As director of acquisitions and development for Toll Brothers' Urban Division, Paul Commito has an affinity for spotting diamonds in the rough. Among his recent finds: a 2.6-acre parcel of land on the east side of Providence, R.I.
Despite the fact that the real estate was in one of Providence's priciest areas, and that the historic city was undergoing a renaissance, most developers "would drive by that site and say, 'this [site] isn't gonna happen,' " says Commito. There was contaminated fill. The topography sloped off rapidly. And the site was tightly constrained by a shopping center, single family residences, and existing train tracks.
But Commito wouldn't give up. "I knew, just from looking at the site, that it was an absolute gem," says Commito. "I just felt like a well-designed building that was sensitive to the surrounding architecture; that included parking; that was new and fresh--I felt like it would be a winner."
It looks like his hunch is paying off. After opening for sales on Oct. 12, 2003, 20 of Eastside Commons' first 46 units, selling from $264,900 to $450,000, were sold by December 1.
Commito's knack for converting urban land sites into new residential profits is just what chairman and CEO Robert Toll was counting on when he wooed him from a regional developer three years ago. Commito was hired to apply his commercial and residential experience to spearhead what would eventually become Toll's urban division, under the direction of vice president Ben Jogodnick and senior vice president Doug Yearley.
The Huntingdon Valley, Pa., builder's strategy to expand its infill and urban development business is not altogether unique.
Hovnanian Enterprises, based in Red Bank, N.J., has been developing urban locations long before the concept of infill had become part of the industry's lexicon. WCI, of Bonita Springs, Fla., has been building mid-rise and high-rise residential towers in Florida for more than 15 years. And a host of big builders including Beazer, Centex, D.R. Horton, Lennar, Pulte Homes, Standard Pacific, and others have become a familiar presence among a growing number of downtown developments.
However, Toll Brothers' city strategy is gaining a new level of momentum that promises to make it, and other big builders, a more credible--and potentially, a more formidable--force in urban development projects in selected markets during the next five years.
"We see a burgeoning market," says CEO Toll. "It represents not just another niche, but something we believe will become a growth market." And a significant one for the company: "I would guess, in two to three years, [urban and infill developments] will probably be 10 percent of the work we do," Toll says.
Making the move
A number of forces are making new urban and infill initiatives all but inevitable for big builders. Over the past decade, aging baby boomers weary of commuting have been credited with driving the resurgence in city dwelling. At the same time, municipal officials in urban and aging suburban areas have shown a willingness to work with developers to revitalize neighborhoods in contrast to the protracted entitlement battles builders continue to face farther out.
Until recently, the localized nature of infill work has most resulted in local developers and small and mid-size builders capitalizing on pockets of opportunity. Today, however, that's all starting to change. As consumer interest in downtown housing grows, and the capital required to develop those projects demands better-financed players, many of the nation's largest builders see opportunities that now make economic sense, and as a result, are stepping up to the plate.
That broadened sense of opportunity has also expanded the notion of what constitutes infill development. "It can be a lot of different things," says John McIlwain, of the Urban Land Institute. "It's building in an already developed community where you find a site that is available for resale development, change of use, or one that has never been developed."
With the availability of projects and relative ease of entitlements, infill projects are luring many who never expected to find themselves in the city. "We're not leading the charge," says Jay Kerr, president of the San Diego division of Centex Homes, about the company's recent foray into infill. "We're being driven there by forces in the market. Centex is focused on growth and growing our market share. What do we do when the prices are going up in the suburbs and there is less land?"
In more and more markets, the answer is infill. Although San Diego boasts a population of close to three million residents, builders only produce about 1,200 homes a year. "We have been chronically undersupplying the market here for about 10 years, to the tune of about 200,000 units," says Kerr. While the region is penned in geographically, the economy is strong, there is tremendous demand, and affordability is an issue. "It makes for very interesting times," says Kerr.
The city's infill movement started about 15 years ago with a shopping center in the heart of downtown. Over the years, concentric rings grew with supporting shops and restaurants. Although developers began to recognize the need for housing in the area, big builders remained skeptical. The catalyst came in 2000 with the approval of construction for the San Diego Padres ballpark. "Once that site was identified, the floodgates opened," says Kerr. "That made everyone more comfortable that downtown was going to happen."
Today you'll find Lennar, Standard Pacific, D.R. Horton, and other builders working in this market. "The whole gang is in there now," says Kerr. For Centex, its three San Diego-area projects are on the corporate radar as a business model for other markets.
For other big builders, infill and urban redevelopment projects represent familiar territory. Hovnanian's experience with infill projects dates back more than 20 years. "We rebuilt part of Newark in 1980," notes Douglas Fenichel, director of public relations. "We started before anyone was even talking about brownfields." (See "Brown is Gold," page 63.)
Today, Hovnanian is actively involved in low-, mid-, and high-rise projects across the country. In fact, approximately one-third of the business in its northeast division comes from infill. "One project doesn't tell the complete story," says Fenichel. "What's interesting is how versatile you have to be to do this. You need to be able to respond when a community comes to you with their needs." Hovnanian has had particular success with its two-year-old Private Home Portfolio division, which takes a build-on-your-lot approach with property owners who see the value of rebuilding rather than renovating residential properties in mature, upper-end Northern New Jersey communities.
Unique challenges
As seasoned suburban builders venture into infill, they're finding new challenges with each project. There is more complexity in the design and construction process, a likelihood of environmental cleanup, and the need for a specialized staff--all issues that can result in increased costs. "One of the things that's harder for the big builders is that these aren't cookie cutters," says McIlwain. "You can't get a basic formula and just build it. When you're doing three-story townhomes, that's a lot different that doing a 20-story elevator. They're both valuable, but it depends on the site."
Because each project is unique, design and engineering work usually starts from scratch. From due diligence to engineering and construction costs, accommodating the nuances of a site can add up. As a result, it's critical to determine what price point and product--low-, mid-, or high-rise, will work. Commito's team at Toll Brothers uses market research intensively to determine what product and features will work.
"We look at ceiling heights, room layouts, finishes, parking--everything gets analyzed as if we were an appraiser. Very quickly, you can determine the regional adjustments, the construction costs, and what the market will support. The reality is, I have an acquisition price from the seller. All these other things, I just roll into the acquisition price, and if it works, it works," says Commito.
Identifying and recruiting personnel has also become a key component. "You want a different team that has the experience and can adapt to the situation," says McIlwain. For Toll Brothers, that meant creating a separate division at the corporate level. Using his urban expertise, Commito identifies the land opportunities. The product is determined and then the urban division puts necessary contracts in place and takes the project through approvals and due diligence. Once the project is "packaged", it's turned over to the local operating division to facilitate the construction and marketing.
The urban division itself stays lean--consisting of Commito and three others. "When we first started up, we weren't sure if we would run as a completely separate division," says Commito. "We realized pretty quickly that there's no reason to be redundant."
If you build it ...
As builders try to reinvent themselves, they are also discovering different marketing challenges and are, to some degree, walking away from a buyer group they know well. Most acknowledge that infill brings little interest from the families with school-age children that buy single-family suburban homes. Accommodating this buyer group takes creative thinking: In Providence, Toll Brothers borrowed a parking lot from a business adjacent to Eastside Commons and built a full-scale model. In another case, the company rented a nearby storefront and turned it into a model.
"We are sensitive to showing our sophisticated buyers a model when possible," says Commito.
According to McIlwain, big builders can add a lot to the infill market. "Right now, the demand is stronger than production. The big guys bring stability and the ability to ride through any downturn." He speculates that their influence can also help stabilize prices, which average about $400 to $500 a square foot.
McIlwain predicts the public builders can only do a small percentage of their portfolio in infill because the business model is different for builders typically driven by returns. "This is like going into a suburb and building 100 homes before you close on the first one," says Kerr. "That's a little scary." On the plus side, the margins are better. But, while the per-unit profit is generally higher than typical single-family homes, infill is not a high-volume business. "It's not the same business plan," says McIlwain. "It's a piece of an overall strategy."
As these types of opportunities continue to pop up nationwide in established cities, older suburbs, and transportation-oriented districts, big builders need to find efficient ways to capitalize on the benefits. "For a suburban builder, we need to look at downtown like it's a 20,000 unit master plan--one block at a time," says Kerr.
While the company has current infill projects in the Midwest, Florida, Boston, and Providence, N.J., this acquisition extends Toll Brothers' reach into the land-constrained New Jersey residential market by expanding its offerings along northern New Jersey's affluent waterfront, including the Hudson River that separates it from the Manhattan Skyline, known as the Gold Coast.
Specializing in mid- and high-rise residences, MBC is currently developing The Sky Club, a 326-unit, 17-story two-tower structure under construction in Hoboken, N.J. Several other high- and mid-rise projects are in the planning stages, including the Cliffs, a 124-unit, five-story historic rehabilitation condominium project in Jersey City; and The Grove, a 230-unit, 12-story condominium also in Jersey City.
"They have 25 years of experience in the area and tremendous relationships with the necessary governmental officials in order to get things approved," says Ben Jogodnik, Toll Brothers vice president to whom MBC now reports. With MBC's local property and construction management expertise and Toll Brothers' capital and marketing resources, "We think there is a lot of opportunity in the area," says Jogodnik.
Projects will be developed under the name City Living by Toll Brothers. It's a name that's expected to get plenty of real estate press, with news last month of a new joint venture deal involving 20 acres of property--nine acres of water, 11 acres of land--on the site of the historic Maxwell House coffee factory, an abandoned riverfront icon familiar to generations of New Yorkers and visitors to the Statue of Liberty.
The deal is a "50/50 joint venture" with Pinnacle Downtown, a subsidiary of Pinnacle Ltd., based in Millburn, N.J. Located directly on the Hudson River waterfront off Frank Sinatra Boulevard, the former manufacturing and distribution facility will be demolished to make way for a $500,000,000 mixed-use development.
Plans call for Toll/Pinnacle to develop 832 luxury condominium units in six 12-story towers with mid-rise connecting towers. Residential units ranging from studios to four bedrooms will offer views of the Manhattan skyline. "The backdrop of the city is awe inspiring," says Doug Yearley, Toll Brothers senior vice president.
Adjacent to the property is a ferry station boasting a four-minute trip to 38th Street in Manhattan. The subway and train station is in close proximity as well. In addition, a publicly accessible riverfront park and beach will be developed.
Pinnacle brings to the venture 20 years of local real estate development and investment experience in the New Jersey and Connecticut markets, specializing in custom and luxury housing, active adult, rental, office, and retail markets. Toll Brothers is bringing not only the capital but also the strength of name recognition to the project.
"Our brand is going to help us," says Robert Toll. "People know our brand, and will be more willing to say, 'Let's go take a look.'" Demolition is expected this spring; presales will begin in the summer. Yearley estimates that the vertical construction will begin by fall.
True Urban Infill--Low-, mid-, or high-rise projects that occur in an urban setting. Also, projects located in the heart of a suburban town or around a transit stop.
Suburban Infill--These projects occur in outlying metropolitan areas where the land has been mostly built out. New or re-use projects are rental or for-sale; mainly low-rise, townhomes, and single-family units.
What types of structures are being built in infill projects is another area where definitions matter. Although they may vary slightly due to local codes, most projects fall under three classifications: Low-rise (up to 3 stories); mid-rise (three to six stories); and high-rise (seven or more stories).
Located about 40 minutes west of Chicago's downtown, the city of Palatine, Ill., serves as a vibrant town in its own right. When the village issued a request for proposals to redevelop a city parking lot, Toll Brothers made a concerted pitch to create a 92-unit townhome and condo project across from the mass transit stop.
The desire of village officials to turn Palatine into the next stop on the tracks resulted in speedy approvals. Toll went under contract in March of 2002 and received approvals in five months. The result is Palatine Station, with designs ranging from one-bedroom condos to three-story rowhomes at prices from $275,00 to the mid-$400,000s. "It's quite a bit different from the cornfields we normally build on," says Andy Stern, assistant vice president for Toll Brothers' Illinois division. "At 18.2 units per acre, it's a little more cramped than we're used to."
Because the low-rise design emulates stacked rowhomes, Toll's Illinois division oversaw the actual construction with the support of consultants and engineers. "Construction-wise, the coordination has been an interesting and challenging feat. But with the right personnel, we've been very successful in accomplishing a pretty doable project," said Stern.
The concept was just what diverse buyers in the area were looking for, but not entirely for the reasons everyone expected. Opening in March of 2003, 41 of the project's 92 units were presold by November. Attracting empty nesters and young professionals, Palatine Station is thriving on locals who want a downtown environment. "When we did this project, we thought we would attract a lot of people who wanted to take advantage of the Metra station," says Stern. "It hasn't happened that way. Very few are actually commuting downtown [Chicago] to work."
After purchasing the entitled land in October of 2002, and receiving building permits two months later, demolition began. Although no environmental issues existed, an extensive 80-foot retaining "nail wall" was incorporated into the construction to accommodate the site's sheer vertical slope. "We're a stick and brick builder. Now, we're a concrete and steel builder," says Green. "We've never done anything of this magnitude. It's astounding to see how much steel we put in for 48 units."
Targeting a very specific buyer in a very specific neighborhood, these luxury units range in size from 1,950 to 5,800 square feet. And prices ranging from the $800,000s to $4.3 million aren't scaring away buyers--31 units have been sold as of December 1. With six different floor plans, and two penthouse designs, Centex is offering variety within its designed community. "You cannot find new construction of this quality in La Jolla," says Green.
