Bear with me a moment. Let’s assume a middle of the road MPC. It is 2000 acres of interesting land: a couple of creeks, marginal farmland, small woods, and good access. Nearest major city and region has over 500,000 people and expects to grow over the next fifteen years, the land is 40 minutes from downtown.
The net developable land is 1600 acres. The other 400 acres is in parks, open space, preserved habitat, major roads, schools and other extractions. The potential project will have an average net density of 4 units per acre. The project will contain 6400 units (avg. price $450,000). It is, when completed, worth over 2.5 billion dollars of value to the region. Sounds great, right?
But the cost to entitle this project can go like this: fees for engineers, architects, land planners, landscape architects, the environmental impact report (EIR), general plan changes, annexation issues, specific plan production, zoning changes, soil reports, new environmental carbon estimates, fees for this and that and that and that, and marketing. All of this is before the regional utility connections are built, the two new free interchanges are constructed, the regional sewer plant is upgraded, and road intersections, miles from the community, are completed. And much of this has to be funded before the project can start. Some bonds, some cash.
It is reasonable safe to assume that the professional fees could exceed $10 million, the city’s fees could be as high as $80,000 per unit (or higher), utility hook-ups (if available) $25,000. Still look good? The average house has to be at least 2400 sf. Off-site costs are $100 million ($15,600 per unit). The only way this can work, with any profit, is to build the house for $100 a square foot – I do not think so. (oh - by the way I did not put in the cost of the land).
The realities of the current market cannot support homes in the $750,000 range. And this will not change for at least 10 years. Maybe the market will support a few but not the thousands needed to make a MPC work. And, in fact, the average home-buyer in our current marketplace cannot even support $450,000, the new norm is somewhere in the $250 to $325 K range.
Where is the developer going to find the $20 to $30 million needed during the entitlement process when there is no guarantee that there will even be customers after the five year approval process is complete? What bank or institution today would wait that long without a return (that old ROI thing and that old what have the banks done for you recently thing)?
But we still need homes and houses and they will not all be in the infill lots scattered around the old urban cores; they will have to be in planned neighborhoods –smaller and more compact, more efficient and cost effective. The coming demand of the next 100 million Americans will require 30 to 40 million new homes. We have 118,000,000 residential units in the United States for 301,000,000 Americans. We are currently building 1.17 million units a year, well below the 1.85 million that is considered needed to sustain the current demographic trends.
With these numbers in mind, one inescapable fact stands out – there will be a serious push again in the cost of housing at some time in the future – and it may be as strong as the past trend of the 2001 to 2007 era. I predict it may start in the 2014-2015 period when we may be short 4 million housing units. And the greatest demand may be in rental housing.
How does this impact MPC’s and their potential rebirth? For the short term – MPCs are dead. No sane person would try to develop in this high fee and assessment burdened market – even if money was free (as it almost is). When rates rise and money and financing can be found again, they will push pricing upward and may allow profits to return. Maybe! The next hundred million will not be older, wealthier citizens; they will be younger with families and will be trying to carry as little debt as possible. They will have learned, like their grandparents of the 1930s, to be frugal: rent their vacation houses– not own, buy smaller homes, purchase in neighborhoods that do not have homeowner associations. They will still look for good school districts that are in communities with fewer older people – more families mean better schools. They will not be looking at high cost resort communities – there are hundreds existing today that will cycle those who wish to live with, and pay for, those amenities. For the coming population they will have less meaning.
But in another thirty years - watch-out.