Upward Bound

"We didn't just want to build towers," notes Jeffrey Gault, who has just been handed the reigns of KB Urban, a high-rise venture from KB Home. "We didn't want to rush. We wanted to brand our product and build it using best practices," Gault explains, "so that lessons we learn in Los Angeles can be brought to Phoenix and wherever."

"Historically, you used to see five or six new buildings going up on the east coast [of Florida] in a year," says Mike Moser, president of UK-owned Taylor-Woodrow's US Tower Division in Bradenton, Fla. "Now we see that many in a month."

Another Florida home builder, WCI, based in Bonita Springs, entered the high-rise condo scene back in 1988. In 2004, about 34 percent of its overall profits came from that sector. The builder often does closer to 50 percent of its business in the luxury coastal condo niche.

Waterfront views still bring a high premium, but builders have now discovered that urban proximity has become a valuable commodity in its own right. Living near restaurants, convenience stores and theaters sells floorspace.

That's encouraging news for urban enthusiasts such as John McIlwain, senior fellow at the Urban Land Institute in Washington, DC. It means that private builders with deep pockets are finally coming back to the cities. As a result, much-needed high density housing has already sprouted in Los Angeles, Manhattan, New Jersey and many other urban centers.

Case in point, WCI is looking at its first urban infill project in the Northeast. The 12-story luxury condo, dubbed "Watermark," rests on New Jersey's Gold Coast, a booming area for new high-rise and mid-rise projects across the river from the Manhattan skyline.

Ken Plonski, vice president of public relations for WCI, says the company has run up against a shortage of coastal properties in Florida — thus the tactical decision to branch out. That branch reaches not only into sections of the Florida Panhandle, but also to far away sites in New Jersey and New York.

"We acquired Spectrum Communities [a New York builder] in 2004," Plonski recalls. "Up until then, we were only in Florida. Now we're also looking at the Washington, DC area. We see a lot of infill opportunities there."

Toll Brothers, based in New York, also has a strong interest in the mid-rise/high-rise possibilities along the Gold Coast.

Ben Jogodnik, senior vice president of Toll's "City Living" tower division, says the company has carefully lined up the fundamentals for the new division.

"Four or five years ago, we made a decision to go into urban building," Jogodnik says. "We didn't look at it as a gamble. We took the time to figure out where to get access to the right subs, for example. We knew we were diversifying our product offering, along with our lenders."

In the Washington, DC area, Houston-based Centex Homes has formed a new tower division as part of Centex Construction. David Laib of Fairfax, Va., joined the team as vice president of operations in September, 2005. A former Naval Civil Engineer, Laib has already helped the company launch about $60 million worth of new high-rise work, primarily in Virginia.

"I was brought on board specifically to help with the concrete-framed multi-family projects." Laib says. "There's an interest in pursuing this market in various parts of the country. I think it's due to a lot of things — the emergence of urban lifestyle, the long commutes. But the reality is that traditional greenfield development is less and less an option."

"In D.C.," he adds, "Local jurisdictions seem very interested in multifamily construction, especially transited oriented. Typically, the deal here is that you build the Metro a parking garage first, then housing. Anything over six stories is considered high-rise here."

The tower side of residential building, of course, requires skill sets and connections home builders typically lack. Most firms have addressed this knowledge gap by hiring top-notch people from the commercial side of the construction business. Jeffrey Gault is one good example. His résumé includes stints as a banker, a retail developer, and CEO of the Empire Companies, a land developer and apartment builder in Southern California. He says that high-rise construction has to be approached from a top-down perspective.

"Big builders typically divide up their company by regional divisions," notes Gault. "Within each of those boundaries, they convey a product, and the physical product within any division doesn't change.

"But in an urban strategy," he continues, "you need a national, centralized strategy. You can't take a wood frame person in Raleigh-Durham and expect him to build high-rises."

The tower business also changes how you do your accounting, notes WCI's Plonski. "You're always looking at the percentage of work that's complete," he explains, "so numbers may look very different from year to year."

Mike Moser points out that the capital risk — especially for land and entitlement — incurred for tower building appears more daunting than it really is, because unlike conventional home building, most developers won't break ground until 50 percent of units have been pre-sold.

"Ultimately, you're getting 30 or 40 units to an acre," he notes, "so you're getting a higher return on that capital employment."

As one of their first projects, Gault says, KB Urban has partnered with Lennar to build two giant condominiums (40 stories and 27 stories) side by side in downtown Los Angeles.

He notes that this move has been a long time in the making. Bruce Karatz, KB's CEO, inched into the decision to go urban.

"Bruce and I had known each other for more than 30 years," Gault recalls. "He came to me and said he had been evaluating an urban high-density strategy. I told him that urban development is development in context. You don't build it like you build homes. The way you build in downtown LA is very different from Manhattan or Pasadena."

Miami-based Lennar has already added towers in Miami and San Diego to its portfolio. But those are pedestrian when compared to the company's grand plans in California. Last June, the company announced it hopes to build 11 residential skyscrapers in Anaheim, Calif, in an area called the Platinum Triangle.

In addition, the company has become known for its conversion of former military bases. That experience, coupled with its expanding high-rise business, have resulted in some bold proposals, such as the "Treasure Island" project pitched for San Francisco (see "Floating City" sidebar on page 25).

Centex Homes, on the other hand, is just entering the high-rise market. The cement is still curing on its first major project, The Eclipse on Center Park, a pair of 11-story high rises in Arlington, Va. The company also just purchased a 13-acre parcel in Las Vegas called Urban Village that will include 2500 homes in brownstones, townhouses and high-rises.

Toll Brothers has tapped a rich vein of would-be urbanites with its acquisition of the old Maxwell House Coffee Plant in Hoboken, N.J. The Maxwell Place project has been selling quickly, and is winning one of the key demographics that has often eluded high-rise multifamily builders — young professional people with a desire to live in an urban setting.

It's all about the land. And the Giants are pulling out all the stops to nail down likely parcels.

For example, Moser says Taylor Woodrow has restructured and hired land acquisition people for each geographic region of Florida.

"What we've learned is that you've got to live there to find the land," he says. We've got somebody in Biloxi now too. We also made another major change. We used to have the acquisitions guy take a project all the way through the entitlement process. Now, we have a vice president who handles entitlement and permitting."

"Entitlement takes you off the street," he points out. "And that's not good. Unfortunately, for every deal you do, there are 40 or 50 deals you don't. We have a land database, and I'd say we historically register 250 to 400 sites, but the bottom line is that out of that we'll do five or six projects."

A good source of land for projects lately, Moser notes, has been other builders who got into a project they couldn't handle.

"Typically he either couldn't sell the product or priced it too cheaply and is looking for a way out. You have to work within their footprint, but right away we try to rebrand the product, reposition it, sell the Taylor Woodrow brand, and add amenities."

Builders have found that even in built-up urban areas, there are many opportunities to obtain lots for infill building. The small footprint of high rise structures, coupled with their high capital returns, has many of the big builders whistling off to work.

"I think there's a lot of growth left in this market," notes Toll's Jogodnik.

"We see many areas that still have enormous potential. Area by area, I think for condominiums, things look very good."

Jeffrey Gault says KB Urban also sees land acquisition as the key to success in the high-rise sector. "Parcels of land are our biggest assets right now he says, and we have 18 properties at the moment we're working on. These are parcels that are suitable for either medium- or high-rise projects. It depends on the area. Again, you have to consider the context."

Some academics have argued that luxury condos serve only one strata of society — the rich — at a time when American society is becoming increasingly divided.

That argument may soon come to a head along the Gulf Coast of Louisiana, as casino resort developers clash with locals in an effort to reshape the region in their own image.

But builders point out that the cost of land and regulatory gauntlet drive unit prices ever higher. Land prices in Los Angeles, for example, have quadrupled since 2001. Without government subsidies, builders say they simply can't afford to house the masses.

McIlwain says regulatory obstacles are unlikely to go away, no matter how good the intentions. "Every few years, somebody has a new regulatory barriers conference," he says, "but it's very tough. What you run into are these entrenched bureaucracies at the city level. They're the worst, but they're almost impossible to change."

Adding market-rate high-rise into diverse neighborhoods may be accomplished without displacement, however, if cities become part of the strategy.

That's the position of Washington, DC, Mayor Anthony A. Williams. The Washington Post reports that Williams has proposed spending $558 million to fund affordable housing in an area surrounded by luxury high-rise condos.

Developers and investors who kick in to that effort, which will produce both low-rise and high-rise affordable units, can qualify for millions in federal tax credits.

McIlwain adds that gentrification — if it means more luxury apartments in cities — is not a bad thing.

"It's displacement of current residents that's a problem, not gentrification," McIlwain explains. "The people who move into those towers will help the local economy. They'll spend a lot of money, and they don't use a lot of city services."

Market pressures also appear to be pushing some builders toward a lower-priced mid-rise product. Mike Moser notes that Taylor Woodrow's latest 8-story Oaks Meridian development has been very successful — with units in the $450,000 range. The Centex condos in Arlington start at $300,000.

"No matter how you look at it, the construction costs for a 25-story tower average well in excess of $250 per square foot," Moser notes. "To beat that, you can go to a 4- or 5-story product. You have less load-bearing issues, and it can be built without an elevator and a lot of other expensive features."

Moser may be on to something. Studies by the ULI (see page 27) show that the number of mid-rise apartment buildings containing 20-49 units has fallen well below historic norms in recent years.

"In the $2 and $3 million price range," he adds, "buyers have a lot of choices. That's not as true in with mid-rises. We're taking the business in some new directions."