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,
Ding-dong.
Hark! now I hear them, ding-dong, bell."

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

Stay tuned . . . .

Are We Ready to Roll the Dice?

Before I begin, please take second and look at this short video I made of our garden this spring, if you're stressed it will help to soften your day.

Windsor Hill Garden

After last week’s extremely pessimistic blog and enumeration of many of the problems within the housing market (it could have been ten pages longer), I thought this week I’ll take a look at the issue from a planner’s point of view.

I have been in the development industry for forty years as a designer, planner, and facilitator for my clients. Probably 70 percent of these efforts were focused on some aspect of the housing market, both rental and ownership. My clients were, and still are, merchant builders; some are developers (speculative entitlements are their meat and potatoes), some are builders (the next step after entitlements – they are the three dimensional guys), and some are both (a much rarer breed). During the last three years the speculators stayed low and dumped land like it was a toxic landfill, the builders cut staffs to nothing and many shut down their operations, and the developer-builder (if he managed his money well) went to Hawaii to wait it out (and are very bored about now).

My small part of the development industry creates plans for things that are to come; it’s all about the future. We try to anticipate what the market wants and will need four and five years from now. In 2004 my company had over 150,000 housing units in master plans, neighborhood plans, infill projects and outland parcels. These were great chunks of land that would eventually generate billions in income and thousands of jobs. In some cases these plans would alter the balances within communities, in others they would greatly improve the overall value of housing, but in general there would be significant improvements to a community’s infrastructure. What a difference five years makes and what a catastrophic difference the fall of 2008 made. Without exception every one of those projects either died or was put on hold for the last three years.

But from this development purgatory there are now glimmers of hope and change. (I am drawn to the definition in Wikipedia: The word "purgatory", derived through Anglo-Norman and Old French from the Latin word purgatorium has come to refer to a wide range of historical and modern conceptions of postmortem suffering short of everlasting damnation, and is used, in a non-specific sense, to mean any place or condition of suffering or torment, especially one that is temporary (so true, so true))

I have, both on my desk and underway, residential projects that are being released from purgatory, many were started in 2007. They are being purged of their sins, (more focused and affordable now), responsive to prayer (i.e. markets), and hope for salvation (buyers and renters). A few are being reincarnated, (changed from podium condos to townhomes), and some are just being reborn as rentals. It’s all so religious; it must be from all the praying that’s been going on at the Urban Land Institute and the BIA.

One theory that I have held for years is that the developer/builder is a gambler, the worst kind in many ways. He plays with other people’s money (OPM). When he’s good he clears the table and makes everyone happy. When he’s off his game or the OPM dries up, he walks away confident the game will resume. But at some point he will get very bored, his wife will throw him out of the house, and his back will go out from too much golf. It is about then (or now) that the itch will return, he’ll start doing ROI’s on napkins at lunch, he’ll cruise through a town he knows and sees empty lots begging for attention, he makes that call to the REIT that has had no place to put its money for three years. Our man is getting ready to put money back on the table and, I think, he’s also going to church more.

Stay tuned . . . .