New urbanist projects attract investment

Investment in traditional neighborhood development (TND) is one of the fastest growing segments of the real estate industry. The TND Fund estimates that cumulative investment in this sector rose to $2.1 billion in 1998, up 75 percent from the year before. A revised estimate puts TND investment at $1.2 billion at the end of 1997. The current figure still represents a drop in the bucket compared to total outstanding real estate investments in the U.S., which add up to about $1.5 trillion, according to Real Estate Capital Markets Report/The Roulac Group. In other words, approximately one in seven hundred real estate dollars is currently invested in TND (see table below), up from about one in $1,300 at the end of 1997. The biggest sources of funds going into the New Urbanism are private investors with large properties, real estate investment trusts, and banks. Since the table represents cumulative investments, money currently flowing into the New Urbanism appears disproportionately small. Almost all TND investment took place in the last several years. Real estate markets topsy-turvy Real estate markets are in a schizophrenic state early in 1999. Wall Street real estate investments are suffering, and many seasoned professionals are talking about a potential recession in 1999 or 2000. The newly created market for Commercial Mortgage Backed Securities (CMBS), viewed by many as the future of rational real estate finance, imploded in September, leaving investment banks with a $30 billion overhang of unsold securities. Little or no CMBS money is going into new urbanist projects, and the collapse of this market does not seem to affect other funding sources for TND. Real Estate Investment Trusts (REITs) lost 16.6 percent of their value in 1998, while the S&P 500 delivered a 31.7 percent positive return. Only two REITs, Post Properties and Federal Realty Investment Trust, are heavily invested in the New Urbanism, and they outperformed the average. Post lost 5.4 percent for the year, and Federal lost 8.3 percent of its stock value in 1998. Much more important to the success of the New Urbanism right now is that home sales continue to break records. U.S. sales of new single-family homes rose by close to eight percent this year to a record 870,000 units, energized by low mortgage rates and a vibrant economy, according to year-end projections by the National Association of Home Builders. Most of these units were in the form of classic suburban sprawl. New urbanist projects, however, also benefit from the strong housing market and generally are performing well. Projects across the country reported solid sales and strong property appreciation. TNDs are demonstrating new ways of building communities, and the success of these early projects is critical. Another positive factor is that banks are in good shape now, and a real estate credit crunch seems unlikely in the near future, which will help developers — including new urbanists — who are seeking capital. Why is TND a fast growing segment? The New Urbanism offers economic and practical benefits to developers, buyers, and local government. For the developer, walkable neighborhoods usually mean higher density which can mean lower land cost per home. TNDs typically attract a broader range of buyers, because they offer a wide range of housing types and prices with neighborhood commercial and retail. Developers who are doing TND believe that the product will have a higher value — this belief is being proven in a number of developments with high rates of land appreciation. TND appeals to growing numbers of buyers who want to escape sprawl, become less automobile dependent, live in a better community, and/or appreciate the style and character of a well executed neighborhood. Governments are beginning to understand that compact, mixed-use growth, with “internal trip capture” within projects, means less burden to overcrowded highways. Why do most real estate dollars go to sprawl? Using Visual Preference Surveys, A. Nelessen and Associates of Princeton, New Jersey, has studied how Americans feel about their built environment. When people are shown pictures of sprawl, they typically give it a negative rating. Yet, sprawl is built with money provided by financial institutions, who believe this form of development is what the public wants. The bottom line is that developers follow the money, and financial institutions are mostly interested in a predetermined list of standard real estate products. These include: 1) Apartments (suburban or infill, minimum 150-200 units, 15-20 units per acre); 2) shopping centers; 3) regional malls (10 new ones per year nationwide); 4) factory outlet centers; 5) manufactured homes; 6) lodging; 7) healthcare and assisted living; 8) office (either build-to-suit or speculative suburban low rise); 9) industrial (build-to-suit or speculative warehouse/flex); 10) self-storage; 11) urban entertainment centers; and 12) for-sale residential (attached or detached). According to Christopher Leinberger, Managing Director of the market research firm Robert Charles Lesser and Associates, all but two of these standard real estate products are “fundamentally sprawl producing.” The exceptions are infill apartments and urban entertainment centers. Designs for the other product types can be altered to fit within a new urbanist or old urban neighborhood. Banks still wary of the New Urbanism Many bankers look at elements of the New Urbanism — particularly multiuse buildings — as risky, says Chip Abernathy, senior vice president of First Union National Bank in Jacksonville, Florida. Nevertheless, First Union made a $2.5 million loan to finance part of a neotraditional project, Amelia Park, in Fernandina Beach, Florida. Abernathy explains that the developer, Joel Embry, did not emphasize the uniqueness of the project, but presented it as he would an ordinary subdivision. The project was “compartmentalized,” Abernathy explains, with some of the “riskier” parts financed by alternative means. “We are not financing all of Amelia Park,” he explains. “We are doing parts of it, and parts are being done with equity. Parts are being left undeveloped, and we are waiting to see what tenants might come in and how the project progresses — rather than just going out on a speculative basis.” After the New Urbanism has a track record in terms of loan repayment, lenders will be more willing to invest in such projects, Abernathy says. Some banks, particularly in the Southeastern U.S., already are comfortable lending to new urbanist projects. Vince Graham, developer of I’On in Mount Pleasant, South Carolina, reports that two banks, Wachovia and NationsBank, were bidding to finance the 243-acre TND. Wachovia ended up making the loan, even while Graham was still fighting a zoning-related lawsuit. Familiarity with successful projects like Newpoint, which Graham is developing with Robert Turner in Beaufort, South Carolina, added to Wachovia’s comfort level. Turner, who is now developing a TND called Habersham in Beaufort County, agrees that “once (banks) have seen some TNDs work (such as New Point) they are more comfortable.” As the number of new urbanist projects continues to rise in 1999, the investment in TND should grow at a steady pace (In a September, 1998, survey, New Urban News found 97 TNDs built or under construction and 104 planned, compared to 64 under construction and 71 planned in 1997). With continued low interest rates and economic growth, projects are headed for another good year. If a real estate downturn does hit, then a hypothesis put forth by new urbanist theorists will be tested — that TNDs can hold their values better during a recession than conventional subdivisions and shopping centers. TND developers would rather put that experiment off for as long as possible. u Robert Chapman III is president of the TND Fund, an equity investment group for new urbanist developments, based in Durham, North Carolina. Contact: (919) 403-7654.