite allowed for interchangeable product to conform to market demand. – The development was a huge success.
• Pursue zoning that provides for transfer of density within parcels to maximum caps to create flexibility essential for using the property most efficiently as changing market conditions require. Design village parcels with standard home site depths that will accommodate multiple product types and prices. Create a pricing structure for the parcels and home sites where changes from the original formula do not negatively impact the bottom line (i.e. maintain a common ratio of home site prices to home prices that will adjust with density and yield the development the same or a superior price per acre if and when a change from the original program is required).
• Aggressively pursue alternative financing sources – joint ventures with land owners, partnerships with development contractors, partnerships with homebuilders, private syndications, Industrial Revenue Bond (known as “Mello-Roos” in California] financing.
• Also aggressively pursue creating partnerships with builders. Financing market conditions today require developers to be creative but that should not result in reduction of profit. Consider developer financing of home sites for builders under extended terms, granting rights of refusal to purchase home sites when takedowns cannot be structured, subordination of home sites for models homes and limited inventory homes, especially in initial stages. But in exchange for additional risks incurred, negotiate equity kickers and/or premiums when the homes are sold to maintain returns on investments.
The development world faces a new world going forward. However, with good planning and a clear vision of what new buyers want, there is no reason that new world cannot be a success.
Daniel R. Levitan, MIRM, IRM Fellow, CMP, CSP, CAASH, RAM is president of Levitan & Associates, a Florida-based firm providing marketing and strategic consulting to builders, developers and lenders. Levitan has served as president and multi-term trustee of the Institute of Residential Marketing (IRM). In 2007 he was inducted as the first IRM Fellow and in 2010 was honored as the first “MIRM of the Year” designee. Contact him at [email protected], visit his web site at www.levitanassociates.net and his blog at www.residentialmarketingblog.com.