Live/Work Housing Has Its Niche

If you eavesdrop on the cocktail conversations of big builders long enough to get past all the moaning about the market, you're likely to hear plenty of them mention plans for high-density, urban and suburban infill projects. Living in town is a hot item for singles, dinks, divorcees and the biggest marketing target of them all, baby boomers. But what's the right product?

You might not give much consideration to that darling of New Urbanist dreamers: live/work. After all, living above the shop may seem a little too 19th century. And it's certainly not something that lends itself to high-production building. But you'd be smart to take another look; live/work, especially some modern, hybrid variations on the historical concept, is showing remarkable strength even in some of America's most challenging housing markets.

"Live/work doesn't just appeal to people who own bicycle shops and ice cream parlors," says Crosswinds Communities CEO Bernie Glieberman. "It also works for aging professionals planning their retirement."

He's finding buyers for his Eton Street Station live/work retail space with townhouses and lofts in Birmingham, Mich., near his Novi headquarters, even at prices averaging $647,675. "They continue to sell, and not much is selling in the Detroit market," Glieberman says. "We're getting attorneys who want to retire and scale back to a few clients. Another buyer is a consultant in the auto industry. He needs enough space to hold meetings for 10 to 20 people. A small office on the ground floor in a prestige town like Birmingham, is perfect for that."

Eton Street Station Loft, Crosswinds Communities, Birmingham, Mich.

Builders who make money off of live/work caution it's still a thin niche market, more dependent on a carefully chosen location than perhaps any other housing form. "You need a street with good drive-by traffic and preferably strong pedestrian traffic as well," says Tim Hernandez, principal of Delray Beach, Fla.-based New Urban Communities, which has live/work projects in Florida and Chicago's west suburb of Villa Park. "It's an urban living concept that works best on the edge of a suburban downtown, where residents can walk to restaurants, shops and boutiques. It should not be isolated in the middle of a residential neighborhood."

Hernandez says price is also an issue. "Our first live/works sold out because of a great location, the second project sold fast because we were able to keep the prices in the low to mid $200,000 range, and buyers had the option to use the ground-floor space as residential if they didn't want to operate a business in it."

That kind of flexibility is one of the innovations builders want to see in the way Traditional Neighborhood Design (TND) community codes are written today. Hernandez and others point out that live/work is not often built in isolation. It's combined with other housing and commercial forms in integrated mixed-use developments. It's a seasoning, not the whole meal.

"It helps broaden the market if the residential and commercial elements of a building can be separated. Today, a lot of people attracted to living in a townhouse above retail shops don't need or want the storefront commercial space," Hernandez says, "but in many cases, the municipality will only allow live/work if the homeowner buys and uses both the residential and commercial space. They can't lease out one or the other, as often was done in earlier times."

Eton Street Station Townhome, Crosswinds Communities

The reason they refuse to allow the spaces to be separated is TND's old nemesis: the car. If the commercial space is leased out or sold separately, the parking required increases. Especially in urban areas, parking spaces are hard to come by and expensive. So municipalities are often inflexible on the subject, which narrows the market.

Still, innovators are making headway. For instance, St. Charles, Mo.-based Whittaker Builders has a massive, 6,000-unit, 730-acre TND, New Town at St. Charles, with its own separate zoning code. "We were able to negotiate adoption of our own code as part of our TND provisions," says Principal Greg Whittaker. "It supersedes the city's code, which does not even allow live/work," he says, "and allows us to have live/work buildings with any combination of uses. And building owners can lease, live in or sell any portion of the building as they see fit." That's the same kind of flexibility building owners had in 1900. (Whittaker points out that St. Charles' existing zoning code outlaws its own historic downtown.)

New Town at St. Charles is four miles from downtown St. Charles, but the scale of the development is so massive, Whittaker believes he can use live/works to frame his own downtown, as the project moves toward its eventual completion and a population of 20,000 a decade from now. "We're now three years into the project, and our original plans called for us to have 10 live/works sold by now, but we've already sold more than 40," he says. There's no limit on the product mix, so Whittaker will sell as many live/works as he decides the project can accommodate. "If you take out our lakes and green space, our average residential density will be about 10 units per acre," he says.

Whittaker sold those live/works with a two-year lag in delivery time. He wanted more regular residential rooftops before building the live/works, so the businesses would have more customers. The town center will eventually have businesses with as few as two and as many as 2,000 employees.

New Town's live/works have commercial components varying from 600 to 5,000 square feet. A 600 square-foot commercial space topped with a three-bedroom townhouse of 1,600 square feet sells for just under $300,000. The building is sold fee-simple, with the concrete first-floor space unfinished. "The 11-foot foundation costs about $10,000, and with a layer of stucco on the outside and doors and windows installed, it adds about $25,000 to the hard cost of the townhouse," Whittaker says, "but we get about $100,000 of extra returns, so the margins are higher on live/works than on a purely residential townhouse. But people are getting more value out of that space, so it works for them as well as for us."

Whittaker closed 345 units last year for $88.03 million in revenues, but not all of that was in New Town. "We still do conventional subdivisions," he says, "but we're getting five times as much traffic at New Town, and when the market started to slow down, we had 500 sales in backlog there. We haven't had to discount prices at New Town.

"We've now got a second TND under development in the Kansas City market," he continues. "It's 930 acres, and we're asking for 9,000 homes. Our live/works are always built on the side streets leading into the neighborhood centers. As they get closer to the center of town, we allow the height and density to increase, but we never fix the number we'll do."

New Town at St. Charles is unusual because of its size and the scale of its live/work component. Still, if America's largest builders embraced TND, we might see more projects like this one, with those higher densities translating into increased returns on assets. But most of the modest numbers of live/work buildings going up in this country are being developed by smaller companies, many of them specialists in public/private partnerships and working with city redevelopment agencies to redevelop urban and suburban downtown sites.

Leyland Alliance, based in Tuxedo, N.Y., is one of these specialists. It's a profitable business model since a development done in partnership with a redevelopment agency doesn't require a land buy or carry. The city usually provides the site. In the case of East Beach, a Leyland project with a live/work component in Norfolk, Va., the city's redevelopment agency not only chipped in for the site but also hired and paid Miami-based town planners Duany & Plater-Zyberk (DPZ) and Richmond, Va.,-based design code book specialists Urban Design Associates.

"It was a really unusual project in that respect," says Leyland Alliance President Steve Maun. "East Beach is a 100-acre infill site. It was a bad neighborhood the city wanted to turn around. It's a very sophisticated city agency, but it's really unusual for a city to take the lead by employing the design team, but they even initiated two studies by Urban Land Institute."

Leyland landed the project in a competitive request process. The site is now zoned for 700 residential units, mostly single-family detached homes, but there are also townhouses, multifamily condo buildings and live/works. "The live/work buildings are being used here to try to incubate retail and office components into the site," Maun says. "The city hopes to nurture designers, lawyers, accountants, shops and cafes into this area of town. It's really appealing for people attracted to a low-maintenance urban lifestyle."

In this case, buyers can create an income stream by either using the ground-floor space themselves or renting it out to someone else. No restrictions on the owners' prerogative here. "In the live/works I've studied, that's a critical component of this product," Maun says. "People who want to buy in the location — which is always the major attraction — need to have the flexibility to choose how to use their space, even if they decide to lease out the first floor, put their own office on the second and rent the third floor as an apartment."

One of the strengths of the live/work buildings that allowed many of them to endure for so long is the ability to change uses as the market changes and location dynamics make choices easy for the owner. "Our units are sold as fee-simple townhouses," Maun explains, "but a buyer can use any of the three floors any way he chooses. We make the assumption of an office or retail use on the first floor, but it's not mandatory."

Think about that in relation to the current contrasts between the good health of commercial sectors and struggling residential markets. Imagine being able to sell such buildings into whatever use makes most economic sense at the time — just the way they would have been used a hundred years ago.

"Anecdotally, we see that, priced right, these buildings seem to sell well, especially when they are components of larger, mixed-use urban developments," Maun says. "If you tried to sell a thousand of them in one location, they wouldn't do well, because their appeal is to a very sophisticated niche, people who are moving back into town to connect with others, to avoid the isolation of suburbia. That's not the mainstream."

Leyland has elevators in its seed building, so the first one cost about $125 a square foot in hard costs (materials and labor only). "We're selling them at over $300 a foot," Maun reveals. "We sold the first one for just over $1 million. The second unit is on the market for $950,000 and the big corner unit is priced at $1.4 million."

Leyland has a similar townhouse and live/work project under development in Warwick, N.Y., where live/work pricing runs $579,000 to $639,000 for four levels that starts with a drive-under garage, then ground-level retail and two townhouse levels. "In that case, the city doesn't want anything to take away from its Main Street," says Monica Quigley, Leyland vice president of sales and marketing. "And we're about one mile away. So we are only allowed four live/works among 215 units. But we're grand-opening the live/works this month, and we already have a reservation on one."

Before you commit to doing a live/work project, make sure you know exactly what the ground rules are in the municipality. That seems like a no-brainer, but some builders have been caught off-guard by unexpected problems. One Midwest builder (who requests anonymity) tells the story of a curveball thrown by the city on the building code front.

Very late in the approval process, with all design work complete, he discovered that if his commercial or retail first-floor space is over 10 percent of the total conditioned space of the whole live/work unit, it falls under the city's 'mixed use' classification and must be built to commercial International Building Code specifications rather than the International Residential Code.

"That means we're subject to accessibility standards for both movement of people inside the building and in the parking level," says the mortified builder, "and we didn't know these distinctions existed when we designed the building or we'd have made sure less than 10 percent of the total space was concentrated in the ground-floor retail space."

A possible solution: insert a partition wall across the back of the retail space to turn the back section into a residential "den" that shifts the balance back to residential, and the building's retail component has to be classified as "home occupation space."