A square foot of living space is not what it used to be.
For Toll Brothers and the company’s City Living division president David Von Spreckelsen, that means Toll’s strategic game plan of “prudent expansion” sits on a foundational reset in real estate assumptions, and the plan is gathering momentum with each successive three-month financial reporting period.
The post-crash square foot reset has to do with who precisely today’s U.S. home buyer is, and who--among housing’s community developers and home builders--offers what that home buyer seeks. Over-simply, today’s home buyer has “means.” Real estate denizens call these purchasers “discretionary,” in that they can act unimpaired by contingencies such as needing to sell a current home, or needing to get bank approval to put their hands on enough money to buy a home.
Discretionary buyers—ones with access to cash treasure troves, robust and growing stock portfolios, sovereign wealth in search of anti-inflationary investment, and, for good measure, throw in a smattering of seven-figure income households flush with this year’s bonus payouts—are who, unit by unit, have electrified the housing market’s recovery on the heels of institutional bulk buyers of 2012 and early 2013.
They are who have been driving house prices from 2010-and 2012 floors on such a rapid recovery trajectory. They are why house-size trends have quantum-leaped 13% in the past couple of years, from 2,362 to 2,679.
Arguably, among national production home builders, Toll Brothers was, is, and will be the organization most committed to home buying’s discretionary buyer. Toll chief executive officer Douglas Yearley speaks of the firm’s commitment almost like it’s a translation from Latin proverbs, “It’s ‘the buyer above everything’ in our culture here,” Yearley says. The buyer, being the global and domestic affluent.
It’s today’s affluent buyer who’s changing one of real estate’s long-held assumptions.
From Toll’s most recent financials, “In FY 2014's first six months, unconsolidated entities in which the Company had an interest signed agreements for $167.7 million of homes, compared to $22.2 million in the same six-month period of FY 2013. The increase in signed agreements in FY 2014's second quarter and first six months was due in large part to contributions from two communities where the Company is a 50% joint venture partner: Pierhouse at Brooklyn Bridge Park and Jupiter Country Club in Florida.”
The long-held assumption has to do with the cost, pricing, and profitability of each square foot of living space in a home. Particularly for urban development, net prices-per-square-foot tended in the past to be higher on units that were smaller in total square footage, which flowed through to greater profitability on smaller units.
Not so anymore, says Toll’s Spreckelsen. “Thanks to the demand for luxury, and for three- and four-bedroom places, we’re seeing pricing-per-square-foot get better and better the greater number of square feet we offer.”
A case in point, in early May, Wall Street Journal staffer Josh Barbanel reported, “a buyer signed a contract to pay $11.18 million for a four-bedroom penthouse with more than 5,000 square feet of space, plus a 3,400-square-foot garden and patio” at Toll’s headline-grabbing Pierhouse at Brooklyn Bridge Park project (paywall).
The Brooklyn Bridge project, now about 16 weeks along in the selling process, has logged sales on 40-plus of the 108 available condominium units, averaging an eye-popping $1,800 per square foot, a record amount for Brooklyn residential real estate.
Pierhouse condos, reports Barbanel, “designed by Marvel Architects, have large windows facing the water and include landscaped terraces designed to echo landscaping in the park in front. One building is four stories. The other is 10 stories and includes a 192-room hotel, to be operated as a 1 Hotel, a brand of Starwood Capital Group. Starwood and Toll Brothers are partners on the entire project.”
Pierhouse is just one of several world-profile City Living projects Spreckelsen and the Toll Brothers City Living team is releasing to a voracious if highly-finite urban market. 400 Park Avenue South, in New York, is a new condominium designed by Pritzker-Prize winning architect Christian de Portzamparc, boasting 360-degree Manhattan views from every apartment. The building is a pioneering joint venture with Sam Zell’s Equity Residential, with Equity offering separate entrances and shared amenities on for-rent apartments on the first 22 floors, and Toll Brothers, via its own entrance lobby, selling a range including studio apartments for $1.2 million, two-bedroom units for $3.1 million, and four bedroom places for $15 million.
“JVs are still a small but important part of our business,” Toll ceo Yearley told BUILDER. Toll’s joint venture partners include a range of both strategic and financial entities—Taylor Morrison, Shea Homes, NVR, and GTIS Partners on the single-family side, and Barry Sternlicht’s Starwood, Yell’s Equity Residential, and Prudential Real Estate Ventures and construction, design and engineering players like AECOM and Tishman on the rental and student housing fronts.
"Backlog contracts from JVs rose to $160 million from $16 million a year, driven largely by very strong demand for Toll's 50/50 JV development, Pierhouse at Brooklyn Bridge Park," notes Raymond James analyst Buck Horne in a post-up to Toll's May Q2 and first-half financials. "As City Living deliveries continue to account for a larger component of Toll's operations--as much as 11% of total revenue by FY15--and operating efficiencies are implemented on Shapell communities, we believe Toll's margins should continue to see upward momentum."
While the Toll team prides itself on its lack of capital constraints, partnering with the likes of Barry Sternlicht “was particularly helpful in our bid to [then Mayor Michael] Bloomberg and New York City,” Yearley said.
As proof of its go-it-alone comfort zone in the New York pressure-cooker arena, Toll has a number of other projects in various stages of completion.
It’s the pricing-per-square-foot of living space that surprises Spreckelsen the most. “There’s a huge pent-up demand for larger living units, so we’re going with it,” Spreckelsen said. City Living's projects now dot the East Coast, from Boston, to New York and New Jersey, to Maryland, and Miami, and plans for the division include San Francisco, perhaps Los Angeles and Seattle in the near future.