Bye-Bye' burbs

MARKETING CONSULTANT KENNETH Agid clutched a price sheet as he peered through the back window of a fourth-floor condominium at a bank of garbage cans, a power line, and a dirty gutter. The list showed the unit was selling for $25,000 more than most of the others in the downtown Southern California mid-rise, so he brought the mistake to the attention of the sales representative.

“That's no mistake,” the rep corrected him. “That's the premium for an alley view.”

That alley view, Agid learned over the next few minutes, was among the best in the building, whose other exterior walls were within 10 feet of three similar four-story buildings. “You didn't get any good light or ventilation and had to worry about whether the person who lived 10 feet away kept his blinds open,” he recalls.

KB HOME: Multifamily urban housing accounts for 6 percent of KB Home's portfolio. The firm is building a mix of entry-level to high-end condos from Tucson, Ariz., to Texas. Its two-building Midtown Plaza in San Jose, Calif., is home to 257 condominiums as large as 1,340 square feet.

In short order, he had a chance to share his big-city smarts with a client, a top-10 builder who was making a first foray into the urban market after decades as a suburban-only builder.

For units facing a street with a traffic count of 20,000 cars a day, the builder had decided to offer a $50,000 discount to make up for the eyesore and the noise. Instead, Agid talked him into calling that a “street view” and charging $50,000 extra.

They were the first ones to sell.

What passes for pretty in the city might not pass muster in the suburbs. Indeed, says Agid, multifamily urban housing is “virtually the antithesis of ... today's conventional master planned communities in the suburbs.”

Yet the country's most successful builders of suburban communities are swarming downtown in a throng large enough to rival a New York sidewalk crowd at quitting time.

BARRATT HOMES: The firm's new urban development division has replaced a pair of dilapidated motels and a restaurant in La Jolla, Calif., to make way for the 138-home Seahaus mixed-use village. It is also building 184 Metrome condominiums in the downtown San Diego ballpark district that it calls “cool pads in the heart of East Village.”

Quicker than a commuter train, those builders—Pulte, Centex, Toll Brothers, and Hovnanian Enterprises among them—are adding townhomes, lofts, and mid- and high-rise condominium buildings to their realty repertoires, and they're building them on sparse city lots in neighborhoods where most people wouldn't have walked alone after dark just a few years ago.

“As much as a demand as there is for moving into suburban areas for larger yards and more square footage, there's an equally strong demand from those who want to live closer to their place of work, to transportation—closer to the city,” says Derrick Hall, vice president of communications for Los Angeles–based KB Home, which a decade ago built no urban product but will close the year with 6 percent of its stock in high-density downtown homes.

Correspondingly, 200 of the 700 homes Barratt Homes will deliver in 2005 will be multifamily urban units. The Carlsbad, Calif.–based builder has nearly 1,000 more high-density units in the works and eventually will sell 500 of them a year. Standard Pacific Homes, meanwhile, estimates that up to 7 percent of the homes it delivers this year will cluster with more than 20 others per acre. And within six years, high-density housing could account for half of the builder's California production.

Suddenly, “cities are a cool place to live,” notes Ben Jogodnik, vice president of Philadelphia-based Toll Brothers, which is building in Providence, R.I., Hoboken, N.J., and Chicago. And that means they're a profitable place to build.

Trend watchers can't say whether empty-nest baby boomers' sudden desire for downtown digs started this new urban gold rush, or if it followed the collective effort by big-city mayors to chase crime and grime out of metropolises to render the urban landscape safe and livable for the 50-something crowd.

JOHN LAING HOMES: The Boulevard, an urban village in the heart of Anaheim—California's oldest city—will blend single-family homes with attached townhomes in Orange County. The homes will be sold at affordable rates in cooperation with the Anaheim Redevelopment Agency.

Either way, cities such as Los Angeles, Washington, San Diego, and Phoenix suddenly have too few homes for everyone who wants to live there. And both trends have coincided with a dearth of suburban land for sale to builders who need to erect homes in order to make money.

“It's a response to the reality of suburban sprawl, to the guy in the oak tree,” notes Javier Mariscal, director of urban regeneration for John Laing Homes, still smarting after spending a court-ordered $1 million to uproot and transplant a massive 400-year-old oak tree that a man lived in for 71 days to protest the builder's plan to destroy it to make way for a suburban housing community. “There's not much land anymore. It's getting really tough to get greenfield development.”

The brownfield is no cakewalk, but at least municipal officials are quick to rezone abandoned industrial sites if a well-endowed builder offers to demolish or refurbish an antiquated building, convert it to upscale condos, add a few shops or restaurants, and sell the units to dozens, or even hundreds, of tax-paying, economy-boosting suburban transplants.

“It's a welcome environment,” notes Rob King, senior vice president and project manager for WCI Communities in Bonita Springs, Fla. “You walk into a situation where you've taken a piece of property that's been vacant for years, that's an eyesore, that's going nowhere fast,” he says. “There's a team of people in the city who are trying to solve your problems.”

And while urban renewal projects sometimes involve the cost of demolishing abandoned factories, the builders can usually skip the suburban prerequisite of installing roads and sewers because they already exist.

WCI COMMUNITIES: The largest builder of master planned communities in Florida, WCI's subdivisions routinely feature “towers”—high-rise condo buildings amid single-family homes. The firm's latest project, the Westshore Yacht Club, will replace a 500,000-square-foot factory (above) and will include a high-rise, town-homes, and waterfront estate homes.

Still, admits King, who notes that half of WCI Communities' properties are high-end, high-density, a suburban builder in the big city can feel a long way from home.

“Builders are smart in finding this market,” says John McIlwain, a senior fellow for housing at the Washington-based Urban Institute. “It's a very high-value market. But it's a tough market.”

And it's a market so different from the suburbs that builders have to pay a high “dumb tax” on their first urban projects, notes Eric Brown, a small, central Phoenix builder who saved suburbanite Engle Homes some pain when he merged his company, Artisan Homes, and his expertise with the Boca Raton, Fla., firm.

“You're not doing the same thing in the city as you're doing in the suburbs,” confirms McIlwain, who says mass producers of suburban housing often assign separate divisions to take on the contrary job of multifamily building. “A mistake would be to say: ‘I'll just take my [suburban] product downtown.' That will never work.”

Alan Boeker can attest to that. “On our first project,” says the division manager for Standard Pacific Los Angeles, “we tried to utilize processes from our traditional line of businesses. It didn't work perfectly.”

Specifically, the builder sold some condos in a mid-rise building early in the construction cycle and, as is typical during transactions for single-family homes, offered the buyers a slew of optional upgrades. Crews, trying to finish 85 units at once, couldn't customize each condo and still stay on schedule. The builder heard an earful from buyers who had already waited a year to move in.

Builders also hear plenty from their city neighbors, who demur when it comes to the formulaic housing that populates many master planned communities, insisting that a city's character depends on an eclectic mix of housing styles. But they also expect new homes to blend in with the block's existing architecture.

“Neighborhood opposition can be intense, and city politics is intense,” says McIlwain. “There is a barrier to entry.”

Barratt Homes headed off some of that by handing out discount coupons for car and window washing in the neighborhood to defray the cost of cleaning up construction dust, and by observing strict start and stop times for noisy crews.

An additional urban hurdle: Suburban builders, used to housing sales staff and displaying product upgrades in a model home on the premises, have no place to set up shop or store materials when building condos.

“On a two-acre piece of property,” Mariscal says of a John Laing project that built townhomes on the site of a former supermarket in Pasadena, Calif., “the site is so tiny that we couldn't sell on site, not even out of a trailer.”

So the builder rented a nearby store-front and built a kitchen, living room, and bathroom in it so shoppers could see and touch the appliances, countertops, and finishes. Its showcase piece is a large video that gives potential buyers a computer-generated, three-dimensional tour of the as-yet unbuilt homes and community.

A virtual tour is the closest would-be owners will get to a walkthrough until all of the townhomes are finished, a situation that can be a real nail-biter for the builder.

In a suburban community a builder would have a dozen or so homes under construction at a time, notes Kevin Hake, vice president and treasurer of Hovnanian Enterprises in Red Bank, N.J., which has added for-sale condos to its product line in the past year. Multifamily structures require the builder to complete all of the units—sometimes 100 or more in a high-rise building—before delivering a single home to a buyer.

“It takes a lot of capital,” admits Hake.

And it takes a huge commitment, adds Standard Pacific's Boeker, whose firm is putting up mid-rise condominium buildings in Los Angeles and Pasadena. “Once you start, you're committed to those 100 units,” he says, noting it can take twice as long to build a multifamily building as a single-family neighborhood. “There are no phasing opportunities that allow you to manage that risk. When you start, you start them all.”

“I could do three suburban projects for the same amount of equity that it takes to build one of these urban buildings,” estimates Brown. “But if you hit it right, you can do extremely well.”

Without the option of changing the product mid-stream in response to buyer feedback or poor sales, an urban builder has to be ultra-confident that the homes do, indeed, hit it right, both with the neighborhood and the potential buyer. That can turn into quite a feat if the project is located in the middle of a one-time industrial site that nobody has called home before.

Agid recalls trying to assess the market around urban legend Playa Vista, a huge master planned community in Los Angeles. “We wanted to survey the competition, but there wasn't any for 35 miles,” he says. He couldn't compare housing prices or styles with other new products because there weren't any, so he had to rely on the resale market for homes that were 50 years old. “At many urban sites,” he notes, “you are the pioneering effort in an otherwise antiquated neighborhood of housing.”

And the pioneer, notes Brown, “takes all the slings and arrows.”

Still, while builders such as KB Home and Standard Pacific are pricing some of their city places so first-time buyers—mostly childless young couples—can afford to move in, most are working with the well-to-do.

The price of condo-sized metropolitan mansions reflects the cost of land and construction—including, on some urban sites, the demolition or gutting of an existing structure. That wasn't always the case, says Agid, who notes that until recently, urban infill housing attracted more struggling singles and young couples than mid-life suburban transplants whose pockets are stuffed with cash now that they no longer have to pay for children, tuition, and the upkeep of a large house.

“Now, most of the urban opportunities are in the $500,000-and-up price point, and the margins are far more attractive,” notes Agid of the California market, “so the builders are more interested in taking on the challenge of going into the urban areas.” Market analyst Jeff Meyers of Hanley Wood Market Intelligence (formerly the Meyers Group) says they will continue to be. “There's no question it's going to grow,” he says.

Still, notes McIlwain, builders are unlikely to turn their backs on the 'burbs. “It's never going to replace the suburban market by any means,” he says, “but it's a valuable new product line.”

Sharon O'Malley is a freelance writer based in College Park, Md.

Builders making a first foray into the city are finding the rules are different than they are in the suburbs.

Suburban builders have come to the rescue of the wrecks in the city, demolishing or gutting abandoned factories and replacing them with spectacular mid- and high-rise condos. Along the way they've learned that city folks do things a bit differently than suburbanites.

Hovnanian Enterprises enters the urban market with a little push from suburban regulators.

Red Bank, N.J.–based Hovnanian Enterprises has built suburban homes in the heavily regulated Northeast market for 40 years. It segued from suburbs to city, thanks to suburban officials who are slowing development by raising fees and stalling approvals.

Hovnanian's first forays into high-density building began two dozen years ago and resulted in 3,000 townhomes in New Jersey's cities and hundreds of high-end attached homes on the newly coveted Jersey shoreline, where owners have an easy commute to and a stunning view of the Big Apple.

Over the last year or so, Hovnanian has gotten into the mid- and high-rise condominium business, reaching beyond its Northeastern boundaries and into San Diego for its first effort. Its Acqua Vista features 382 condos—from 600 to 2,460 square feet—in two 18-story high-rise towers.

Hovnanian, which recently bought smaller builders in Houston and Minneapolis, is looking for multifamily opportunities in Dallas and elsewhere, says Kevin Hake, the company's vice president and treasurer.

This year, urban infill represented nearly 3 percent of Hovnanian's deliveries, and Hake says he expects that number to double in four years.