Production home builders have made their living in the suburbs and still do. Their business model, based on developing and building suburban America, has been highly successful, thanks to demographic migration away from the urban core, toward more space, more affordable housing, and better schools. But increasing energy costs, longer commute times, slowing economic growth, and the thought that “less is more” indicate change must come.

How will production builders adapt their business model to meet shifting demographics and consumer demands?

As large urban centers have grown, suburban locations are ever more remote—extending commute times—and the cost of owning a suburban home has become more than the monthly mortgage payment. Energy costs, transportation expenses, and rising taxes all need to be included in suburban living.

The costs of suburban ownership, coupled with the buying habits of the next generation of first-time homeowners—the immigrant population and Generations X and Y—are refocusing the preferred location for new homes. These buyers prefer a more central location that reduces commute times and is convenient to entertainment and basic necessities. This trend will drive the production home builders to modify their business model and focus more of their time, effort, and capital on urban development.

Due to increased costs associated with urban development, builders will need to turn to a smaller, efficient attached product to maintain affordability. The production builder will have to either acquire or develop the necessary resources to develop and sell these urban homes.

These resources include personnel with the following skill sets:

  • Buying, remediating, and developing environmentally sensitive sites
  • Dealing with urban planning commissions and neighborhood activists to obtain the necessary entitlements
  • Designing and constructing a more complex structure—multi-stories and multiple units, with site limitations, existing utilities, and access issues
  • Marketing and selling to a more demanding and educated buyer
  • The financial model also differs substantially. There are a number of differences in the construction and development of an urban home, which may affect cash flow. They include:

  • The possibility of a longer time period to acquire a property and attain the needed entitlements
  • Higher land costs and, possibly, development costs
  • Higher permitting costs
  • Higher design and engineering fees
  • Longer build times associated with a more complex structure
  • Significant insurance costs
  • These differences front-load projects with cost and delay booking revenue. Thus, there is the need for more initial capital. Asset turns also may be adversely impacted.

    These changes point to a need for different resources to adopt successfully the urban development model. As builders recover from the impact of the recession, they will have the opportunity to restructure and focus on the urban market. There will be ample qualified personnel to support the change in focus. The increased costs associated with urban will favor the well-capitalized builder—whether public or private.

    Phil Whitcomb is president of AH&P Investments, a partner of AgoraRetail Advisors LLC, and acts as president of Promethean Structures. He may be reached via e-mail at