Going Up?

This past September, nearly 1,000 prospective buyers turned out for “Toll Advantage Day,” an invitation-only event that Toll Brothers conducted to showcase three mid-rise projects in the New York metro area. A picnic was followed by a tour of Hudson Tea, a 523-unit condo conversion of a former Lipton tea factory in Hoboken, N.J.; Maxwell Place on the Hudson, a conversion of a former Maxwell House coffee plant in the same city that ultimately will become a luxury complex with 823 for-sale apartments within four buildings ranging from five to 12 stories; and 700 Grove, a 324-unit project in nearby Jersey City, N.J.

Toll also has vertical projects going up in Manhattan, Brooklyn, and Miami, which it markets under its “Toll Brothers City Living” brand. Doug Yearley, who manages this business, says the builder expects vertical (mid- and high-rise) projects to eventually represent 10 percent of its annual business, from 5 percent today. In fiscal year 2006, Maxwell Place sold 250 units at an average price of $950,000 per unit.

Credit: Beazer Homes

SEASCAPE SOLUTION: One of Beazer Homes' vertical projects is The Pointe At Moore's Inlet in North Wildwood, N.J., which will have 60 beachfront condos. Paul R. Schneier, president of Beazer's New Jersey division, says local land-use policies are forcing builders to develop closer to urban centers.

In their pursuit of homeowners who prefer an urban lifestyle or wish to live closer to where they work, production builders such as Toll are venturing into steel-and-concrete construction, five stories or higher, of condos, lofts, and townhouses. Later this year, for example, buyers should start moving into Fifty One, Centex's $120 million redevelopment of a former Del Monte fruit cannery called Plant 51 in San Jose, Calif. This condo project, which the builder has worked on for nearly three years, is Centex's first podium building in Northern California and its most ambitious effort to date in vertical residential construction. The 65-foot-high Fifty One offers 46 floor plans for 265 lofts and flats that range from 800 to 1,500 square feet and from $496,000 to $656,000. “It's an ideal location, right at the downtown area and adjacent to transit lines,” says Christopher Warren, vice president of urban development for Centex's Bay Area division.

Credit: Toll Brothers

RIVER VISTA: Residents of Hudson Tea, a 523-unit mid-rise condominium redevelopment in Hoboken, N.J., have a breathtaking view of Manhattan's skyline across the Hudson River. Toll Brothers is marketing this and other vertical projects under the “Toll Brothers City Living” brand.

Beazer Homes has a half dozen mid-rises (each no more than six stories) under development in Florida, California, and the Mid-Atlantic region, says company CFO Jim O'Leary. One project is The Pointe At Moore's Inlet in North Wildwood, N.J., a four-story structure that will be completed this spring with 60 two- and three-bedroom beachfront condos ranging from 1,310 to 3,000 square feet and from $724,900 to $1.8 million. “You have to take what the market gives you, and up here, government [regulation] is pushing people back into the urban areas,” says Paul R. Schneier, president of Beazer's New Jersey division.

“This is an interesting time for vertical, because more people are getting into it,” observes Michael Lander, who owns Lander Group, a Minneapolis-based mid- and high-rise developer, and who founded the first “Urban 20” group within the NAHB. Lennar, KB Home, Hovnanian Enterprises, and Kimball Hill Homes are some of the other production builders whose portfolios now include vertical product. This trend, though, involves more tiptoe than leap. “The key to this business is being conservative,” says Emile Haddad, president of Lennar's Western region, which has five vertical projects in the works but withdrew with KB from a tower development in Los Angeles because of its cost.

Credit: Centex

PRESERVATION PROJECT: In converting a Del Monte fruit cannery in San Jose, Calif., into a condo called Fifty One, Centex kept the plant's brick exterior by building the mid-rise inside of the older structure's original walls.

Home builders acknowledge that moving into vertical is competitively daunting, especially because there's already a plethora of companies that specialize in this kind of development, including Milliken Development Group, whose high-end towers feature retail components that promote a sense of community.

Remi Cos.' $50 million, 128-unit Velocity project in Hoboken is that market's first urban luxury residence to use 7.5-inch precast-concrete walls for noise containment. AvalonBay's Chrystie Place was New York's first residential tower built above a subway tunnel.

Some industry experts wonder why production builders are dabbling in vertical, given what one expert calls their “checkered” performance in multifamily development. Tim Alt, a Minneapolis-based interior designer whose company works on residential and commercial projects, fears that the penetration of production builders into this sector could lower its design standards. “I don't know if the builders understand the customer in this market,” he says. “Buyers are a lot more savvy now, and I don't see the correlation between people who want to move into a $300,000-to-$800,000 single-family home and people who want to move into a condo.”

Credit: Lander Group

CODE CALAMITY: Just as it was about to take occupancy of its Midtown Lofts project in Minneapolis, Lander Group was forced by an 11th-hour code change to add an exterior water system that was installed improperly and flooded some apartments. The developer, however, made repairs and used the situation to demonstrate how it stood behind its construction.

Production builders are also expanding into vertical at a time when market conditions are less than ideal, with flagging buyer demand and condo overload in several markets. Nearly 38,000 mid- and high-rise homes are currently under development in Las Vegas, for instance (see “Raising the Ante,” page 192).

“[In the New York metro area,] we're competing with 8,000 [vertical] homes that are either planned, under construction, or selling,” says Larry Florin, president of Lennar's year-old New York Urban division. In response to the current downturn, WCI Communities, which has built residential towers on the East Coast for more than 15 years, reduced the number of towers it planned to start in 2006 to between one and three, after originally planning to start 11 to 13 towers.

However, an increasing number of production builders feel they have little choice but to diversify into vertical construction in order to capture urban infill opportunities to expand their customer bases. They hope to give their companies a viable growth avenue into densely populated metropolises where relatively affordable land for horizontal construction is difficult to find and entitle, if it is available at all.

While the number of buyers interested in vertical living might be increasing, an uninitiated builder could be forgiven for viewing vertical construction as a quagmire of sprinkler systems, bedroom-to-parking-slot ratios, “sound attenuation,” union labor, and constant inspections, as well as a sector in which natural light and space are marketed as “amenities” and buyers expect virtually every design detail to be standard. The risk factor is magnified by the sizable up-front costs: Yearley says Toll invests $50 million to $200 million in each project and might have only 30 percent of its units sold when construction commences. “That's why we demand a higher rate of return on these properties,” he says, on average $700 per square foot.

Credit: Remi Cos.

COMPETITION APLENTY: Production builders getting into vertical construction find themselves going up against myriad specialist developers, such as Remi Cos., which touts its 128-unit, $50 million Velocity project in Hoboken, N.J., as the first urban luxury residence to use precast-concrete interior walls to attenuate noise between apartments.

Lander says it's not uncommon for building codes to change mid-project. As his company was about to receive its certificate of occupancy for Midtown Lofts, a 72-unit redevelopment in Minneapolis, the fire chief decided that water valves were needed to service the outdoor decking. The system's installation was botched, and six months later, when winter hit, pipes burst, flooding some apartments. Lander says his company turned this fiasco into a coup by installing a dry system, which has no water in its pipes when the system is idle, to cover the building's balconies and decks. “It gave us an opportunity to demonstrate how we stand behind our product.”

Credit: Lennar

MASTERFUL PLAN: Lennar has five high-rise projects in Southern California, including Central Park West in Irvine. Lennar is injecting a master planned sensibility into its vertical projects, which include a healthy dose of retail, entertainment, and recreational areas.

Centex has the advantage of being able to draw on the resources of Centex Construction (its commercial arm), which it's used as its general contractor on several projects, including Fifty One and two mid-rise buildings in San Diego. Still, Fifty One posed unique challenges. Warren notes that his division “schemed” its layout 34 times to calculate its maximum usable square footage. The builder is also preserving the original brick walls of a Del Monte warehouse that was built in 1913. (It has done this by shoring up the walls and constructing the mid-rise structure within them.) Centex added a new foundation, too, and removed decades' worth of graffiti (the cannery closed in 1990) to restore the façade's original color.

Most production builders admit that their operations don't yet have the talent to execute vertical construction and that they must hire outside designers and construction managers. Toll's joint-venture partner in Maxwell Place is the Pinnacle Downtown division of Pinnacle Cos., which has been developing mid- and high-rise projects for more than five years. Lennar uses several general contractors, including Intergulf Development Group, which has vast experience building high-rises in Canada. It's worth noting, however, that Lennar is adding “people from the GC world” to its staff, says Haddad. And Kimball Hill Homes eventually wants to bring the general contractor function in-house, says Doug Guthrie, president of the builder's four-year-old Urban Centers division, which has several projects under way, including 360 Residences, a 23-story condo tower in San Jose that offers 360-degree unobstructed views. It will have 213 units and 11,000 square feet of street-level retail space. That project is a joint venture with Mesa Development, whose project executive, Charles Young, says its sales office will open in February and display a 1,700-square-foot apartment.

To spur downtown development, San Jose waived its affordable-housing requirements. But Kimball Hill's vertical projects in Chicago target mixed-income buyers. The first phase of Parkside of Old Town, a redevelopment of the notorious Cabrini Green public housing complex, has 391 units divided between three mid-rise buildings (one devoted to rental apartments) and 76 horizontal townhouses.

Lennar, says Haddad, also offers “an affordable alternative” to buyers by keeping prices for its vertical product at least 20 percent below the median price of a single-family house in the same market. And like Kimball Hill—whose first phase of another Chicago redevelopment, Park Boulevard, will have 17 different building types—Lennar is injecting variety into the mix: One project, in Irvine, Calif., will have 1,400 homes plus office and retail space, with six different high-, mid-, and low-rise product types. “We've been applying what we've learned in our master planned communities to our urban [developments],” Haddad explains.

Christopher Homes forms a new division and brand to attract loft buyers around Las Vegas.

Four years ago, only two residential high-rise projects were under construction in Las Vegas. Since then, vertical buildings have mushroomed in Sin City. “Now, there are about 75 [projects] that have been started or are on the boards,” says Erika Geiser, vice president of marketing for Christopher Homes, which is based there.

Credit: Christopher Homes

VERTICAL BRAND: Las Vegas–based Christopher Homes formed a new company, C2 Lofts, to develop and market its mid-rise products. The venture's first project—the 100-unit, two-building C2 Lofts at Summerlin—is scheduled for completion this month.

Christopher Homes, which specializes in luxury single-family detached houses, wanted to get in on this vertical action. But the company's owner, Chris Stuhmer, was reluctant to roll the dice on 20-plus-story towers for resort-minded buyers who covet a residence on The Strip. He saw more promise in mid-rise buildings (at no higher than seven stories) located in “suburban-urban” communities bordering Las Vegas, where prospective buyers “don't want to live on The Strip but still want the ‘lock-and-leave' lifestyle,” says Geiser.

In October 2004, Stuhmer formed a separate business, C2 Lofts, to develop and brand the vertical product. It brought in Newport Beach, Calif.–based Scheurer Architects and a local general contractor, R&O Construction. C2's first project, started in November 2005, is called C2 Lofts at Summerlin. It features 100 residential units in two five-story buildings nestled within the burgeoning Summerlin Centre master planned community, which has its own casino, nine restaurants, and a 1-million-square-foot regional shopping mall under development. Each of C2 Lofts at Summerlin's buildings has modest retail space, too.

The project offers four floor plans for lofts that range from 1,400 to 2,800 square feet (versus condos on The Strip that might be as small as 800 square feet, says Geiser). The fifth floor is a roof deck with a panoramic view of Red Rock Canyon and Las Vegas' lights. It doubles as a communal area, with restrooms, a fire pit, a barbecue grill, and a bar.

The first building was nearly sold out in September, and construction should be completed this month. C2's opening price point in Summerlin was in the upper $500s, but now the lofts sell for between $700,000 and $1.2 million. C2 Lofts has been selling this product from a retail preview center that includes a full-scale mock loft. At first, recalls Geiser, C2 Lofts didn't offer many options. (“We have high-standard features to begin with.”) But it discovered that luxury clients want more choices, so it broadened its selection to include more finishes, such as 15 countertop choices instead of nine, and five or six cabinet options.

Having tasted vertical development, Christopher has acquired two more properties for C2, which is planning a mixed-use project in Summerlin that will have 800 units in five stories that will start in the $700s, and a project in West Las Vegas that will have 700 to 900 units starting in the $400s. Sales for each should begin sometime this year, Geiser says.

The Rottlund Co.'s first vertical redevelopment project encounters unexpected demolition costs and an uncertain market.

The deal should have closed Aug. 31. But after three subsequent delays, officials at The Rottlund Co. wondered whether their company would ever begin its first vertical redevelopment project, on an acre of prime waterfront property the builder agreed to purchase from Ramsey County, Minn., for $3.9 million.

Credit: The Rottlund Co.

TOUGH TOPOGRAPHY: The Rottlund Co. ultimately dropped out of its plan to convert a former office building and a jail into mid-and high-rise residential structures in St. Paul, Minn., primarily because of unforeseen development costs related to the site's unusual waterfront location.

Rottlund was lead developer on a team that included a commercial builder (Ryan Cos.), a commercial brokerage firm (NAI Welsh), and a commercial developer (Metro-Plains Development). The county chose the team to raze two buildings along the Mississippi River in St. Paul and build a tower and mid-rise building that would house 300 condos. Its partners brought Rottlund into the deal for the company's residential expertise, even though the builder previously hadn't worked on a multifamily project with more than 88 units, says Todd Stutz, president of Rottlund Homes Minnesota.

During its due diligence, Rottlund discovered “that this would be a more difficult site to develop, with more ‘hair' on it,” says Tim Whitten, vice president with Rottlund's David Bernard Builders and Developers division, which primarily handles Rottlund's urban projects. The structures to be torn down—a former jail and an office building—are on a bluff below Kellogg Boulevard, which is elevated by a bridge. Stutz says that to raze those buildings and reinforce the bluff with a retaining wall would add $6 million to the cost of the project, which he estimates would have been around $120 million. The city might have chipped in $10 million to $12 million, but the team's pact with the county prohibited Rottlund from receiving financial assistance until after the deal closed.

The development team's original plan called for replacing the office building with a 26-story tower including seven underground parking levels and 200 condos; and replacing the jail with a seven-story building with two parking levels and 100 residential units. (The condos would range from 1,300 to 3,000 square feet and sell for $350 per square foot.) The site itself is considered to be one of the choicest locations in St. Paul, near Xcel Energy Center arena and a new museum. But with pre-construction costs escalating and buyer demand declining, Rottlund went back to the county with a revised plan to reuse the jail, which would have included workforce housing and a museum. Rottlund also suggested that the tower component become a separate development, but the county wouldn't yield. “It wants to sell the jail,” says Stutz.

Even though the county agreed to extend the closing deadline to Oct. 27 to give the developers more time to rethink what they would do, Rottlund finally backed out of the deal because “our gap for potential profit kept getting smaller,” says Whitten. He also says the county was primarily interested in selling a piece of property. “They just didn't have the expertise to see that what we wanted to do was the best solution.” Rottlund, he says, would be willing to reenter the project “if the county changed its tune,” though he's not too optimistic about that happening soon.