COMSTOCK HOMEBUILDING IS IN ALL OF TWO markets. It's placed its biggest bet on Washington, D.C. (Comstock is also in Raleigh, N.C.) While Washington certainly is a market almost any builder would covet a stronghold in, its saturation level is daunting. Limited land availability has stretched suburbs from the District as far as West Virginia and Pennsylvania. So, when Comstock CEO Chris Clemente and his team say they want to evenly diversify their portfolio of products among single-family, townhomes, mid-rise, and high-rise, the reasons are clear.
Comstock just had an IPO at the end of last year. So with its primary market already fairly mature, the builder had better get mid-rise and high-rise right.
The rush to high density isn't only happening in Washington, D.C. Builders all over the country are diving into mid- and high-rise projects with enthusiasm—or they are at least thinking about it. They're showing interest for good reason. According to projections from Global Insight, between 2006 and 2010, a yearly average of more than 284,000 units should be built in structures of five or more stories. With the median price of a condominium being $193,600, that would mean about a $56 billion annual market—in today's prices.
Those numbers actually include rental units, of course, but you can expect condominiums to take up an increasing share of the overall multifamily market. According to U.S. Census bureau information, in 2003 there were 262,000 multifamily starts, 87,000 of which were for-sale condominiums. Compare that to 2004, which actually had fewer starts—225,000—but the number of multifamily condos jumped to 120,000. According to BUILDER 100 data, the top 200 home builders, meanwhile, did only about 18,500 for-sale condo units. Plenty of room to make inroads in a growing market.
“The share [of condos to multifamily rentals] is going to continue to rise, and the real reason is affordability,” says Stanley Duobinis of Crystal Ball Economics. Particularly when and if those interest rates ever start rising, says Duobinis, look for the condo market to surge all the more. Why are builders taking note? A trend toward condo buying, at least in some markets, conceivably could erode home builders' traditional customer base of detached home buyers.
Once upon a time, a company like First Home Builders of Florida probably wouldn't have given a second thought to any vertical trends that might be happening at a given moment. But as a builder of entry-level product, the builder is sensitive to affordability issues. As a result of escalating home prices in its markets, says CFO Jamie Pirrello, “We're losing our customer base with our traditional product.” Thus, the movement toward higher density product is “something that we're starting to pay attention to.”
So it comes as no surprise that Comstock isn't the only home builder playing in the mid- and high-rise arena. But don't assume it's only the national players getting involved; while having launched a glitzy IPO, Comstock only had 328 closings in all of last year. And not only do builders getting into vertical product vary in size, they vary in background and level of expertise as well. Some are smaller companies with truckloads of condo experience, while larger players include those both relatively new to the vertical game (Hovnanian Enterprises and John Laing Homes, for example) as well as battle-tested veterans of vertical construction, both in the commercial and residential space (Centex).
With such disparate backgrounds, the issues builders face may overlap, but they are not all the same in this evolving and changing climate of vast opportunity, higher risk, and increasing competition.
Following are snapshots of five different companies converging on the mid- and high-rise space, each of which is facing unique challenges.
THE RIGHT PEOPLE IN THE RIGHT PLACE: CENTEX CORP. THE TEAM
THE CHALLENGE Centex is the veteran of the bunch: It has been doing residential vertical construction since the 1980s (minus a few economy-related pauses). Further, the company projects that mid- and high-rise development will make up an $860 million chunk of its business by 2010. Managing volume and growth, then, becomes the key challenge. On a day-to-day basis, that translates into getting the right people on board, both in-house and in terms of trade partners. “The biggest challenge going forward is going to be a people challenge,” says Lloyd Nakayama, vice president of operations for Division Three, which spans from Texas to California. “This business is all relationship based.”
Learn more about markets featured in this article: Washington, DC.