EPA presents smart-growth ideas to big builders

Studies suggest that production builders could capture a growing market and avoid the coming glut of large-lot houses.

The US Environmental Protection Agency (EPA) is carrying out an educational and research effort that could spur more of the nation’s large homebuilders to develop smart-growth projects.
Over the past several months, Lee Sobel in EPA’s Office of Policy, Economics, and Innovation has met with executives of “high-production” builders and supervised the preparation of reports that tell how and why large-volume construction companies might get involved in smart growth.
EPA is writing white papers for developers that interpret demographic trends, examine the potential demand for compact development, and explain the financial implications of smart growth as compared to conventional development. The white papers set forth planning principles drawn from New Urbanism, such as having a well-defined center, a clear edge, small blocks, and an interconnected street network, along with using open space to create a public realm and paying special attention to civic spaces. EPA expects to publish the papers in September in a report tentatively titled “Making the Case: Smart Growth for Production Builders and Developers.”
Because of their economies of scale, big builders are key players in markets throughout the nation. The top ten homebuilders in the US produce 25 percent of the country’s new housing, according to information compiled by Jonathan Ford of Morris Beacon Design.
By 2030 the nation will need 34 million new housing units and 78 billion square feet of new nonresidential space, Sobel said in a speech March 30 to the CNU New England Chapter. Many of those units, or the neighborhoods in which they sit, may have to differ considerably from what production builders built in the past. Families with children — traditionally the main customer base of production builders — make up a declining segment of the market. Consumer surveys say approximately a third of the public is interested in renting or buying in a smart-growth community. Consequently, EPA is hoping that builders will become increasingly receptive to this form of development.
Sobel said four high-production builders — which he defines as companies building 4,000 or more dwellings a year — have established divisions or product lines focusing on urban and infill projects.
• K. Hovnanian Homes, in Red Bank, New Jersey, established Metro Living in March 2006. It is operating at waterfront locations in four northern New Jersey cities and is building in Center City Philadelphia; a historic district in Frederick, Maryland; metropolitan Washington, DC; Houston; and southern California.
• Los Angeles-based KB Home formed a high-density and mixed-use division called KB Urban in October 2005. It has been building in Anaheim, Los Angeles, Irvine, and Woodland Hills, California.
• Toll Brothers, in Horsham, Pennsylvania, in 2004 started a City Living division, which has worked on projects in Providence, Rhode Island; Manhattan, Brooklyn, and Queens, New York; Hoboken and Jersey City, New Jersey; Philadelphia; Chicago; Phoenix and Scottsdale, Arizona; and Ontario, California.
• Dallas-based Centex Homes in 2001acquired a business that became Centex Cityhomes. The Cityhomes product line is being built in Belleville and Jersey City, New Jersey; metropolitan Washington, DC; and Addison, Irving, Dallas, and Fort Worth, Texas.
“We’re not ignoring reuse and urban infill,” Sobel emphasized to New Urban News. EPA would like to see much development take place in existing cities and towns and on brownfield sites. But, he said, “it’s a reality that production builders generally build on greenfields,” so the agency is attempting to show how the large companies can make greenfield projects that are compact, pedestrian- and transit-friendly, and better for the environment.

Growing wave of smart growth
As smart growth has started catching on, Sobel said, “new players from other real estate disciplines have been entering the market,” including Crescent Resources LLC, Developers Diversified Realty, Federal Realty Investment Trust, Forest City Enterprises, Gables Residential, and Miller Weingarten Realty.
EPA studied 73 smart-growth projects that were under construction between 2000 and 2004 and identified the most active high-production builders in those projects. They were D.R. Horton (also operating as Trimark Communities), 5 developments; David Weekley Homes, 3 developments; Lennar, 3; Centex, 2; McStain Neighborhoods, 2; and NVR Inc. (as NV Homes and Ryan Homes), 2; Beazer Homes, KB Home, K. Hovnanian, Newland Communities, Shea Homes, and William Lyon Homes each had 1 project.
These projects — combined with other smart growth projects begun in the 1980s and 1990s or after 2004 — will have generated 192,907 housing units and 123 million square feet of commercial space upon completion, according to Sobel. Although those are substantial totals, they’re minuscule compared to the output of conventional development. Sobel sees the disparity as another reason for large-volume builders to jump into smart growth.
“Between 2 and 5 percent of all [housing] starts now are smart growth, which means there is a demand gap of about 510,000 smart-growth houses each year, even before considering the demographic changes that are under way,” Sobel said. EPA says that in 2003, large-lot detached houses — those occupying at least 7,000 square feet of land — accounted for 54 percent of the nation’s housing supply, whereas recent preference surveys show that only 25 percent of today’s renters and buyers want large-lot houses.
The proportion of households containing children is projected to fall from 33 percent in 2000 to 28 percent in 2025. Singles, 26 percent of the market in 2000, will expand to 28 percent by 2025. The result of such changes will likely be a tremendous oversupply of large-lot houses, causing problems for builders unless many of them shift toward a smart-growth product.
Limited studies of new urbanist developments have confirmed the strength of demand by looking at how prices have held up. Between 1997 and 2005, Sobel noted, there were 4,744 resales in the Kentlands and Lakelands developments in Gaithersburg, Maryland. Kentlands houses commanded a 16.1 percent price premium over other houses in the area. Lakelands achieved a 6.5 percent price premium. Kentlands has sustained its premium year after year, and Lakelands has seen its premium grow — reaching 9.5 percent between 2002 and 2005.

Overcoming objections
To provide a sound financial basis for decisionmaking, EPA has been studying the comparative cost of infrastructure, with help from Ford, an engineer at Morris Beacon Design. Building on earlier work by Dover Kohl & Partners, Morris Beacon is creating a series of planning and design scenarios that estimate the cost of producing conventional suburban development on the 750-acre Belle Hall site in Mt. Pleasant, South Carolina, and the cost of developing the site as a TND instead.
The study, which has not yet undergone final review by EPA, found that it would cost 47 percent more to install the infrastructure for a conventional large-lot residential development than for a compact TND. (These costs do not include expenditures on design and entitlement.)
“Big-lot sprawl is certainly more expensive,” Ford said. He suggested that even if TND resulted in infrastructure costs slightly higher than those associated with conventional development, developers wouldn’t necessarily be deterred from going the TND route. What’s essential, he said, is that the costs are understood and fit within the overall development equation — and that there’s a market for TND. Developers “get a lot more return from building the TND product,” he said.
Morris Beacon also compared the size of the initial investment that a developer would have to make for a conventional suburban project versus a TND. The study found that at Belle Hall, only 34 acres were needed in order to produce a TND containing a range of housing and commercial structures. To produce the same range of housing and commercial structures in a conventional large-lot format — one in which each type of housing or commercial structure gets its own separate “pod” — required 228 acres and an increase of approximately 270 percent in the initial outlay.
Ford noted, “Due to the pod-like segregation of residential product types and sprawling infrastructure, CSD development patterns are far less flexible and require greater initial investment and risk.”
“Now we’re trying to quantify the vertical construction cost as well as the infrastructure cost,” Sobel told the CNU New England conference in Lowell, Massachusetts. Last January he organized a gathering with production builders.
For developers, a critical question is what is the market looking for. “If you’re selling place,” Sobel emphasized, “then the smart-growth amenities and the benefits consumers attribute to them would certainly tend to help sales. This is the route we’re going to present to builders and developers.”