Residential Futures: Summary of a ULI Discussion Paper from the Denver Meeting
Provided by The Terwilliger Center for Housing – by Sandra Robles, Lynn Ross, and Robert Sharpe, et al.
A HOUSING PARADIGM SHIFT: THE NEW HOMEBUYER
Who are the customers that will be buying new homes from 2012 to 2015?
- First-time buyers
- Young women in the 20s are outearning their male counterparts
- The first wave of buyers will be renters and young families
- Nationally, the move-up market has accumulated five years of pent-up demand
- Many 2012-2013 buyers will be people who decide the market has bottomed out
As the decline changes course it will emerge in demand across gen X, Y and baby boomer generations.
What does the buyer need in terms of housing and community?
- Buyers want safety, good schools, and proximity to employment
- Although widespread, sweeping changes are unlikely, some shifts will occur
- The market is too niched to answer the question definitively
- These buyer groups are looking for value (affordability), walkability, shopping, restaurants, services, good schools, and a sense of community
- Buyers require a situation where they have certainty about “additional costs”
- Single-use zoning is out and mixed use is in, along with living close to services and jobs
Buyers need what they can afford and what they can finance. Sustainability and energy efficiency is important but buyers are not willing to pay extra – this is the new standard.
Why will the new consumer buy? Will it be new or resale?
- New homebuilders have an opportunity to remove (rather than increase) the fear factor of a home purchase in today’s environment.
- People have always had many reasons to buy a new home as opposed to a resale.
- The resale housing stock continues to age in place
- Cost savings: eventually people will come to recognize the operating cost impact of owning a home
WHRE AND WHAT TO DEVELOP
In terms of market and site selection, what factors will help developers make the right choices?
- Historically, in difficult environments, price elasticity becomes the primary force.
- “A” and “B” will be in demand for only the near term.
- In general, job creation and new household formation need to be proximate to justify development.
- It take a much more holistic picture of the market location than ever before,
- The key to success is still location, location, location.
Back to the basics before the market become overheated – the basics haven’t changed.
Is suburban development dead? How does urban and infill development work for large homebuilders and community developers?
- Suburban greenfield development is not dead, just dormant until infill prices increase and push people out.
- Big builders are still suburban.
- Extreme suburban is dead, but good infill suburban will do well.
- It is probably dead until generations X and Y start having families. Lots of entitled land needs to be absorbed or reworked.
- Suburban development is not dead but need to take cues from the things that make urban development attractive.
- Exurban is not dad, but only a handful of communities will succeed.
Feasibility of suburban development is questioned in tough economic times but people continue to want yards, good schools and a secure way of life. Urban infill doesn’t work for most production builders. Suburban development is not dead but remote suburbs have lost appeal – closer in locations close to jobs and services will succeed.
What will make good community, neighborhood, and home design? What are the amenities?
- Well-designed smaller homes will provide to be more successful.
- Homes should be designed to appeal to an increasingly technological homeowner.
- It is more refinement of what we already know – but GOLF COURSES ARE DEAD!
- Back to the basics, consumers do not want to pay for amenities that they simply drive by and don’t use.
- Social networking and technology.
- Lifestyle amenities will not change dramatically, but rather they will evolve.
Great planning is important in establishing a social infrastructure that will create community.
What are the new development ideas that will be successful in the future? What are the breakthroughs?
- Lessons of integrated marketing and segmentation will be brought to the urban core.
- Reverse the parasitic relationship between retail and residential – develop near existing retail centers to create a walkable retail amenity.
- One of the biggest challenges for the industry is the love-hate relationship between municipalities and developers or builders – enhance communication.
- Capital providers and buyers are demanding more micro planning – developments will be smaller and more refined.
- One major breakthrough pertains to the high level of transparency that is expected by the consumer today.
- Home features, including legacy designs, energy efficiency, and wrap=around courtyards, are the current “new” ideas that are working.
Inexpensive shifts that positively impact our lives will be the successful breakthroughs. Mini-master planned communities will be 50-100 acres in first and second ring suburbs; they will be 40 year old strip malls and old industrial areas which are close to where things are happening. 20-40 units per acres that still feel relaxed and comfortable; active adult and age-targeted homes will mix into traditional neighborhoods.
MARKETING AND COMMUNICATIONS
How do you market and communicate differently with today’s consumer?
- The message must be different.
- We are paying a lot of attention to social media.
- Our new communities will have far greater web presence.
- In general, the old paradigm was to withhold information to force buyers to have to visit your website.
- Begin with better customer insights: customer first, then product.
- It’s time for the master planned community industry to follow the lead of big consumer companies.
Face-to-face conversations and connections are still important. Social media, by itself, is not a tool to sell a community, but rather a way to engage a community and drive lifestyle.
How do you change your marketing strategy to persuade consumers to purchase a new home over a resale in the 2012-2020 market?
- A well trained sales force is key?
- Just sell and market new homes as energy efficient.
- The practical approach of presenting your project with a high level of “fit and finish” still works.
- For most buyers, competition from the resale market will always be there.
- Understand who your buyers are, design hoes to meet their unique needs, create a relationship, and then continue to talk with them.
- You have to be careful with begin too far to what “customers want.”
The reality is that millions have damaged credit and potential for financial innovation exists to meet the needs of consumers.
What is the new paradigm in profitability for homebuilding? What return on equity will new developments generate for sources of capital?
- The public builders seem to be content at the moment to break even operationally on a global basis.
- The biggest challenge will be replacing tolling option lot takedowns and creating innovations in funding land development
- This question can only be answered within the context of the availability of leverage.
- Most recently, many of the public homebuilders have raised their return criteria from a variable contribution.
- Until sufficient job growth and demand for new housing reappear, the pace of home sales will be tepid.
Market uncertainty appears to be transforming the adversarial nature of the builder, developer, and capital relationship to one of collaboration and cooperative alliances, and more creative partnerships are becoming the norm.
What is the new paradigm in profitability for community development? What return on equity can community development generate for the capital providers?
- Equity for new community development is likely to be scarce for the next few years.
- The lack of competition from other developers and the supply limitations on finished lots will drive developer markings over the next three years.
- How to underwrite the likely prospect that a large-scale development will have to survive multiple economic cycles is the primary issue.
- Because generally no debt is available, most equity investors are looking for 20 to 25 percent unlevered returns, which compress prices and limits trades.
New development will not be feasible until distressed lot supply is absorbed.
Who has the capital (debt and equity) for residential real estate and community development, what are they looking for, and what are the hurdles, terms and prices?
- Public builders have the money for today’s subdivision deals, and private equity is looking for the larger plays – private equity seems these deals as high risk.
- Private equity will drive and finance community development.
- Banks do not seem ready to lend for development construction.
- The handful of funds that are playing in that space all what 20-plus IRRs.
- The good news is that institutional and private equity are available.
What is the future of infrastructure funding and CDF financing?
- We haven’t done many deals recently that would have benefitted from community facilities districts (CDF) financing.
- If you need significant off-site infrastructure funding, the land is probably not ready for development.
- Ideally, bond financing of infrastructure remains and grows.
- All local units of government are broke, and the will look to the development to fund infrastructure.
Successful public/private partnerships will require long developer track records and impeccable credibility.
Given the above, what is the ideal size, type, and location of financeable deals for the foreseeable future?
- The ideal size for a residential development deal would be a project that can be absorbed within no more than ten years and generate a very strong return.
- No more than 200 lots in any one location is the perfect size because near-term absorption is easier to demonstrate.
- During this transition period from the downturn to the next up cycle, the “hot spots” for real estate opportunities are scarce.
- Development will be closer in to the urban core on smaller land acquisitions.
To secure financing, loans for projects need to be relatively low leverage at 35-40%.
How do you finance projects and enterprises in either business model?
- Private equity will be the first to jump back into real estate finance. Banks and institutions will follow reluctantly, but only once a sustained records of growth, in terms of home and land pricing and absorption rates, is established in the market.
What is the new business model for the relationship between the builder, the land developer, the debt and the equity?
- In the short term, national and large regional homebuilders will dictate much of what happens in markets because of their significant cash positions and current small margins.
- The relationship between the builder and the land developer ill eventually return to what is has been historically.
- The new business model seems to be that the public builders would prefer to stay out of the land development and ownership business and to make their money building houses.
- The relationship will not be too different from in the past.
- In the words of Ronald Regan, “Trust, but verify.”
- Everyone will be working for less than they think they are worth.
How do you plan to make money between now and 2015?
- My first priority is not to lose any more than we already have.
- We getting into the apartment game.
- Under the present (and foreseeable) circumstances, the greatest opportunities in selectively purchasing (and reselling) distressed properties.
- We will be partnering with landowners to absorb their land.
- The key to success is to purchase projects in certain submarkets where the job and population growth is creating housing demand.
- Some good advice: focus on smaller projects.
By 2014, the business model will morph into a land banking structure to supply production builders with lots. There has never been a time in modern history when more real estate assets were owned by entities that wish they didn’t own them, including banks, investors, stranded developers, and even vulture funds picked up assets with a game plan to buy and flip. Meanwhile, the industry has purged hundreds of real estate companies out of the business, and only a few strong survivors are in each market area. The survivors will have many people knocking on their doors wanting to sell, partners with, or hire a developer on a fee or participation basis. We will all be in the business of fixing broken projects for the next few years.