Emerging Trends in Real Estate 2010 - Part II
While developers are hitting the links waiting out the real estate recovery, they will surely be contemplating the projects they will build in the future. What will buyers, consumers and businesses demand in a few years?
Here is the Urban Land Institute’s dream for the future as reflected in the Emerging Trends in Real Estate 2010:
Next-generation projects will orient to infill, urbanizing suburbs, and transit-oriented development. Smaller housing units – close to mass transit, work, and 24-hour amenities – gain favor over large houses on big lots at the suburban edge. People will continue to seek greater convenience and want to reduce energy expenses. Shorter commutes and smaller heating bills make up for higher infill real estate costs. “You’ll be stupid not to build green.” “Operating efficiencies and competitive advantage will be more than worth “the minimal extra cost.”This sounds like utopia populated with a single-minded, idealistic human race. But then it is called a “dream for the future.” Unfortunately the only way this vision will be realized is by a combination of legislation or other forced governmental issues like zoning laws, utility availability and/or infrastructure, along with financial considerations like high gas prices. And last but not least, it will be driven by resulting profits.
ULI’s vision of urbanization is my point of departure from their philosophy. Our differences however are probably a matter of semantics. ULI says this is what should be built by developers. I say if developers rely on urban projects offering homes to a cross section of the population, they will fail except for a few cities. Most cities are not ready to sustain a substantial migration into the innermost rings.
As far the new urban movement, it is a grand ideal conceived by planners with lofty goals to reduce our carbon footprints and create communities, but our last round of city-bound mixed-use developments with towers of unoccupied units and empty retail spaces points to the difficultly and in some cases, sheer folly of such ambitious developments. With the cost of urban land, these dense and massive projects are called for in order for developers to earn an acceptable return. But the pitfalls are huge.
With the residential market in the tank and condos at the top of the trash heap, at least in most markets, it is a mighty task to make a 24-hour urban happening scene with an overly stressed housing component. The lack of integrated customers from the high-density residential sector, coupled with a challenged economy, means the retail will definitely suffer if it even gets off the ground initially.
ULI comments here on the on the place making process to create a centralized community to encompass live, work and play:
“Place making offers developers, public officials, and consumers unbeatable opportunities to collaboratively create thriving, profitable, sustainable environments to live, work, and play. Great place making requires bold vision, entrepreneurial business models, and long-term commitment from private and public sector players. Optimizing these opportunities can challenge even the most inventive professionals.”Through our years of real estate prosperity we convinced ourselves that the urbanized mixed-use, town center concept of developing new communities was the way of the future. These communities would waggle a magic wand and create walkable, 24-hour, sustainable living centers, giving us all a new reason for being. We called this smart growth. The problem with this concept is it is probably the single most difficult type development to pull off with any degree of success.
ULI’s vision of place making is an ideal worth pursuing but let’s be realistic. We had much of this decade to test the effectiveness and profitability of high density urban and even inner-ring suburban mixed-use projects that were large enough to encompass the live, work and play concept. Here are some of the problems as I see it:
- Many cities lack a vibrant downtown sufficient to capture and sustain a quality lifestyle beyond a subject mixed-use development. If a social and civic environment (good schools, recreational parks, libraries, transportation, and security) already exists within an urban area, a developer can capture those amenities as a value-added element. If that does not exist, development would have to be self-contained and restricted in complete opposition to the community building concept (which by the way, nobody is talking about these days according to the Emerging Trends report.) In our current market, I think we will see more of the smaller, but expensive, infill projects where city infrastructure will take the place of the web of a large development.
- It takes a very strong and committed developer to acquire suitable land, obtain complicated financing, and risk there will still be demand when the development comes to market. And in the case of the largest ventures, that it can sustain multiple cycles over the term of completion. Without resounding initial success, the debt service can easily spiral beyond the probability of profitable containment. It spells tremendous risk. But then there are always the developer stories that defy the market with solid success. To them I offer kudos. Maybe it’s just a matter of guts, lots of cash, tremendous vision and exceptional execution and extraordinary luck.
- Mass transit is crucial to this type of urban living where live, work, and play converge. In many of the major markets mass transit is a marginal effort at best. Take Atlanta for instance. You will lead a very frustrated life if you rely on mass transit for transportation in this metropolitan area of 5 million. But in all fairness, even if Atlantans were offered an excellent mass transit system, I’m not sure how many would give up their cars. We have yet to find a strong enough incentive, although we’re in a death struggle to strangle the city with traffic congestion.
- During this last decade baby boomers were expected to flood the cities, buying condos and giving up their large family homes for a scaled down urban lifestyle. Didn’t happen. You obviously can’t count on those unpredictable baby boomers to fulfill your expectations. We’re too busy pretending to be 40 again.
- These ideal developments require a massive, I mean massive, demand for residential occupants. Never mind the current market debacle facing us, how will these mammoth projects with thousands of units fare in a normal old run-of-the-mill, mid-1990s-type real estate market – not off the charts but just an OK market.
- Call me a cynic, but I just can’t see families not seeking a more “wholesome,” green grass, bicycle-riding, playing outside unsupervised, environment. Once the kids arrive on the scene, hard core city dwellers sacrifice anything to inhabit a family-friendly community. When the kids grow up they may, or may not move back to the city. Speaking of cynicism, how do we change human nature (at least as I’ve observed it) that continues to strive for big, bigger, best? When the economy roars back, one of these days, how will consumers react? Big houses, big cars are my bet, tempered only by financial restraints. The only concession I see is a complete conversion to small lots. If we have anything, it is a short memory of the ill effects of overindulgence.
These days most markets are stressed in several of the components that comprise mixed-use developments. It may be a while before the planets are once again properly aligned signaling that it is OK to come out of the woods.
How Smart is Green?
Smart growth policies graced real estate headlines prior to 2006 and real progress was marching toward mainstream development. Smart growth basically meant higher density, urban-type centers, with mass transit reducing automobile dependence. A greener way of thinking and living. The smart growth policies haven't gone away and they have widespread support, but in most cases the current market will not support their ambitions. The Urban Land Institute, rightfully so, is still all about urban living and building green.
I have a great deal of respect for ULI, but I have to question the viability of building green in today’s market. The financial feasibility depends on whether we’re talking about housing or hotels or office. But the moral obligation of green is without question.
The most likely properties to be developed and built with a LEED's certification are income producing properties where the owner is responsible for the usually substantial expenses of the building including utilities, i.e. office buildings and hotels. Where operational expenses are passed along to the tenant or homeowner, the motivation to go green greatly diminishes, i.e. residential housing, retail, and industrial.
There are studies that show LEED office buildings will sell for a substantial premium over a non-green property. But there is virtually no meaningful data available on the cost or returns on building green residentially.
Everyone will agree that green building in whatever property class is a good thing and it is very important that we do our part to protect the environment. But developers and builders must find the profit in green before it will become mainstream. At the end of the day, green is self-serving. Only when energy efficiency and carbon emission reduction is mandated by the market or by government regulation will we see the real estate industry embrace the world of green with consistency.
One thing is for sure. The next-generation projects will be driven and formed by the devastation caused by today’s real estate market. Ideals will be put on the back burner, unfortunately. When prices are diminishing, there is a scrap for every dollar.
BTW, this was not penned by Machiavelli