Friday, July 8, 2011

The Coming Sea Change

A sea change is a fundamental or significant transformation in life or business. In development it is where the form may be retained but the substance is replaced. Such as is the case with housing, we are moving from ownership to rental. Ownership has been shown to be fickle, unpredictable and unreliable. For home owners with ten years or more there is a collective breath-holding, a hope that values don’t drop. They have magic number in their equity and they watch the neighborhood comps like you might watch a stock in the stock market. “Please,” they hope, “don’t fall anymore.” Like a passenger on a boat taking on water, they pray to stay afloat.

Values are driven by the marketplace; it is the storm the home is tossed about on. The storm has taken many of its passengers, those left on board lift their eyes in trepidation. And the housing industry is watching. It’s in their collective genetics the need to build, to answer the marketplace. In the industry a home is call a product, no need to say more. For the last three years these builders have sat on the shore watching, they have seen the storm and the fear, they are now answering the passenger’s calls.

To rent is to remove a great anxiety from the shoulders of the home-seeker. Even the wealthy are shunning ownership; they are freeing their capital and releasing it from the guileful marketplace. While suburban foreclosed homes are now converting to rentals (horizontal rental complexes), it is in the cities and urban areas where remarkable events are changing the direction of the vertical landscape.

For years the development industry shunned the rental market. “No way am I building rentals, too much exposure, land prices are too high, can’t make it pencil. And besides who wants an 850 square foot apartment when you can own a 1,600 sf home for the same price. No, never. Never will build another rental, never.”

A sea change. . . . Land values have dropped through the floor in many markets, older office buildings can’t compete in the commercial lease market. Why pay $2.50 for Class C space, when you can get Class A space for the same price or significantly less. Commercial owners are under water, especially if they refinanced in the heady days of 2006. They, like the homeowner, are looking for life preservers and someone to help them out of their personal ocean of debt; they too are looking for a sea change. Many of their properties are in excellent locations, have good to great access to transit and are ripe for acquisition.

Cities recognize this as well; empty offices and commercial space do nothing for a community. Retail suffers, restaurants suffer, revenues drop. Conversion to apartments will help; they add vitality and density to urban centers and put butts on restaurant chairs. Whereas to sell out a condominium building might take years, rentals may fill faster. Neighborhoods are changed faster and for the better.

I also believe that the new rental market will be broader than last. It won’t be just inexpensive apartments under 1,000 sf; it will reach for the more affluent and offer 1,500 sf to 2,500 sf units (and maybe even larger). These complexes will cater to both the young professional and the empty nester and retiree. Better quality will be demanded, the industry will respond, they will have to.

Yes a sea change is in order. The ship is turning, but like a super tanker it is a slow and ponderous course change, but it will be a course hard to change.

In Shakespeare’s The Tempest the first use of the term sea change is found, for your pleasure:

“Full fathom five thy father lies,
Of his bones are coral made,
Those are pearls that were his eyes,
Nothing of him that doth fade,
But doth suffer a sea-change,
into something rich and strange,
Sea-nymphs hourly ring his knell,
Hark! now I hear them, ding-dong, bell."

To the development community: Do you hear the ding-dong, bell?

Stay tuned . . . .

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