So far, new urban projects weather downturn better

Product diversity, closeness to transit, and the appeal of urban living help offset the biggest housing decline in years.

Sales of new housing slowed in August to the most laggard pace in seven years, and some conventional homebuilders reported losing tens of millions of dollars per quarter. New urban projects, however, have kept chugging along — many of them marginally affected by the market’s decline.
As higher mortgage rates and the subprime lending crisis drove many homebuyers out of the market, the number of unsold new and existing houses jumped to nearly 4.5 million nationwide — almost twice as many as in early 2005, according to The New York Times. Figures for July showed the median price of new housing had dropped 7.5 percent from a year earlier, to $225,700, the sharpest monthly price decline since December 1970.
Some new urban developments are suffering along with the rest of the market. “The buyers are basically on strike,” said John Anderson of New Urban Builders, a developer of traditional neighborhood developments (TNDs) based in Chico, California. “We’re selling one house a month in a project that should be selling four to eight. We’re not decreasing prices, but we are offering incentives like paid closing costs and landscaping the backyard for free.”
Other new urban developments are down, but not nearly as much as their conventional competitors. “We continue to roll right along,” said David Tomes, managing director of the 600-acre Norton Commons project in Louisville,  Kentucky, designed by Duany Plater-Zyberk & Company. “Builders aren’t building high-end spec houses in Norton Commons or elsewhere. That market is dead throughout Louisville. Banks aren’t loaning money for high-end specs.”
Nonetheless, spec houses in the $300,000 to $450,000 range are “selling very well” in Norton Commons, and “we continue to roll along with contract homes at $500,000,” Tomes told New Urban News.
Bill Gietema of Arcadia Realty Company in Dallas-Fort Worth said his firm’s two active TNDs “are outperforming their submarkets” (competing subdivisions in the same trade areas). One of the TNDs, HomeTown, in North Richland Hills, is selling at “about a 10 percent slower velocity” than before the downturn, Gietema said, but in light of the overall market, that’s considered a healthy performance. “Competitors have closed down their models,” he noted. “We’ve stolen everybody else’s share.” The other TND, Capella Park, on the south side of Dallas, is “outselling competing neighborhoods five to one,” Gietema said.

Infill beats greenfield
In most markets that were thriving two years ago, such as metropolitan Washington, DC, the reductions have been most dramatic at the region’s edge, according to Patrick Phillips of Economics Research Associates. “Production builder clients are clear on that, and increasingly pessimistic in terms of the depth and length of the downturn,” Phillips said. Anecdotal evidence suggests that infill and transit-oriented development are holding their values better than other kinds of projects.
For example, in close-in, high-density Arlington, Virginia, which is served by Metro rail, prices in mid-2007 were up 20 percent from a year earlier, according to Phillips. DC itself was up 5 percent, Phillips said, whereas most other jurisdictions in the region slipped.
Another example: CityVista, in the Mt. Vernon Triangle neighborhood in Washington, came on the market just as the downturn was taking hold, and contrary to what many market-watchers expected, it “is performing above pro-forma,” Phillips said. “It has the scale and the infill location, and a great retail presence  on the street, with a Safeway store as an anchor,” he said of CityVista, which Torti Gallas and Partners and Michael Marshall Architecture designed for a combination of 685 rental and for-sale units and 130,000 sq. ft. of retail, including a new prototype urban grocery store.
A recent interactive map of real estate sales on the Denver Post website indicated that the downturn’s impact is highly variable. Some neighborhoods in the city have done well, some in the suburbs poorly, and vice versa. Despite the variations, the data for 2007 show that Denver areas with traditional urbanism —walkable blocks and street networks — now have an advantage.
While the Denver region as a whole has seen sales prices slip by one percent this year, many walkable neighborhoods have risen sharply in value. These include North Capitol Hill with a 47 percent increase, tops in the region, and Jefferson Park, Hilltop, and University Park, all up 24 percent. Other urban neighborhoods have shown more modest increases in values. The Post pointed out that the neighborhoods that increased in value were the most expensive to begin with. However, more than a few pricey suburban developments have suffered a large drop.

A positive verdict
Phillips said that in much of the US, the pattern this year is different from what the nation experienced in the last market downturn, in the early 1990s. At that time, infill and TOD did not perform better than other real estate products. “The last time around, [city neighborhoods] didn’t have the product,” he observed. “There was no confidence in city government. Now there’s a better amenity base downtown, a better track record.”
Cities like Dallas, Detroit, Philadelphia, and Atlanta have similar stories, Phillips said. “This is the first downturn since the emergence of the urban housing phenomenon of the last six to eight years,” and for New Urbanism the results have been encouraging.
Todd Zimmerman of Zimmerman/Volk Associates real estate consultants suggested that “the most significant factor is location, rather than urban form. Urban and transit-oriented suburban locations are holding up quite nicely. Exurban and ‘drive ‘til you qualify’ locations, where housing is treated as a commodity, are not. There are exceptions, of course. Cities that had significant speculative activities — Miami, San Diego, etc. — have real problems in the mid- to high-end condo sector.”
The weakening of the market has caused some developers to alter course. JBG Companies, developer of the Upper Rock District — the transformation of an existing suburban business park in Rockville, Maryland, into a mixed-use neighborhood — had intended to erect five-to-eight-story concrete buildings containing hundreds of condominium units.
“When the market for condo collapsed, we redesigned it for four- and five-story rental — wood-frame construction on top of concrete garage platforms,” said Pete Jervey, principal. Delayed by the change of plans, construction is now expected to get under way next year. Even so, Jervey reported that the company is sticking with its mixed-use concept — adding housing, a small volume of retail, and some inexpensive space for startup businesses to a conventional office park.
Memphis developer Henry Turley has also seen sales of condos slow significantly in his city. “’We’re running 50 percent what we were a year ago,” Turley said. But he said his company has coped fairly well, in part by renting units it couldn’t sell. “One building is 96 percent sold,” he said. “The other building is 50 percent sold but 40 percent leased. So we have 90 percent productive units.”

Foreclosure in Connecticut
Across the country, some projects have failed to sell and consequently are headed into foreclosure. TD Banknorth initiated foreclosure proceedings in August against the developers of Southport Village Green, a mixed-use project situated between a Metro North commuter rail station and Interstate 95 in Southport, Connecticut. Southport Village Partners had priced the housing high, even by the standards of the Connecticut Gold Coast. When New Urban News published the 4.7-acre project in October 2006, its prices ranged from $650,000 for a one-bedroom condo to $3.25 million for a 4,100 sq. ft. attached house.
Stuart Baldwin, head of the Southport development group, has attributed the project’s scant sales to an overly long construction schedule and the mistaken decision to build the residential rather than commercial — which included the amenities of an upscale inn — first.
“The problem with this project as it now stands is that it is literally and figuratively the wrong side of the tracks for the market it is after,” said architect Patrick Pinnell, who participated in the development’s charrette. “The posh stuff in Southport is the other side of Amtrak and the little downtown; this side is Rt. 1 and the constant tire hum of 95.”
Pinnell recalled that when Southport Village Green was being planned, he, New Haven architect Robert Orr, and others initially favored “more and smaller units, especially true live-works, and a liner of apartments above retail for the street connecting Route 1 and the downtown.” Pinnell believes that “this would have worked in the turned-down market that has occurred since the charrette.”
Live-works are seen as an asset by many new urbanist developers. Anderson, in California, said he’s noticed interest in live-work — “people need a small office and can’t come up with space anywhere else in town. Live-work is selling better than some other product.” In Philadelphia, Sam Sherman of New Urban Ventures said live-works under development three blocks from Philadelphia’s Chinatown “are tapping into the Asian market.”
And although the Southport TOD did poorly, California real estate analyst John Schleimer expressed confidence that “TOD will become increasingly important over the next 10 years with the rising cost of energy.” Said Schleimer: “It comes down to where the TOD has the right location and product mix.”

Diversification pays off
Gietema, in Texas, attributed much of the success of traditional neighborhood development to its range of offerings. HomeTown is “the first four-generational development in North Texas,” its spectrum of housing extends from the young all the way to “independent living” for seniors. “With TND,” Gietema observed, “you’re diversifying from one single choice [found in conventional subdivisions]. We have a fruit cart, and our competitors have an apple cart or an orange cart.”
“If I had to go through a housing depression, I’d rather do it in a TND,” Gietema said. “I can manage my risk better because of the flexibility of the zoning and of the product types I can bring to market — which is what bankers want to hear about now.” In addition, he noted that “people who are attracted to TNDs have higher levels of education and higher levels of income.”
Phillips said a study that his firm conducted for the US Environmental Protection Agency prior to the downturn found a small but clear advantage for TND over conventional development in absorption and price growth. He believes TND’s advantages will be more pronounced in markets where New Urbanism is already well known and well established.
Greg Whittaker of Whittaker Builders expects to make 170 to 220 sales this year in his New Town development in St. Charles, Missouri — a slower pace than last year, but better than what he’s experiencing in the company’s conventional projects.
“A lot of builders have gotten into trouble because they paid crazy prices for land,” Whittaker said. ”Then, with a conventional project, you are getting three units to an acre. … With TND, we average eight units an acre. You are looking at [per unit] land costs that are much lower.”
The emphasis of many TNDs on offering parks, schools, retail, and other amenities within walking distance is also thought to have helped them in the current market. The 400-acre Capella Park, which Arcadia is developing through a partnership with Metroplex Economic Development Corp., is anchored by several church-sponsored public facilities, including Clay Academy, a pre-kindergarten through 10th grade faith-based school. The academy, which exhibits Classical Revival architectural influences and will be the heart of a Jeffersonian-inspired campus, is sponsored by The Potter’s House, a nondenominational church founded by Bishop T. D. Jakes, which claims more than 30,000 members.

The outlook
“We’re a third of the way through the downturn,” Phillips believes. “We’ve got another six months to stabilize, and then a slow recovery.” The current difficulties, he believes, will lead to tighter standards for underwriting.
Zimmerman said that “as lenders seek to continue to market their ‘product,’ I am hopeful that mortgage lending will refocus on those areas — efficient, often transit-served locations with better-than-average jobs-housing balance — where the risk of housing value decline is the lowest.” He thinks that “the fundamentals of the demand side of the housing equation are undergoing radical, once-in-a-century change,” and that “family-oriented exurban houses in many markets may never regain their peak values.”
Meanwhile, in Missouri, Whittaker sees a silver lining to the downturn. “The prices of materials have just dropped,” he pointed out. “To build a typical house is $15,000 to $20,000 cheaper now, which is great because we can pass along the savings to the customer.”