From his temporary location in Cambridge, Mass., where he is attending Harvard University on a Loeb Fellowship, veteran architect/developer Kevin Cavenaugh bemoans the housing market's troubles. He's trying to construct a 20-unit apartment building across the country in his hometown of Portland, Ore., but the incipient slump has forced him to temporarily shelve his plans. Despite firm verbal agreements, since last summer the $2.3 million loan he needs has slipped through his fingers three times. "The hard part is done, and my intent was to have this building completed by the time I got back to Portland," Cavenaugh says. "If I were there, I would be able to be more aggressive about suggesting alterations to keep banks at the table." Meanwhile, the elusive loan - a casualty of the subprime crisis - means he'll have to shuffle other assets to make interest payments on the land.
In San Diego, the slowdown also has Kevin deFreitas, AIA, on edge. Sales of his entry-level row houses have gone to zero in the last six months. Of the 15 units finished in January 2007, only seven have sold, despite 20 percent price reductions. He, too, blames it on the unraveling mortgage industry, which affects first-time buyers who have thinner credit histories, and on the deep discounts that D.R. Horton and Centex Homes are offering local buyers. Whereas the big builders' marketing machine includes full-page weekly newspaper ads, for a small-time developer like deFreitas, marketing feels like throwing good money after bad. So he's being patient. "Fortunately we're small and can be pretty nimble," he says. "We're going to take a breather right now, sit back, and see how things shake out."
Cavenaugh and deFreitas are among the many architects who, caught in the swirl of shifting markets, are rethinking their development strategies. As home sales slacken and the surge in foreclosures makes investment money harder to come by, the new caution is creating a game of musical chairs. Some architects are playing it differently than others. "We're not slowing down," says John Vetter, AIA, a principal of Milwaukee-based Vetter Denk Architects. "Being a hybrid architect/developer means you can adapt more quickly than conventional developers. Our background is about creating solutions."
To be sure, not every metropolitan region across the country is experiencing the same problems, and some folks optimistically characterize the housing market's health as a hiccup. "What downturn?" asks Charlotte, N.C., architect David Furman, FAIA, who complains that the national media are amplifying the bad news. "It's like rubber-necking on the highway," he says. "Everyone slows down to see what's there, and there's nothing there."
At least not in his market, he's convinced. While acknowledging that the pace of sales has slipped, Furman trusts his niche's numbers more than the daily news reports. "What we're doing is strictly in Center City, which is a booming demographic," he says. "I believe in that more than in the so-called housing downturn." In the case of Charlotte, he says there's a perception that the downtown loop is overbuilt. But given the metro area's strong growth pattern, he foresees a steady stream of urban buyers. "The societal shift of rediscovering the city that we've experienced in the last seven to eight years is driven by demographics that are still there," he reasons, adding that the slowdown is mostly suburban. "The percentage of traditional American households is shrinking, and those are the folks who want to live on the cul-de-sacs."
As he waits for the market to right itself, Furman is staying the course with chic, affordable, market-rate housing in the $200,000 to $300,000 price range, while adding commercial and rental products. Boulevard Centro, his development company, has four buildings under construction totaling about 200 condo units (90 percent of which are sold). Just finishing up is the 28-story mixed-use TradeMark, its biggest to date. And two more large projects are on the drawing board. One is a Charlotte office/retail building with 250 residential units; the other is a 225-unit building that Furman hopes will gain the edge with its location overlooking home plate and fireworks at Charlotte's new minor league ballpark. To get over the lending hurdle, he may finance it as a rental project and convert it to condos later.
Furman isn't alone in his optimism. Those lucky enough to practice in cities that are minimally affected, or those who foresaw the slump and shifted gears quickly, welcome the downturn's upside --the absence of speculative investors and developers doing marginal work. With a focus in Milwaukee, Green Bay, and Sheboygan, Wis., Vetter notes that the decline is location-specific, and he's plotting his course accordingly. While Green Bay and Sheboygan are still on the cusp of a residential boom, two years ago Vetter saw the handwriting on the wall for mid-priced condos in Milwaukee. "There are a lot of $200,000 to $400,000 condos to choose from - just a ton," he says. "We feel comfortable being on either the high or low end." Currently the firm is on the high end, closing out phase two of Bluff Homes at Park Terrace, 10 freestanding condos where prices start at $750,000. "It's selling as well as it normally does," Vetter says. "We try to create a fabulous product and sell it at a price-per-square-foot that's a little under what people at a similar high-end price point are asking." Two years ago he also began planning for a four-story commercial/retail building that's now in construction, and he's in the midst of due diligence on another commercial venture. "If anything, we're as busy as we've ever been," Vetter says. "The project types just change with the market."
Indeed, in San Diego, architects are scrambling to find a solid niche, and it isn't housing. That market has shrunk, but not to the point where land is cheap enough even to build apartments, says Jonathan Segal, FAIA. Recently, however, he picked up a remnant piece of land from a failed developer deal in Little Italy. There he's building the Q, a seven-story commercial/retail building with his family's living space on top. "Retail and commercial space is becoming boss, and residential is subordinate to that," Segal says. "The second we can, we'll be doing for-rent housing again." Rental revenues in the city typically run $225 per square foot, whereas commercial leases bring in closer to $300 per square foot, and the carrying cost is lower.
Segal looks for equilibrium wherever he can find it. On residential projects, "the five stars - rental income, sales price, cost of money, cost of construction, and cost of land- all move back and forth, but three always seem to align," he says. "Now, none are aligning." Until they do, Segal has simply moved his latest residential venture down-market to Idaho, where he's building an investment house. Ever the optimist, he sees clearer skies ahead. As national home builders slam on the brakes, he predicts construction costs will dip at least 10 percent this year before leveling off and starting to go back up. "Looking back, we're going to see that between fall 2007 and fall 2008 was the opportune time to start a project," he says. "There's always a break in the storm."
Ted Smith, principal of Smith & Others and founding director of Woodbury University's Master of Architecture in Real Estate Development program, sees another silver lining in the condo crash: As developers rush to get rid of property, there are deals to be had on infill lots. "We're waiting for the price of land to fall, and it doesn't cost us anything to option a development deal right now and not necessarily build it," Smith says, adding that due diligence periods are getting longer as property becomes harder to sell. Another advantage: Much of the front-end development money is sweat equity for architects.
Like Segal, Smith predicts falling construction prices, starting with demolition and materials at the top of the building chain. "It used to be that we had to pay for concrete bids; now we get free services and free bids," he says. It can't come too soon for architects like deFreitas, who says the price of concrete has gone up 8 percent in the last six months. Two recent estimates for a 1,300-square-foot addition to a 1,700-square-foot house came in at around $900,000. "A million dollars for a remodel on this house was staggering," deFreitas says. "One of the contractors apologized when he turned in the bids from the subs. It's not a fancy house - stucco and drywall, wood stairs, and carpet. The client is, like, 'Forget it.' They're asking whether, if they wait a year, prices will come down. If this is a really deep real estate recession, then they have to come down. People will either reduce costs or move to where things are bustling."
the waiting game
For those with projects in midstream, however, it's hard to be patient. When the winds change, often the best bet is to tweak the marketing strategy. Several years ago, when Omaha, Neb., architect Randy Brown, FAIA, started work on Hidden Creek, a 14-lot speculative suburban development, he wisely decided to build no more than three homes at once. So while Omaha supposedly has a four-year supply of new homes, thankfully, none of them belongs to his development company, Quantum Quality Real Estate.
So far three Hidden Creek homes have sold, although the most expensive one lingered on the market. "We cut all of our profit out of it; the interest was killing us," Brown says, adding that critical mass is needed to attract more families. To speed things along and minimize further risk, Hidden Creek is now being marketed as a cut-rate custom home community. A new brochure lets folks know that the lot-specific designs can be used as a starting point, and clients can get customized service without paying full architecture fees. Meanwhile, Brown is focusing his energies on two nonresidential ventures in Omaha - a $3.5 million retail/office building and a $1 million strip mall.
Given Tucson, Ariz.'s sluggish home sales, Rob Paulus, AIA, is also retooling both product specs and the marketing for indigo MODERN, a cluster home community. Looking back, he wishes he hadn't spent so much money on early advertising of the recently completed first phase, which includes 11 1,800-square-foot homes priced just under $400,000. Although they're all prewired for solar and offer a very different package from the entry-level builder homes glutting the local market, only half have sold.
"We're realizing we have to get it built and then push it rather than doing the glossy stuff we did with Barrio Metallico and the Ice House Lofts, which flew off the shelf" before they were built, Paulus says. "Now people don't buy anything off of plans." He expects to finish out phase two, another 11 units, and then have broker parties and invite the public to walk through. And he's downsizing the designs to hit an easier-to-sell $250,000 price point.
Smaller firms that dabble in development have less at stake. But they, too, are proceeding with caution, confident in the knowledge that their homes are a cut above convention. At Rivers Edge, a cluster of 10 homes on 1.54 acres, Allison Ewing, AIA, LEED AP, and Christopher Hays, AIA, Hays + Ewing Design Studio, Charlottesville, Va., just finished a house that went under contract as they were starting Sheetrock. And they've sold all but one lot without having to drop prices. "With regard to what we're doing, the market hasn't affected the pace of sales," Ewing says. "We're a mile from downtown and we're doing modern, sustainable homes that are very different from what everyone else is doing." Even so, building to a higher quality while staying competitive these days means that if there's any profit, it's in the lot. The trick, Ewing says, is to find inexpensive parcels that others have overlooked.
Dan Webster, AIA, is sticking to a similar script for his first few treks into development. He recently finished a green spec house on a scrub lot in Olathe, Kan., where he heads up Webster Architects. In an area where lot prices range from $150,000 to $200,000, he snapped this one up for $37,000 from a builder looking to unload it. Although local home sales are down 8 percent from a year ago, Webster says prices haven't plunged. "We thought if we offered something different, we'd be able to get a premium price for it," he says.
The house is still on the market, but Webster says the interest it generated resulted in four design/build commissions - two of them far more expensive than the spec house. As he awaits the right buyer, he's reserved another awkwardly shaped lot in the same subdivision. "We're designing the next house but won't start construction until this one sells," he says.
In Pasadena, Calif., rookie developer Georgie Kajer, AIA, is upbeat while waiting for the red tape to untangle itself on two five-unit and 10-unit tenements in Boyle Heights that she purchased for renovation with three partners. With a Metrolink extension soon coming to the neighborhood, she's in it for the long haul. "California has been in a housing bubble for the last 20 years with periodic dips, and this may be one," she says. "But I'm not especially worried. By nature I'm an optimist. Knock on wood."