Friday, January 3, 2014

Development Trends - 2014

Where do we go from here? The development world (in the US especially) is groping about trying to find traction in a world that seems confused and distracted. Is it housing, commercial, office, higher density, affordable housing, urban, or suburban? I'm tempted to say all of the above but, there is always a but, the truth lies in the edges of all of these.

Housing is the dominant driver in almost all real estate transactions. Where people are - much will follow. And, regardless of the experts who love urban, the growth will still be in the suburbs. The dream of most is a home on a lot. My mantra has been for years: The biggest house on the biggest lot that the buyer can afford. Simple, yes. Complicated, yes. Yet opportunities will be significant, especially within the 30-mile radius of the major urban areas. I was once lectured by an experienced planner back in the early 1990s that the master planned community model was deceased. Well it rose from the dead like Frankenstein and then proceeded to be put back in the ground by 2008. Hundreds of master planned communities died on the planning tables with the collapse of Lehman Brothers and other financial institutions. They will again arise due to demand and economies of scale.

Commercial/retail is always a romantic model, cool retail villages, neat neighborhood centers, urban ground floor retail. Yet we are so commercially overbuilt in retail that most markets will see a constant rebooting of existing projects until a mix works. It will be tough but even the retailers themselves are changing and morphing to find niche markets. Look for strong entrepreneurial retailers to try new and exciting things over the next few years to take advantage of competitive rents and locations. Reconstruction and expansion of existing structures will lead the way. There are no easy answers here.

Office markets, like commercial/retail, are also overbuilt. This overhang in square footage will take time to be reabsorbed, buildings will be remodeled, updated and even repurposed (with housing in many markets). Cities will look at horizontal mixed-use as strong alternatives to their problems. Again aggressive developers will see great opportunities, but it is not a market for the timid.

Higher densities are always in vogue, yet have been very difficult to achieve outside the dense urban centers. And apartment density is always relative. 40 units to the acre in one location is appropriate for some markets, 18 units per acre (the old model from the seventies) is probably more appropriate for many ex-urban markets. There has been a dearth of apartment construction during the past ten years (or more) primarily because the foreclosure market has absorbed the demands of the rental market. But now with the strengthening of single-family home sales, renters are being literally pushed out. They will need places to live and not just in urban markets. Look for strong improvements in this sector as we move forward over the next few years. And this will be in middle to small markets as well.

Affordable housing is a political football, "build it everywhere except in my backyard." Social NIMBYism. This only works where there is some form of political cover and subsidy (like electric cars). I see many of these business models morphing into more realistic projects that are a mix of both for sale market driven projects with subsidized components. Will they work? This remains to be seen, due in part to the significant social issues that are brought to bear. As I've said before build more market driven housing, this will free up the lower cost existing housing stock. Look for serious battles in this segment over the next few years.

The numbers continue to show that the growth is still going to the suburbs. You can believe what you want but the census numbers show this across most of the country. This growth will continue in outlying suburban towns that are safe and well managed politically and financially. Diversity is thriving in these towns and villages and will continue, and all the fancy demagoguery about the sterile suburb (a self-serving fallacy at that) won't change this fact. Developers will find a good home in these markets.

Stay Tuned . . . . . .

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