September column for Builder & Developer magazine now online

My September column for Builder & Developer magazine is now posted online. For this month's issue, which is entitled "Affordable Housing Demand" -- I discussed the the challenges of building affordable housing and cited a couple of successful projects on which MetroIntelligence has consulted.

An excerpt:

Given the enormous inventory of unsold homes in the marketplace, it’s very easy to claim that the U.S. is simply over-housed. But despite 300,000 new foreclosures per month and a national apartment vacancy rate of nearly 8%, in many metro areas there is still not enough housing for low-income households. The reasons for this shortfall are many, including high prices for land, impact fees, zoning requirements and pricy carrying costs. Add to that list uncooperative neighborhood groups who assume that affordable housing equals increased traffic, utilitarian architecture and neighborhood decay, and it’s no wonder that the demand chronically exceeds supply.

The Challenges of Building Affordable Housing

Given the enormous inventory of unsold homes in the marketplace, it’s very easy to claim that the U.S. is simply over-housed. But despite 300,000 new foreclosures per month and a national apartment vacancy rate of nearly 8%, in many metro areas there is still not enough housing for low-income households. The reasons for this shortfall are many, including high prices for land, impact fees, zoning requirements and pricy carrying costs. Add to that list uncooperative neighborhood groups who assume that affordable housing equals increased traffic, utilitarian architecture and neighborhood decay, and it’s no wonder that the demand chronically exceeds supply.

In the case of Heritage Walk, a collection of 34 single-family homes built on small lots in the Southern California City of Fullerton, they look like many other infill developments and feature Spanish-style elevations which blend with the surrounding neighborhood, LEED certification for energy-conscious buyers and three pocket parks for those with families.

Not surprisingly, like many infill communities in established areas, sales have been brisk, with the first phase of homes selling out within the first weekend of opening. Yet not all hopeful buyers will qualify even if they can afford it: in a fairly unique situation for California in which the builder partnered with the city’s redevelopment agency, eligible buyers cannot earn more than 120% of the Orange County median income based on household size, the home cannot be rented out (not even a bedroom), and it must be resold to another eligible buyer at an affordable purchase price based on the same formula used for the original sale.

Consequently, it’s possible that if interest rates rise faster than countywide incomes and they’ve not paid down enough principal, if they sell original buyers could actually lose money – an issue which made it difficult for us to price the community against competing new home developments and resale homes which had no such restrictions. Fortunately for Olson, the combination of low costs, an efficient land plan and an effective marketing campaign in an area desperate for affordable new homes has meant brisk sales as well as a healthy profit margin.

For rental housing, the Low Income Housing Tax Credit (LIHTC), which was created under the Tax Reform Act of 1986 and provides dollar-for-dollar tax credits administered by each state and ultimately sold by developers to investors to raise funds, has historically been a huge success, accounting in part for nearly 90% of all affordable rental housing nationwide. And yet as the Great Recession began and corporations no longer had the earnings against which to shield income taxes, it’s become nearly impossible to find willing buyers for these credits even though the demand by low-income households remains unabated.

In these cases, affordable housing developers have had to be both nimble and quick, cobbling together financing from local jurisdictions, tax-exempt state bonds and HUD-administered HOME funds. Moreover, although the market studies which must be produced by third parties typically adhere to LIHTC guidelines, they’ve gradually become so complex and time-consuming that most traditional consultants can’t or won’t touch them.

However, in MetroIntelligence’s dealings with both non-profit and for-profit entities, such projects are increasingly crucial, whether providing the inclusionary housing to get a large master plan approved, allowing a builder of market-rate apartments to clear a financing hurdle by reserving some units for low-income households, or ensuring that cities are meeting their requirements for low-income families, seniors and other special populations. And for those driving or walking by, these projects are certainly not the public housing projects of yesterday. They’re now just part of the fabric of a dynamic community.

Homebuilders and brokers should first ask themselves: "Who's Your Company?"

(Note: The following article was first published in the June 2008 edition of Builder & Developer magazine).

In his new book “Who’s Your City?” author Richard Florida -- who brought us the 2002 national best-seller “The Rise of the Creative Class” -- argues that not only is the choice of where to live the most important decision someone can make, but those who match their interests and personalities to specific cities tend to find the best-matched careers, spouses and friends.

Frankly, I think this concept should be marketing catnip for homebuilders, allowing them to leverage these ideas (and roadmap included in the book), arm themselves with increasingly sophisticated demographic data and decide, both for their companies and their buyers, exactly ‘Who’s Your Development?’ In fact, some would argue that only those builders who are able to successfully address these questions throughout their organizations and provide a distinctive yet trusting brand image will both survive and remain strong enough to benefit from the eventual housing rebound.

It’s an important concept at a time when builders are shouldering much of the blame – rightly or wrongly – for the current housing slump. When I recently wrote a guest blog post defending the idea of extending the tax loss carry-back for homebuilders at the L.A. Land blog, the reader responses ran 40-to-1 against the idea, so clearly builders have a steep PR hill to climb. Consequently, I think tomorrow’s building industry will look a bit different than in the past, with a focus on customized solutions to buyers’ life stages, personalities and demographic profiles.

I had the chance to talk with Dr. Florida when reviewing this latest book for the Los Angeles Times, and a major theme he discusses is the changing nature of what people want from a community. In many urban areas, for example, time has steadily been on the rise --even more than money -- as the primary resource for people to live happy and fulfilling lives. Explains Florida, “It’s not about the price of oil, it’s about the time cost of commuting, and meeting people, and leveraging those networks within solid neighborhoods close to employment centers.”

Although “Who’s Your City?” focuses its research at the citywide level, Florida and his team provide specific examples of how different neighborhoods have distinct personalities. For example, a slowly revitalizing Koreatown in Los Angeles might be an ‘urban mosaic’ characterized by ethnic restaurants and relatively cheap rents, whereas Tyson’s Corner, Virgina or California’s Silicon Valley would be two of the country’s best-known ‘edge cities’ in which single-family homes with larger-than-average lots mix with plenty of local employment and shopping opportunities.

But what if you want to identity an area’s personality to a more specific level – say a specific neighborhood that’s defined not just by existing residents, but also those who might be attracted to a future vision? That’s when someone like Jonathan Smoke and two of his companies, BlueSmoke and HousingIntelligence.com, can assist. Smoke, as a former SVP for corporate strategy and innovation at Atlanta-based Beazer Homes (and before that their Chief Information Officer), has tapped these experiences to create a national resource of data and analysis oriented towards the supply side of the building industry.

With the company motto “Don’t Just Guess,” Smoke and his team have partnered with Claritas (a division of Nielsen, the same company which tracks television viewers and website visitors) and Scarborough Research (which tracks shopping patterns, media behaviors and lifestyle decisions) to create proprietary demand models he says are far more accurate than what most builders and consultants currently use. Instead of reviewing what he calls ‘demonstrated demand’ models -- defined as homes already sold and review past performances instead of those of the present or future – his company focuses on current and projected demographics, preferences and lifestyles and translates that information into estimated demand for any variety of product types, price range or geographic areas. The end result? Higher absorption rates and a better return on investment for marketing dollars.

Moreover, instead of attempting to cram these households into the existing limited array of ‘entry-level’ to ‘luxury’ consumer segments relied on for decades, Smoke has developed an expanded and more detailed set of eight categories that focus more on personality traits than just incomes alone. As a result, he says his segments are more adaptable to markets that can change over time for a variety of reasons, and are especially useful to assist those developments failing to meet their projected pro forma models.

Explains Smoke, “It’s important for the best use of dirt, for designing product, for marketing and promotional purposes, and be able to adjust as market conditions change due to a new competitor or any host of externalities.”

But are most of today’s builders even set up to implement such changes quickly? According to development management consultant Philip Simmons, the answer is no, as many builders and developers today simply don’t know how to strategically adjust their operations to a rapidly changing market. Simmons, a veteran of the building industry who most recently ran the Urban division for John Laing Homes after stints with Archstone, Avalon Bay Communities and Watt Industries, argues that the skills needed for a housing boom are completely different when it eventually busts.

“When times were good you had five people for three jobs, whereas in times like this you need two people to cover five jobs,” he explains. Consequently, the past focus on a narrow skill set simply isn’t relevant when it’s equally important to understand the dynamics of all company departments and divisions. Says Simmons, “It’s a different world and what used to work isn’t working.” So when the inevitable finger-pointing starts, the consequences for a development team can be a lack of trust leading to conflicts among team members, a loss of commitment, the avoiding of accountability and, ultimately, failed projects.

For Scott Laurie, named President and COO of California infill specialist Olson Homes in 2007, his years as both a Division President and at the corporate office for a volume builder like KBHome came in handy when he was tapped to reorganize the Seal Beach-based Olson. “The easy thing to do is reduce headcount to nothing, but that’s the short-term thinking,” he says.

In his case, instead of cutting headcount alone, he looked at both salary levels and job functions in order to envision how to keep core talent around for a market rebound. Within nine months of taking the reins, he had reduced staffing by over 40 percent, mostly by eliminating middle layers of management and dramatically consolidating divisions. Since sales people and construction superintendents now report directly to senior level VPs, the benefits are twofold: restoring accountability while reducing costs.

On the marketing side, he’s revamped the company’s outdated website – which has spiked the percentage of sales leads from the website to 35 percent today from the low single digits a year ago -- and created a new corporate brochure focusing on Olson’s unique strength among the state’s production builders, namely expertise with walkable, transit-oriented (and therefore greener) living which promotes a balanced lifestyle just as much as its floor plan designs.

By salting this new brochure with pithy quotes ranging from the philosopher Cicero to classic author Henry David Thoreau, it manages to convey the important daily benefits of in-town living that doesn’t mean sacrificing style or safety. The company’s motto – “In Town. In Style. In Reach” – extends to all of its product lines from mixed-use condominium developments to small-lot single-family detached homes. Olson is also serious about market research, and is one of the few builders which requires their consultants to use pre-set report templates in order to provide a detailed, objective comparison of proposed developments with a particular focus on demographics, schools, crime rates and proximity to retail services.

It’s hard to argue with success: over the last 20 years the builder has entered into partnerships with 80 different cities and counties throughout California, making them a preferred partner for local redevelopment agencies. Home buyers have also responded, with Olson’s recent per-project absorption rate of more than one net sale per week exponentially greater than the market average.

According to Laurie, this success is no accident. “To be successful you have to be patient to get deals done. Olson has both patience and great people. The focus is to maintain relationships.” Concludes Philip Simmons, “Whenever there’s a problem it’s always about management. Sometimes it’s just about filling in some gaps that should be the mortar in between the bricks.”

This pro-people attitude certainly makes sense, as you can’t hope to define “Who’s Your Development” until you’ve first answered “Who’s Your Company?”