While there always will be some demand for homes in the suburbs or green fields, transportation costs, infrastructure needs and challenges, and employment will drive demand for urban housing. In any case, emphasis will be on:
· Walkable neighborhoods, but not necessarily traditional neighborhood development (TND). Maximum market share for TND seems to range from 10% to 20%, depending on whom you’re listening to.
· Reliable public transit, meaning a variety of methods such as bus, light rail, etc., which makes locations near multimodal sites more valuable.
· Accessible recreation areas, whether provided by the developer or governmental entities.
· Job-housing links, with a greater emphasis on live-work-play opportunities, but not necessarily live-above-work housing.
In many urban areas, this will require significant “redensification”, and this means overcoming at least two major hurdles:
· Outdated zoning and land use controls:
· Popular sentiment against density, and in some cases growth itself.
Challenges to New Construction
· Given the vast inventory or “overhang” of housing units resulting from massive foreclosure activities as well as overbuilding prior to the Recession, when will the demand for new housing arise? Last year housing starts were lower by half than in any year since 1959, when the U.S. population stood at 178 million (compared with 310 million today).
· A substantial percentage of the jobs lost in this recession have been related to the real estate development industry. This shortage of labor and management will challenge the ramping up of the development industry when demand strengthens. A complicating factor is the loss of industry experience in the retirement of the Baby Boomers who built the industry over the past few decades.
· The precipitous plunge in prices of existing housing makes new construction problematic. The greatest decline in housing prices occurred in the suburban areas; exceeding 40% to 50% in some cases. Most urban locations have fared better because of transportation, recreation, cultural, retail, and job-housing linkage. Nevertheless, housing prices, adjusted for inflation, have declined 28 percent overall since the high water mark in 2006/07, and in many places are still in decline. The challenge for new development will be, as Christopher Leinberger points out in his article cited below: “to offer competitive pricing by limiting the number of models, simplifying their plans, reducing house sizes, using more vinyl, relying more on factory construction, and shipping prefab housing parts in on a flatbed, so they can assemble some houses in a week.”
· Financing development is another sticking point. With little RMBS activity and ailing balance sheets, banks have become very conservative, meaning they are not making home loans in the volume and at the loan-to-value ratios of the recent past. If prospective buyers can’t obtain financing because of insufficient equity or credit-worthiness, community developers’ potential market is much smaller.
For an excellent discussion of these issues, see Christopher Leinberger’s article in a recent online article.
The bottom-line is to keep the basics of development in mind:
· Population growth drives real estate development. Where that development locates is driven by jobs, transportation, schools, medical facilities, convenience factors such as shopping, cultural, and recreational facilities.
· Jobs drive residential.
· Residential (rooftops) drives commercial.
In closing remember:
· Study and analyze the data continuously;
· All real estate is LOCAL. Capital and human resources are global;
· Keep your operation lean and agile;
· Don’t overextend;
· Develop and stick with core competencies;
· Real estate is a cyclical business – manage your overhead as if you always are at the bottom of the cycle.
There are no coincidences!
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©2010 by The Falbey Institute for the Development of Real Estate
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