Stacked Deck

In the past, The Corky Mc-Millin Cos. would almost always sell to other builders and developers parcels within its master planned communities that were zoned for attached-home construction. Not anymore.

“As we continue to operate in a more [land] constrained market, we're seeing the need to augment what we develop and build with attached product,” explains Guy Asaro, the San Diego–based builder's first senior vice president for land development. He notes that Corky McMillin has several attached projects under development, including one that's part of a larger community in Chula Vista, Calif., that could yield up to 100 units per acre; and another called Lonestar, in Otay Mesa, Calif., that allows for between 12 and 30 units per acre.

Other production builders are, well, becoming more attached to selling attached homes, too, and not just because finding large land tracts is difficult and expensive. They see a genuine opportunity that, up until recently, few builders have exploited. In 2005, attached sales represented a sliver of Royce Homes' closings; now, the company is building attached townhouses in Houston and Atlanta that average 1,760 to 1,920 square feet and two to six units per building. In 2007, attached homes should make up 8 percent of its closings, says Shawn Speer, Royce's Houston division president.

In 2006, 42 percent of McBride & Son Homes' estimated 2,050 closings were attached homes, up from 28 percent the previous year. “We're seeing that more municipalities are receptive to the concept of providing housing to keep empty-nesters in the community,” says John F. Eilermann Jr., CEO for the Chesterfield, Mo.–based builder, which has been in the attached game since the 1980s. The company focuses on villas that range from 1,000 to 1,850 square feet and two to three units per building.

About half of the estimated 1,000 units Pulte Homes closed in 2006 in the San Francisco Bay Area were attached (compared with about 30 percent across all of its divisions). Pulte's multifamily product there is different because it ascends three stories or higher, versus its mostly two-story buildings in other parts of the country. Merry Sedlak, the division's vice president of marketing, says Pulte got into attached in a bigger way in the San Francisco market five years ago when it hired Steve Kalmbach from Catellus Development Corp. for his expertise in acquiring land zoned for attached construction. Kalmbach is now that division's president.

Around the time Kalmbach joined Pulte, Centex acquired Dallas-based City-Homes, which had been building upscale urban townhomes since 1997. This year, Centex is expanding CityHomes' activities to the Houston market, where it eventually plans to have 10 to 12 communities selling attached homes ranging from 1,700 to 2,400 square feet and from the mid-$200s to the mid-$400s. In Dallas, CityHomes sells three-story brownstones that borrow design elements from downtown San Francisco and the Rainbow Row community in Charleston, S.C. Don Barrineau, CityHomes' president, says Centex's divisions in Denver and metro D.C. are also developing attached communities. “This is a growth area for the country, and we're poised to do a lot more interesting housing over the next decade.”

Barrineau thinks that by tapping into demand for attached homes, Centex has a clear competitive advantage, because he's not seeing other production builders diving into this market with the same fervor. But attached could become more than an afterthought for the housing industry. Through September 2006, 19 percent of homes started nationwide in that year were attached. That's a far cry from the 28 percent that multifamily represented in all of 1998 but up from 17 percent in September 2005, according to Census Bureau data. According to the Joint Center for Housing Studies' “State of the Nation's Housing: 1998,” that year represented an eight-year peak for multifamily sales, at 340,000 units. The Joint Center attributes this to several factors: Rising rents were making ownership more attractive; the overbuilding during the 1980s had steadily depleted itself; and echo boomers were coming into the market. All that started changing, however, after 2000, when, according to data on the NAHB's Web site, there was a dramatic, five-year-long increase in single-family starts, which one presumes made multifamily construction less pressing for builders.

Some builders, though, continue to view attached housing skeptically, and practically no one believes multifamily will supplant single-family homes as the purchase of choice for most buyers. Building two- to four-story structures over parking garages or retail stores remains outside most production builders' strike zones. “We'll probably be moving in the other direction,” says Troy Black, a spokesperson for Federal Way, Wash.–based Weyerhaeuser Real Estate Co., whose Pardee Homes and Winchester Homes divisions build attached product to counter land-constraint issues in Southern California and Washington, D.C. Nonetheless, attached remains a small part of the builder's business.

Denver-based M.D.C. Holdings specifically limits the lots it controls for attached development. “We believe that attached products carry the most amount of [liability] risk,” explains Gary Reese, M.D.C.'s CFO.

Even Ashton Woods Homes, which for six years has built attached homes in Atlanta, Orlando, Fla., and Dallas, does not foresee attached product exceeding its current level of 20 percent to 25 percent of the company's annual closings, says Tom Krobot, CEO and president of the Roswell, Ga.–based builder, which currently does not offer attached houses in its Phoenix or Houston divisions.

The recent condo glut has probably soured some builders' enthusiasm for attached homes in general. In San Diego, for example, 6,400 of 30,000 homes for sale in mid-October were attached condos or townhomes, according to MarketPointe Realty Advisors, a local consulting firm. Tom Bozzuto, CEO of The Bozzuto Group in Greenbelt, Md., which specializes in multifamily development, notes that 38 projects in the metro D.C. area that initially were to be for-sale condos are converting to rental units.

“Production builders were certainly getting heavier into attached nine to 12 months ago, but I'm not sure that's true today,” says Geoffrey Stack, a managing director and principal with Irvine, Calif.–based Sares-Regis Group, which since 1970 has built more than 19,000 condos and apartments for sale or rent. Still, Stack believes it's inevitable that more production builders will expand into attached “because more people want to live this way.”

No one disputes that demand for attached homes located closer to urban centers is fertile. This past fall, when Ivanhoe-Huntley Homes opened its attached-townhome project in West Bloomfield, Mich., with 49 units selling from the mid-$200s to the mid-$300s, it had a waiting list of 500 buyers, says company partner Steven Perlman. Research by Hanley Wood Market Intelligence (a division of Builder's parent company, Hanley Wood) finds that attached sales, as a percentage of total home sales, have risen steadily over the past five years in many metropolises (see “Closer Quarters,” page 146). “You can't pick up a newspaper or turn on the TV and not hear about graying baby boomers” who want maintenance-free living, says Ed Bacome, a principal with Dublin, Ohio–based Epcon Communities, which in 2006 closed an estimated 4,000 attached for-sale condos, the only type of home it builds. “There's been a slowdown in single-family [demand], so builders are looking for an alternative.”

Builders' interest in attached homes is evident on NewCondosOnline.com, an Internet advertising portal for condos and other attached products, which counts among its clients D.R. Horton and Hovnanian Enterprises. “We're definitely seeing more big builders making a transition into attached,” says Brent Gleeson, the San Diego–based company's president. And over the past five years, West Des Moines, Iowa–based Bloodgood Sharp Buster Architects and Planners has seen its multifamily-related business increase threefold, says partner Doug Buster, who observes that production builders are moving in this direction primarily to capitalize on greater infill opportunities.

“In the long run, multifamily is going to be a bigger part of the market and mostly urban,” predicts Bernie Glieberman, CEO of Novi, Mich.–based Crosswinds Communities, which is selling attached units in Florida and in its home state, including Lofts at New Center, located two miles from Detroit's downtown business district, with 1,280-square-foot lofts starting at $179,900. The building is in an enterprise zone that offers property-tax breaks to owners. On Nov. 4, Crosswinds held a “Priority Reservation Event” for Village Lofts, a work/live/play product in Flagler Village in downtown Fort Lauderdale, Fla., with seven models (including some with second floors, libraries, and balconies) ranging from 1,044 to 1,504 square feet and selling from the mid-$200s to the $500s. The building's amenities include a pool and a fitness center.

Builders say attached homes appeal primarily to two buyer groups: young singles or couples who are purchasing their first homes and covet urban living, and empty-nesters downsizing their living spaces. “The newly wed and the nearly dead” is how Glieberman playfully characterizes the attached market's sweet spots. Two-thirds of Epcon's customers are 55 years of age or older, and its homes average 1.9 people and 1.5 cars per household. Conversely, Pulte's attached portfolio in the Bay Area includes a building in Emeryville, Calif., with two floors of lofts atop three floors of town-homes. “It's a walk-up, so you have to be young to live there,” quips Sedlak.

CityHomes' Barrineau and Ashton Woods' Krobot point out that even first-time buyers demand a level of quality that, in some cases, must exceed what might be found in a comparable detached house. “This is a ‘move-up' buyer, even if it's their first home, and they come with expectations about standard features,” such as granite countertops and hardwood flooring, says Barrineau. Empty-nesters, on the other hand, usually want to customize what they buy. “On $400,000 to $500,000 homes, people might spend another $100,000” on upgrades, says Stack of Sares-Regis. Epcon's Bacome notes that, over the two decades his company has built attached homes, more options have become standard features, starting with garages, which weren't offered by most builders in the 1980s. He says Epcon prefers standardization to keep its home prices affordable. “We always try to limit choices to Exhibit A and Exhibit B, each on two pages.”

Most builders agree that location continues to be an attached home's strongest selling point. Consultant Bill Becker, of The William E. Becker Organization in Teaneck, N.J., says that several projects he's been involved with lately have either included mixed-use components, such as shopping villages or farmer's markets, or are near colleges, restaurants, and other “lifestyle centers” that are close enough for residents to walk to.

From a design standpoint, Speer says Royce Homes emphasizes the “sharp curb appeal” of its buildings to suggest what their potential resale value might be. Sares-Regis concentrates on “space utilization” within its homes by reducing the square footage dedicated to corridors and devoting as much area as possible to closets and storage. Bozzuto points out that over the past decade, virtually all of the multifamily projects his company has worked on have required some degree of “handcrafting,” in that each has been unique. Consequently, he says, production builders that are adept at constructing the same detached house over and over again within a large community must rethink their approach as they get into attached-home building more seriously.

Buster says that while putting up one- or two-story townhouses and flats isn't much different from building detached homes, three- and four-story buildings are “entirely different, with more complicated sets of documents.” He also observes that production builders keep making the same mistakes when they get into attached products: They don't have good reconnaissance about what kinds of attached products local buyers want; they use the same subcontractors that build detached homes; and they don't provide jobsite supervision early enough in the process.

Bozzuto and Stack caution production builders about the increased liability that comes with the attached territory, especially in the areas of potential fire and water damage. “There are many insurers that won't have anything to do with multifamily,” Bozzuto says. Glieberman of Crosswinds Communities acknowledges that insurance is a “big problem” for any builder of attached homes, which is why companies like his buy completed-operation insurance that covers the entire building.

In Glieberman's view, such obstacles actually give builders the chance to spread their creative wings, particularly when they're developing projects with 100 units or more per acre. Roy Russell, vice president of strategic planning and marketing for Centex's Houston division, adds that developing a multifamily site that might have only 1.5 acres, with per-acre densities of 20 to 35 units ranging from 18 to 24 feet wide, requires “talented architects and a keen understanding of consumer preferences for optimizing the smaller space.”

Two factors determine density, say builders: market demand and municipal regulation. Each presents challenges, although the first is proving to be a lot easier for builders to deal with than the second. For example, Ivanhoe-Huntley has five different multifamily building schemes, including a 12-unit, stacked-ranch product for buyers looking for an affordable alternative. Perlman says his company's plans are flexible enough that it can alter its product mix depending on market and land circumstances.

Ivanhoe-Huntley favors densities of seven to nine homes per acre, says Perlman. Other builders in more populous areas want more. “We try to get as high a density as we can,” says Stack of Sares-Regis, whose recent projects have between 24 and 55 units to the acre. Buster thinks the broader acceptance of the traditional neighborhood development concept has softened some municipalities' resistance to attached housing. But city planners in many markets still view “attached” solely in terms of more traffic congestion and children. “We build attached in five markets, and two of them are flexible, two aren't there yet, and in Texas it's not on their radar screens,” says Asaro of Corky McMillin. Eilermann of McBride & Son says that municipalities also regularly demand “upscale designs with lots of passive amenities,” such as parks. “The key is to match the look, feel, and density of the project [with] surrounding zoning.”

While municipalities' entrenched negative perceptions about attached homes might be changing in builders' favor, it's still not a slam dunk. On one of its newer projects, the Villas at Glenealy in Dublin, Ohio, it took Epcon 21 months to get land it wanted rezoned from industrial to attached residential, and even then it ended up with a density of only 3.4 homes to the acre. But by October, when construction of the units and clubhouse was 80 percent complete, “people [were] saying that maybe it's not so bad after all,” says Bacome.