Townhome construction, one of builders' and developers' go-to tactics in cyclical battles to deliver more new homes that meet would-be buyers' asking price tolerance levels, is trending upward as costs continue to challenge affordability.

Prospects for new attached offerings--along with a raft of smaller, simpler, denser, more far-flung, and, ultimately, less expensive to build, new construction types--are improving as demand for them exceeds the builders' current output rate in many markets.

Demand for attached townhome communities draws not only on young adult prospects looking for a first-time homeownership experience as they try to evacuate the rental market, but appeals too to buyers looking for move-down or more walkable, urban-suburban communities, for connection, convenience, amenities, and a more simplified property-ownership experience.

So, investors, developers, and builders have--in trying to follow the money as expense- and supply-side constraints have driven single-family detached home prices well-beyond the pace of household income increases in many markets--accelerated attached townhome construction, especially in the past 24 to 36 months.

National Association of Home Builders chief economist Robert Dietz noted in an analysis of Census data last month that during 2018, townhouse starts totaled 119,000 on a national basis, a 14% increase over 2017. This growth-rate exceeded the single-family starts rate of growth for the year by five times, Dietz observed. He writes:

Townhouses, or single-family attached housing, accounted for 25,000 starts during the final quarter of 2018, although this was lower than the 29,000 total for the final quarter of 2017. Using a one-year moving average, the market share of new townhouses stands at 13.8% of all single-family starts, near a post-recession high.

Looking beyond the national data, into the regional and market-level dynamics of what's happening with attached development performance, Meyers Research director of economic research Ali Wolf shows how and where the heat is on--and getting hotter--for new community offerings with attached product. National data doesn't do justice to the timing, the direction, and the trajectory of attached townhome opportunity, whereas Wolf's analysis here reflects the ability to zero in on where the trends are heading, and what opportunities lie ahead for developers and builders who're able to get projects shovel ready sooner than later.

Here's Wolf's topline take on how attached development maps differently depending on where you look across the national landscape:

Some of today’s communities are bearing the fruit of the strategy pivot 24 months ago:

  • Northeast and Southern California have the most attached product. Nearly 50% of the new home projects are attached in the Northeast, up from 43% in 2016. In contrast, Southern California’s attached offerings are the second highest nationally but at a much lower share of the market, representing 30%, up from 20% in 2016.
  • West sees the fastest growth. Attached product has gained popularity in the Northwest, Northern California, and the Southwest, increasing by roughly 40%+ each since 2016. One in five actively selling communities in the three regions are attached.
  • Texas adjusts product in different ways. Attached new home communities in Texas represent 7% of the market, flat from 2017 and 2018. Builders in Texas are facing affordability problems unlike in the past, but in many cases, solutions mean moving from 80′ product (lot frontage) to 60′ and 50′.

Builders and developers face an intensifying dilemma as they go to great lengths to extend the slow, broad housing recovery cycle that started--albeit glacially--in 2010. They need to inspire, excite, and allure buyers with their offerings, but they need to do so as their own costs shift and accelerate underneath them, and buyers' demands and expectations eclipse their own means to pay for what they want.

We've heard an executive level strategist from one successful home building enterprise say:

"If we ask customers exactly what they want in a new home, and we build that, the customers won't be able to pay for it. We have to build something that they'll want, that they don't know they'll want, that we can build profitably, and they can afford."

That expectation gap, Wolf says, comes through in the out-performance of attached, townhome products and communities in some markets versus others. She writes:

Buyers are increasingly open to denser neighborhoods to help hit a lower price or to be positioned in a good neighborhood. Attached new home communities increased by 16% on average nationwide from 2016 to 2019.

  • Attached product doubled as a share of overall in one market. Attached offerings as a percent of total communities in Charlotte doubled in three years to 17%. Of the 15 best-selling communities over the past three months, two are attached in Charlotte with an average sales rate over eight per month.
  • Markets are adapting. Attached product also gained a sizable share in Atlanta (21% of the market), Seattle (19%), Salt Lake City (22%), and Las Vegas (12%). In Seattle and Salt Lake City, 50% of the best-selling new home communities over the past three months were attached.
  • Low supply, low action. Attached offerings are scarce in San Antonio (1% of the actively selling projects), Dallas (4%), Columbus (4%), Austin (6%), Sacramento (6%), and Riverside-San Bernardino (6%). Unsurprisingly, none of these have attached communities in the top 15 best-selling except Columbus and Riverside.

The variation on the narrative "if you [can] build it [affordably], they will come" applies, as attached communities outsell--in pace per month per neighborhood--single-family detached offerings in a growing number of markets, Seattle being the poster child for the biggest gap between current stock and sales pace among attached townhome neighborhoods. Wolf notes:

Data suggests that if more well-executed, well-positioned attached product hits these markets, the denser communities would be well-received.

Don't just watch the gap; fill it!