Developers get creative with downtown housing

Part 2: A return to cities
By: Glenn Roberts Jr.: Inman News
Editor's note: Downtown living is no longer taboo, and residents and developers are increasingly drawn to urban areas in many cities across the nation. Experts say demographics and lifestyle choices are driving the trend. More people are getting fed up with long commutes, immigration and population are surging in some areas, and a niche group of people – including young professionals and empty nesters -- are bored with living in the suburbs. In this three-part series, Inman News peels back the buzzwords associated with inner-city rebirth to find out what's really driving the new trend of downtown digs. (See Part 1: Downtown dwellings bring new life to urban core.)

Developing residential projects in inner-city areas is bold and daring. It can also be challenging, complex, chaotic, and costly, experts say. But that hasn't stopped builders across the country from putting up housing in unconventional places.

Scott K. Choppin of Urban Pacific Builders, who spoke about infill development during a presentation at a builders' conference in San Francisco this month, said developers must take a creative, visionary approach to urban infill development. "The rules have to be broken almost everyday, and almost every minute of every day," Choppin said during a presentation to hundreds of conference attendees. "You have to be able to take risks in design."

A few blocks away, participants in a parallel conference on multifamily housing trends heard presentations on mixed-use development that combines residential with retail space, developing in mixed-income urban neighborhoods, and building high-density and high-design projects in urban areas.

Downtown living is no longer taboo, and residents and developers are increasingly drawn to urban areas in many cities across the nation. Experts say demographics and lifestyle choices are driving the trend. More people are getting fed up with long commutes, immigration and population are surging in some areas, and there is a niche group of people -- among them young professionals and empty nesters -- who are bored with the 'burbs.

David Smith, a principal at Thomas P. Cox, Architects, Inc. in Irvine, Calif., who attended the multifamily conference, said, "In two years our business has entirely changed. (There is) a renaissance in downtown urban cores. High-density housing for a long time was thought of as inferior -- a less than desirable type of housing. Now you have the option of living where the jobs are." Developers earlier tested the central-city housing market with rental units, and now the thrust is in housing units for sale, he said.

Smith also said that the shift to urban development in the Southern California region has been "breathtakingly" rapid. What would have been a five-story wood-framed apartment building project a few years ago is now a 20-story condo development, he said, and the rental market has given way to a strong for-sale market in downtown areas.

Lawrence S. Bond, chairman for Bond Cos., a developer, said the popularity of infill is a byproduct of population growth, and because of this he doesn't expect the urban market to dry up. "What we have is a population explosion. Investors are clamoring for these (infill development) properties. They see a trend for the future."

Neil Takemoto, who in 1997 co-founded National Town Builders Association, a trade group for smart growth and new urbanism real estate developers, said developers typically don't like urban residential development, but they can't ignore the demand, and suburban development is facing an increasingly uphill approval process in some regions.

"(Urban development) is not cookie-cutter and requires greater risks and costs, but permits are becoming too difficult as sprawl becomes a greater issue." City living, he said, "Is an entirely new mentality of what the American Dream is." Takemoto, who runs a CoolTownStudios.com Web site that tracks urban infill issues, lives up to the standards he promotes: In 1997, he moved to downtown Washington, D.C., and walks five blocks to work.

Cities and other community agencies play a vital role in city-center residential development. But not every municipality is easy to work with, and that can make residential infill projects difficult at best. "We have a saying, 'There are two things every city hates: Its density and its sprawl,'" said John Ochsner, division president for Centex Homes, Northern California.

"The development community is one of the most highly regulated industries in the United States. We really need the backing of the community, at a neighborhood and local level, to pull these projects off. If we are going to turn inward we are going to need to find a way to improve the process," he said. For high-density infill projects, "the time to market and delivery time is very lengthy. There is a lot of market and investment risk compared to traditional single-family projects."

Atlanta, Boston, Chicago, Los Angeles, Minneapolis, New York, Portland, San Francisco, San Diego, and Washington, D.C., are among the cities that have embraced urban infill residential developments, and the list goes on. Kevin Wakelin, CEO for Holliday Development, based in the San Francisco Bay Area, said his company looks for properties that are priced very low in neighborhoods that may be blighted or have been overlooked by other developers. A presenter at the multifamily trends conference this month, Wakelin said that his company won't pay more than $100 a square foot for property, and his company looks for development partners to share the risk.

The company typically turns its attention to new cities and neighborhoods as the real estate market around its current projects begins to rebound and thrive, he said. Holliday's niche is building affordable housing in communities that are on the rebound.

"We're not going to say it's easy but where there's a will there's a way," he said. "You have to rely on your audience to also be pioneers...people who want to live in edgy urban areas." Wakelin's company is something of a pioneer in seeking out the middle-market, a market that can be somewhat "elusive," he said. Some urban residential developers compensate for high property costs by building high-density luxury condo units that cater to upper-income consumers, for example.

Jay Stark of Phoenix Realty Group, who participated in a panel discussion titled "Infill: The 'Out of the Box' Solution" at the Pacific Coast Builders Conference this month in San Francisco, said, "Infill is not for everyone. If you don't love mixed use you probably shouldn't be doing it."

Developers tend to lag slightly behind the demand for urban infill housing, said Alexander von Hoffman, a senior fellow for the Harvard University Joint Center for Housing Studies who wrote a book about urban renewal efforts in Boston, New York, Chicago, Atlanta and Los Angeles. "Developers show up last because they have money at risk," he said.

Sometimes, residential urban infill is an unintended consequence of other development. In Detroit, a new baseball stadium spurred substantial urban renewal, though only after neighbors fought for change, von Hoffman said. While urban infill has been practiced for decades in some cities, "a lot of people haven't got the message yet," he added.

Andrew Young, senior vice president for CenterPoint LLC, a real estate investment group that provides capital for luxury condominium developments, said, though, that it's surprising how many communities are now turning toward high-density, inner-city residential development. "There are a lot of markets that were pretty scared of high-rises that are now coming up." Denver, Dallas, Phoenix, Chicago, Las Vegas and Miami are among the markets that have seen a lot of interest in infill residential development, Young said.

There are demographic factors that builders cannot overlook about the future of urban infill development, said Ochsner, of Centex Homes.

"There is population growth, immigration -- more and more people are getting into housing," he said. "I think there is a sustained level of demand that will be with us in perpetuity. In the U.S. right now there are 400,000 housing units a year that become structurally or functionally obsolete and need to be rebuilt. That's true especially in urban cities."