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 . . . . . .

The Current State or District of Housng

It is no surprise, at least to those paying attention, that the one area that doesn’t seem to have (if ever) a housing crises is the Washington D.C. area. The growth of government requires bodies, bodies require housing and there you have it. Inventories are shrinking and prices are rising. In an article in Builder by Jim Caulfield titled Nation’s Capital Continues to Lead Housing’s Recovery he goes into some detail about the numbers and the comparisons to the past. I’m reminded of the old line from Casablanca, “I’m shocked, shocked, there’s gambling going on here!” You think? The massive growth in government, at all levels, is driving this non-surprising phenomenon. It’s too bad that those agencies couldn't shift to Florida or Las Vegas or the Central Valley of California. It’s summed up with this:

Perhaps the best news for this market is its current inventory of available for-sale homes. There were 10,510 active listings in May, the lowest number for that month since 2005. “As interest rates remain low and demand rises, the low supply will continue to put upward pressure on prices,” the report states. “This price growth could entice hesitant sellers to enter the market.” However, the report also cautions that the listings might also indicate that many people, worried about the economy’s future, are still comfortable remaining in their existing homes.

You wonder if the legs were kicked out from under this anomaly whether it could stand. But that is an argument for another day and topic. Smile if you are a Washington builder.

In the never ending discussion to make the bottom call, the Wall Street Journal posted an interesting note from a few experts and participants in the current housing market. S. Mitra Kalita posted the article (GO HERE). While most begged the question to some degree, they were all optimistic, the end will come soon – say 2015. That means this bear market will have lumbered across the housing wasteland for eight – yes eight - years, 2008-2015 (inclusive). This is longer than the 1930+ Depression period. Sure housing didn’t really turnaround until the 1947 plus era, but then again there was a war to deal with and the pent-up demand of almost eighteen years.

A friend of mine, Gregg Logan with Robert Charles Lesser & Co. (RCLCO), sent this company missive out a few weeks ago, posing the questions as to whether the housing market still wants the suburbs (GO HERE). It has very good graphics and interesting charts, take a look. The trend is to the suburbs as it has been for fifty years, but as said in the current young parlance of “Friends with Benefits” – it’s now “Suburbs with Benefits.” 

And taking advantage of this “suburbs first” concept is Waypoint Homes located in Oakland. Waypoint buys foreclosed homes, fixes them up, and then rents them. It makes many adaptable agreements with its tenants, but what it really does is protect these neighborhoods from blight due to abandonment and lack of care by the banks. They rent over 1,500 homes and hope to grow this by ten times in the next few years. It has been in the local news this past week with its $20 million partnership with Enterprise Community Partners to help expand its reach into marginal hosing markets. Doug Sovern is his article on KCBS quotes Colin Wiel, Waypoint’s founder:

“Basically what we do is single-family rental. So we’re buying homes, renovating them and renting them out, which is our core business model, but to do it in certain harder hit neighborhoods in Oakland than where we’re currently operating today.”

This is an exciting company that saw an opportunity and built an aggressive business model that provides housing, protects these valuable assets in the market, and also gives hope and home to people who often desperately need it. This is not a “Government” program, it is an honest to God for-profit venture, and they are showing everyone how it can be done. I wish them continued success.

Stay Tuned . . . . .

Getting out of Dodge

I have always believed that the American citizen wants the following: “The biggest house on the biggest lot that they can afford.” Simple isn’t it. And this is in complete sympathy with the fundamental law of good economics: “The market is supreme.”

Why then are we continually bombarded and chastised by do-gooders and New Urbanists who firmly believe that we are on the road to perdition and our just end by living in single family homes in the suburbs? In Joel Kotkin’s rebuke of two op-ed pieces in the New York Times touting the decline of the suburb HERE, he chastises their tenets as “more a matter of wishful thinking than fact.” Yes it is more than wishful thinking on both Chris Leinberger HERE and Louise Mozingo’s HERE part to believe (almost over-passionately), that they will be proved right and the “fringe suburb” and the suburb itself will go the way of the dinosaur.

In both of their arguments they blame the architecture not the economics. The blame the suburbs and the unenlightened, not the marketplace. And to use the excuse of climate change is just plain lazy thinking. And Ms. Mozingo, what the hell is pastoral capitalism? I must have missed that economics lecture. After reading both Leinberger’s and Mozingo’s diatribes I swear I have been pushed back to planning classes of 1970 when Denise Scott Brown, Robert Venturi and Vincent Scully’s musings on Le Corbusier’s fascistic views on urban redevelopment and Las Vegas chic were the rage, Edmund Bacon was required reading on Philadelphia, and Paolo Soleri’s dreams of human anthills were at museums of modern art. Save the world – go vertical.

The average American (and I’m sure far more than 50%) distrusts cities. They see criminals and civil discourse. They see danger and are fearful. They see uncontrolled costs, poor management and excessive tax burdens. Sure they go into the city centers during the day to the museums and to shop but they get out of Dodge before the sun sets. That’s one part of the problem with the current foreclosure issue, fear. Many took advantage of this opportunity to escape and then, combined with stupid lending practices and the collapse of the economy; these otherwise sane people were put in jeopardy.

Urban areas have higher concentrations of voters (obviously) and where there are voters there’s politicians handing out money. Billions of dollars flow into the cities - much without reason or control. So we now have Lexus cities that can’t afford to put gas in the tank. The most current gross excess is the high speed rail that is planned between dense urban areas while ignoring the suburbs it will fly through. Transit only functions both economically and operationally in higher density urban areas, thus to believe that density is good is to justify the outrageous cost per user that will saddle the general public - who live in the suburbs. The market thumbs their nose at these ideas.

EVERY land use is temporary. Every castle, hovel, office tower, office complex, stadium, single family housing tract is temporary, it is only a matter of time. Even the billion dollar cyclotron office building proposed by Apple will be knocked down some day. Every ring of urban growth “fringe” eventually becomes an inner ring of decayed housing ripe for redevelopment Cool Example.  I have planned residential communities on lands that were once insane asylums and office complexes (don’t read anything into that statement). Well planned money goes to where there is the best return; a new freeway interchange may affect thousands of acres and foster growth. A new sewer plant allows for more effective suburban planning, while also clearing up environmental problems.

And what is urban anyway? Every planner and politician has one idea and every home buyer and family has another. The debate is not an architectural one it’s a social issue. It is a debate on the automobile and its attendant demons; it’s an attack on the politics of these suburban residents, and it’s a reaction of their collective “thumbing of the nose” toward the academics.

Yes Virginia, believe in the market and the demographics.

Stay tuned . . . .