An Influx of Infill

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With the cost of land climbing and resistance to suburban sprawl mounting in some areas, GIANTS are looking for alternatives to business as usual, seeking options that will help them achieve and maintain the growth Wall Street expects. Large builders are taking on infill projects — brownfields as well as land skipped over in previous developments — that are more indigenous to smalle...

October 01, 2005

Sidebars:
Atlantic Station Puts Beazer on the Urban Infill Map
K.Hovnanian Cleans Up with Infill

With the cost of land climbing and resistance to suburban sprawl mounting in some areas, GIANTS are looking for alternatives to business as usual, seeking options that will help them achieve and maintain the growth Wall Street expects.

Large builders are taking on infill projects — brownfields as well as land skipped over in previous developments — that are more indigenous to smaller, niche builders. They are using them as a way to reach a different buyer segment, achieve higher margins and thrive in an arena of less competition.

 

"Typically [infill] deals are more profitable because there is less competition and because they are harder to do and put together," says George Schulmeyer, Atlanta division president for Beazer Homes. Beazer will complete 186 homes at Atlantic Station, a 138-acre redevelopment in Atlanta scheduled to open in October 2005.

Atlanta is a very good market — often competing with Phoenix for the highest number of housing permits issued, according to Schulmeyer. "When you invest in a product like infill, for which the competition isn't as direct, you gain some market advantage," he says.

"There is less resistance to doing infill than there is to doing traditional greenfield building," says Douglas Fenichel, regional director of public relations and communications at K. Hovnanian. "In places like New Jersey, and more and more in other states, regulations are actually making it very difficult to do any kind of traditional greenfield building, and [that's] pushing us back into the cities."

"Builders in general are fleeing to cities you've never heard of on the outskirts of town," says GIANTS contributor John Burns, president of John Burns Real Estate Consulting. "Some of that is okay, but you don't want to have all of your assets an hour from the job centers. Some of them are looking for diversification."

Finding the right mix

GIANTS have varying philosophies and practices regarding how much of their production is, or should be, devoted to infill. In many instances, the market a particular builder serves determines the ratio.

"You have to look at it by geography," says Burns. "I'm sure it's going to be a very small part of their business nationally. You are not going to build much of this in Las Vegas, Phoenix and Texas, where they have a lot of their volume. But . . . it could easily be 40 to 50 percent of their volume in California, or some places that have major urban areas where there is a lot of demand for this. You'll have some divisions that will focus on it, and some will ignore it altogether."

"You can't build a business around infill, because the opportunities are too inconsistent and you just don't know when they're coming," says Peter Simons, senior division president for Beazer Homes' Colorado division. "If you have your mainline business with your long-term, greenfield projects [and] one of these comes along, then it's a great opportunity to spike your business plan in a given year by selling a bunch of high margin units that typically sell very fast, because there's not much product out there."

"It will grow first in California — [because of] land value and the scarcity of suburban or greenfield land opportunities," says Alan Boeker, president of the Los Angeles division of Standard-Pacific. "In [terms of] a percentage of all new home sales, [infill is] 30 to 60 percent [here]."

"We've been doing some consulting with our divisions in Florida and Denver," Boeker says. "[In] those markets, the divisions are a little slow to evolve. The extent to [which] they can still find land to do what they're used to doing, and achieve their business plan in more traditional housing forms, that's probably the best thing for them to do."

"We are at about 25 percent of our business, headed to 35 to 40 percent over the next couple of years," says Schulmeyer. "We believe in it strongly here as a great compliment to our business."

However, there are large builders who have, through perseverance and perhaps ingenuity, cultivated a successful, exclusive infill business. Being in the red-hot infill market of California doesn't hurt either.

"We've structured a business around infill," says Steve Olson, president of The Olson Company in Seal Beach, Calif., "which takes a lot of time." Part of the success that we have is the ability to partner with cities and local communities — working with municipal planners, redevelopment agents and elected government officials — turning them into partners and development advocates. We're providing solutions to them, rather than just being somebody that walks in the door with an opportunistic housing project."

"Our primary, if not exclusive business, is some kind of infill," says Joe Head, president of SummerHill Homes of Palo Alto, Calif. "As I understand it, we set out to become an infill builder from the very beginning.

"The pros of infill projects," Head says, "are that they are almost always in a market area that is established, that has enough going on in it so that regardless of the ebbs and flows of the economy on a macro basis, they are still a great community to live in."

Builder beware

Despite the success stories, GIANTS would be wise to take a good look before leaping into infill.

"Urban infill housing is generally pretty expensive to build," says Burns. "The land is usually expensive and the construction costs are quite expensive. You need a market that can support the price that you need to make money. In a lot of the affordable markets around the country, that's difficult to do. [If] you can get a nice house for $200,000, those markets don't usually have a lot of urban infill opportunities, because who's going to buy a condo in town for $250,000?"

"You need to do an analysis from a zoning standpoint as to density and how many units you're going to get," Simons says. "Because if you go through all this brain damage and at the end of the day you're approved for 10 units — if you're a big production builder, that's not going to make sense. It might for a little guy. That is why you typically see smaller developers and builders doing this stuff, because they don't have a lot of overhead. They don't have Wall Street to respond to on their growth. They just need to find a good project that's going to make them money. For us, we need to have it fit into our business plan.

"To make it worthwhile, it ought to be your most profitable part of your business," adds Simons. "It won't be [in terms of] the number of units, it won't be [in terms of] the number of dollars, but as far as your margins — you ought to have your best margins in your company with infill projects for sure."

Not business as usual

GIANTS have discovered that infill building, to some degree, requires a different skill set.

"They've found that it's a very specialized business," Burns says. "They've had to hire additional management or additional expertise to do this. It requires a different subcontractor base and a different project management skill."

"We decided to bring all the expertise in-house," says Tom Noon, COO of the California division of D.R. Horton. "We call it our urban division. It doesn't go out and find the projects. But it serves the purpose of a general contractor — from value engineering in the beginning, to plant checking the architect's plans, to delivering the finished unit to the buyer."

Standard-Pacific's Los Angeles office functions in part as a company wide resource on infill.

"Other than expanding the company's brand presence and business in Los Angeles," says Boeker, "we gather and offer best management practices associated with higher density housing and then share those with the other operating divisions for them to use as is appropriate in their markets."

 

Neighbors and NIMBYs

"With an infill," Simons says, "you're surrounded by people who may have lived there for 30 years, and they kind of like that abandoned lot down the street. You really have to do extensive due diligence, much more than a greenfield site, so you know what you're getting into, and you can quantify in terms of both time and dollars what it's going to take to get your product across the finish line — or even to get it to the starting blocks."

"You need to fit in," says Head. "You have a variety of neighbors who are anxious about what it is you will be and how you will interrelate with them. That could be residential neighbors not wanting to have their traffic and densities increase, or it could be commercial neighbors that don't want to have their activities negatively impacted."

"You need diversity of product," says Fenichel. "If all you're used to building is a 3,000 square foot colonial-style home, no matter how much you mush it, put it on its side, or stomp on it, it may not fit into an urban setting or into a first ring suburb setting. You need to be able to have the products in your portfolio that will fit."

More challenges

Infill projects generally require a larger investment of time and money. But this is where GIANTS generally have an advantage.

"They, by and large, have very strong balance sheets," says Burns. "With a typical subdivision, you're able to phase it and build ten units at a time. On these, you might be building 100 units at a time, because it's a large building with 100 people. You'll frequently have $50 million or $100 million invested in this property. You can't get any of the cash back until the whole thing is complete, because no one can move in until the whole building is finished. It puts a lot a strain on the balance sheet, but the GIANT builders can handle that easily. A lot of the small guys can't."

"There's a lengthier approval time," says Schulmeyer. "But we go in early. Instead of walking in and saying, "This is our product," we walk in with the city and say, "What would you like to see?" and then try to combine it with, "This is what we had in mind." So we work through that process, which is longer."

"The home building industry today is very internal-rate-of-return driven," says Olson. "Land is inventory, and maximizing inventory returns and being good builders — having homebuyers cued up and closing that whole cycle as quickly as you can — can maximize your returns. With infill, because you are dealing with long-range entitlement issues and you are dealing with trades that, in many cases, are different from what you would have with a traditional kind of greenfield housing project, you end up with a lot of different challenges."

Finally, it is important that builders recognize who their infill buyers are, because, in many cases, they are not the same buyers to whom they sell production homes.

"You're not generally selling to families," says Burns. "You're selling to singles, couples without kids, empty nesters and retirees. We've been doing a lot of psychographic demand research to help [builders] understand who these buyers are."

Knowledge is power

The best way for builders to determine whether infill is right for them is to do their homework.

"The pot of gold at the end of the rainbow on these projects needs to be really good sales prices and really good margins," says Simons. Do your market research. One of the benefits of infill sites often is you've got a very mature population there that's built up a lot of equity in their homes, but they don't want to move out to the suburbs to buy a bigger or newer house. So you can provide some cool product that they have money to spend on, and have an opportunity to buy something in the neighborhood they like living in. You can do an analysis based on your psychographic and demographic information on the population [living] there."

"[Infill] may not be [among] your high volume projects, but if you get a reasonable number of units in a reasonable period of time and make great margins on them, then they can fit in, and they can be your most successful projects."

 

Atlantic Station Puts Beazer on the Urban Infill Map

Beazer Homes made a big leap into infill early on, and almost 10 years later is reaping huge benefits. Its involvement in Atlanta's high profile Atlantic Station — a 138-acre environmental development of the former Atlantic Steel Mill in Midtown Atlanta — is the largest urban brownfield redevelopment in the United States. Scheduled to open in October 2005, the development is projected to include 12 million square feet of retail — including a new IKEA store and a 16-screen movie theater — office, residential and hotel space, as well as 11 acres of public parks. Atlantic Station is so big, it has its own zip code — 30363 — to accommodate all the new residential and commercial addresses going into the area.

Jacoby Development Inc. initiated plans to redevelop the 100-year-old steel mill in 1997. Beazer began working with Atlantic Station in 1998, and began constructing homes in early 2003.

"We signed our first contract for purchase of residential lots in 2001," says George Schulmeyer, president of the Atlanta Division of Beazer Homes. "We were mainly focused on the residential piece of the project. During the time period from 1998 to 2001, we worked with the Atlantic Station team to understand all the intricacies of the re-development as well as designing the residential piece that we would purchase for its highest and best use. "

At the time it signed the contract with Jacoby, Beazer was not doing a lot of infill. "To the best of my knowledge it was fairly new, especially something of that [size]," Schulmeyer says. "Beazer had always done some multi-family work. In Atlanta, a lot of times people use the term "infill" to mean inside of the perimeter, which is the [Interstate] 285 loop. Beazer had done work inside there. But physically in downtown and midtown? [Atlantic Station] was the first."

Beazer was responsible for building a total of 186 townhomes, single-family detached homes and duplexes. "That is fairly large [for us]," says Schulmeyer. "Most of the ones we are involved in now range from 80 to 150 [units]."

One of the biggest challenges for Beazer was the brownfield remediation.

"You take a step-by-step approach with a remediation as large as that one was," says Schulmeyer. "It took several rounds of planning and comments back and forth with the agencies, and then to actually do the work and start to move forward."

With remediation came other challenges.

"We had to have special foundations and pollens on the floor," explains Schulmeyer. "This remediation [meant] they added two feet of clean fill dirt as final topping on the development."

Giving buyers what they want

"The divisional [marketing] team that I work with daily, we did extensive research over the first few years [of the project], to really determine who the typical buyer would be," says Schulmeyer.

Beazer's research anticipated the trend of suburbanites returning back to the city. "If there are people willing to spend a few more dollars to live close to where they work, they demand certain more detailed, almost custom, touches," Schulmeyer explains. "I think we needed to do a job like Atlantic Station to help our reputation, [to demonstrate that we were] able to come up with these designs and tailor it to the consumer."

"The [product is] going to make you feel like you're back in early 20th century Atlanta," Schulmeyer continues. "The exterior touches make you feel the real comfort of old-time living with the modern conveniences inside — your granites, your upscale hardwoods, your upscale faucets and lighting packages — things of that nature. The Atlanta in-town buyer wants a brand new home — and they want it to feel like it's a hundred years old. We're trying to match that look and feel."

Did Atlantic Station achieve the success Beazer hoped it would?

"It absolutely achieved all the success we've desired," Schulmeyer says. "Almost every potential land seller that I talk to wants to talk about Atlantic Station. They say, "How is everything finishing up?" "How's that going?" Those kinds of conversations occur regularly.

"And with the combination of the grand opening of Atlantic Station in the month of October, we anticipate a huge, strong finish for us," adds Schulmeyer. "We'd like to see more jobs, more projects like this out there."

K.Hovnanian Cleans Up with Infill

It is little wonder New Jersey-based K. Hovnanian Homes does so much infill. Location makes it almost a necessity.

"My division focuses on the northeast part of New Jersey and the surrounding areas in New York State," says James Driscoll, Metro New York area president of K. Hovnanian Homes, "so for me, it's probably 50 percent of what I do."

Jersey City officials asked K. Hovnanian to redevelop the area surrounding the abandoned Roosevelt Stadium — perhaps most famous for hosting the historic debut of the Brooklyn Dodger's Jackie Robinson in 1946, who broke the "color line" in professional baseball by stepping into the batter's box.

K. Hovnanian remediated the land and built more than 1,000 townhomes in Society Hill at Jersey City. Currently, the company is working on Droyers Point, the third phase of the area's development.

Driscoll cites Droyers Point as the most recent example of K. Hovnanian taking an infill location that was contaminated and putting it back to use.

K. Hovnanian demolished a factory and cleaned up solvents and other materials at the site of Hickory Manor, a community of 180 townhomes and 40 active-adult homes in Union Township.

In Clifton, N.J, a municipal economic development committee chose K. Hovnanian to redevelop the former site of an industrial facility used to dye, bleach and finish textiles. This site became River Walk, a community of more than 200 townhomes, a clubhouse and recreation facilities.

The Roosevelt Stadium site had a significant amount of environmental contamination.

"We were involved in about a $9 million clean up," Driscoll says, " and now we are in the process of building and selling 380 townhomes in that location."

Driscoll says the chromium clean up at Droyers Point is something that wasn't even feasible at the time K. Hovnanian built out the first two phases of the Jersey City project in the mid to late 1990s.

"[It took] about seven years," says Driscoll. "Our acquisition cost was our clean up cost. Technology caught up at the point that we were able to move forward. We were able to clean up the property for the $9 million that I spoke about, which was actually our land basis.

Driscoll says there are other GIANTS competing for these kinds of infill projects.

"Within the area that I operate in, Toll Bros., Lennar, WCI — all have active communities," he says. "In addition to that, small, private donors that are doing joint ventures with equity partners typically dominate the high-density arena. Those groups are still a part of the environment as well. While they dominated it traditionally, the more bricks and sticks public home builders are now entering that area as well."

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