By Susan Bady. While the opportunity to grab market share in big metros abounds, the competition has become fierce -- too fierce for some. Mid-size builders looking for unclaimed ground find there are other ways to make a housing splash. Smaller cities like Raleigh, N.C., Nashville, Tenn., and Austin, Tex., still hold promise for those who find the competition in top markets a bit too intense. Lucrative niches, they're discovering, do exist in the land that big builders forgot.

Take, for example, the Pocono Mountain region in Pennsylvania. A new rail line is under construction that will bring commuters from the Poconos to Manhattan in about 55 minutes. This will attract buyers from New York City and northern New Jersey, where the economy is well-established and diverse. "The job market isn't dependent on one industry or another, and we like that," says Kyle Upper, director of acquisitions for Orleans Homebuilders, which is located in Bensalem, Pa.

Orleans looks hard at location as well as the source of employment. "Move-up buyers are our primary customers, so we need to know where people are going to work and how they're going to get there," Upper says.

Eric Belsky, executive director of Harvard's Joint Center for Housing Studies, says some niches may be surprising. "When people think of New York City, they don't typically think of building going on in Pennsylvania as part of that big economic engine. But unless you're a local builder, a lot of opportunities will be in places that may not be that close [to cities]."

In some parts of the country, people are leaving high-cost areas for cities like Bakersfield, Calif., Richmond, Va., and Boise, Idaho, where those with transferable skills, such as teachers and construction workers, can easily find employment. And it isn't just couples with young children who are migrating. Empty-nesters, too, are selling their existing homes, pocketing a profit, and buying the house where they intend to spend their retirement years, generally in a more affordable area.

Demographic Shift

Despite the hype, not all baby boomers are gravitating toward the Sunbelt. Many are clamoring for infill housing in urban areas and close-in suburbs, according to Mike Castleman, chairman and CEO of American/Metro Study Corp., a Houston-based market research firm. They want smaller homes on smaller lots but prefer to stay in the same neighborhood, he says.

Belsky notes that there has been unprecedented demand for age-restricted communities near highly populated areas that haven't historically attracted retirees. Chicago's southwest suburbs, for example, including the fast-growing towns of Plainfield and Crest Hill, have been a mecca for people age 55 and older. Several builders, including Lakewood Homes, Neumann Homes -- along with Pulte Homes' Del Webb -- are developing active adult communities in the area.

Another hotbed of activity is Washington, D.C., specifically the beachfront area of Norfolk, Va., a smaller market that Belsky says is expanding rapidly "not just because of spillover from Washington, but on its own merits and its own base."

Second-home sales are also benefiting from the natural aging of the population, particularly for those who have been priced out of tonier spots. Traditionally popular vacation areas, such as the Berkshires in Massachusetts, have become so expensive that buyers from Boston and New York are pushing north into Maine, Vermont, and New Hampshire. Belsky says that while the luxury segment remains soft, the large number of middle-income buyers keep second-home demand strong.

Multifamily Pockets

Low interest rates may have created a stampede of renters from apartments to their first homes, but the rental market is still viable in some areas. The top five apartment markets are Sacramento, San Diego, Washington, D.C., Orange County, and Riverside/San Bernardino, according to Marcus amp; Millichap, a research firm that studies 40 multifamily markets nationwide.

"Most of the markets at the top of the list have low vacancies and decent job growth, and tend to have building constraints," says Chris Overhouse, director of research in the firm's Phoenix office. "Sacramento has very high job growth. San Diego, Washington, D.C., and Orange County are areas where it takes less lead time to complete an apartment building than a single-family subdivision."

Ultimately, it's household growth that makes one market hotter than another, says Overhouse. "More people want to live in Sacramento than in Milwaukee," he says. "It's as straightforward as that. If there is population and job growth, apartments are going to do better, all else being equal. Then, if you have a city that's very attractive to people -- like San Jose was in the late '90s -- and geographic constraints in terms of building, you see the apartment market just shoot to the moon."

Lifestyle renters -- people age 50 and older who don't want to be tied down to a home -- are as much a force in the market as they've ever been. As echo boomers continue moving into rental housing, opportunities will expand.

Filling In

As land availability near urban areas continues to tighten, builders can count on an upswing in the recycling of old warehouses into lofts. Of that, market analyst John Burns is convinced. "If you look at the absolute volume, the numbers have been pretty small, but I think that's going to change," he says. "Chicago has led the way with that trend." Another promising niche is the redevelopment of old shopping centers into mixed-use (residential and retail) projects. There may be an uptick in such projects because of cities' need to sales tax.

In some markets, including Atlanta, urban infill housing may be moving down the price ladder. Steve Check, vice president of land acquisition and development for MDC Homes, in Alpharetta, Ga., points out that the amount of building and developing going on in the $600,000 to $1 million range, has slowed over the past year. MDC, whose product is priced from the $150,000s to the low $400,000s, is zeroing in on the $150,000-$250,000 market. "I'd be a little concerned if I was in the $300,000-and-up range in Atlanta," says Check. "That seems to be a little bit soft."

Belsky says the fundamentals that will drive long-term growth in any market are job formations, the attractiveness of the business climate, and the likelihood that other businesses will want to relocate there. "The biggest risk is job loss," he says. "Job losses will cause a downturn, and some areas have more exposure than others simply because of the types of employment they have."

Susan Bady is based in Chicago.

Published in BIG BUILDER Magazine, February 2003