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A New Frontier For Suburban Builders


Boston's Fan Pier is just the kind of choice waterfront property that urban developers have used to help reinvigorate cities stretching from New York to San Francisco. But when a 21-acre parcel located across the harbor from Logan International Airport was put up for sale in mid-August by Chicago's Pritzker family, the high bidder was a newcomer to big cities. The $125 million winning offer came from a group led by Miami's Lennar Corp. (LEN), a company best known for sowing suburban sprawl across central Florida.

Lennar isn't the only suburban builder heading downtown these days. Among the newest players now moving into urban housing are such tract homebuilders as Toll Brothers Inc., (TOL) based outside of Philadelphia, and Los Angeles' KB Home.

Both have spent decades trying to lure folks out of the city. Now, faced with a land scarcity in the 'burbs that threatens to crimp their growth, those same companies are suddenly making a reverse commute of their own by gobbling up urban properties at a fevered pace. "As land becomes rarer, you have to look for new areas where you can drive growth," says KB Home CEO Bruce E. Karatz, who vows that urban projects "will be a bigger part of our business."

To be sure, the downtown market is fraught with challenges for the suburban builders -- including strict zoning requirements and environmental cleanups of some industrial properties, as well as land and construction costs that are far higher than what they're used to in the suburbs. What's more, builders accustomed to having carte blanche in the exurbs often find themselves in protracted negotiations with zoning officials and preservationists who demand that each project be tailored to the community. "It's higher-profile, so many people have opinions," says Karatz.

For suburban builders who get it right, however, the urban market can yield profits every bit as fat as what they make in suburbia. Consider Pulte Homes Inc.'s (PHM) foray into Emeryville, Calif. Just across the bay from San Francisco, the city was an industrial wasteland full of abandoned factories and toxic cleanup sites. Pulte ponied up a hefty $55 per square foot for a property that had been an oil tank farm -- which included $800,000 in environmental remediation costs. Now the development's one- and two-bedroom condos have been selling briskly at $509,000 to $649,000, or roughly $475 per square foot. The payoff? A return on capital of greater than 20% -- comparable to Pulte's suburban developments -- and the gratitude of city officials for converting an abandoned property into housing. "They've been an asset to the community," says City Councilmember Nora Davis.

DESIGN CUES

For now, urban development remains a small part of the portfolio for most of the big homebuilders. But it's growing quickly: While the government doesn't keep data on urban-vs.-suburban construction, the U.S. Census Bureau estimates that sales of newly built town homes -- which tend to be located in urban areas -- now represent 13% of all new homes sold, vs. 10% in 1999. And KB's Karatz says that urban housing will constitute 6% of the 32,000 homes his company builds this year, up from virtually nothing four years ago.

Of course, there's always a chance that the builders, unfamiliar with the tastes of urban homebuyers, may trip up. When Texas suburban builder Perry Homes moved into the Heights, an old neighborhood near downtown Houston, sales of its brick townhouses initially were slow. Only after the developer shifted to a design that took cues from the Victorian style of the neighborhood did sales pick up, says Mel Reyna, a broker at Greenwood King Properties.

The shift downtown won't mean the end of suburban sprawl. But with their billion-dollar balance sheets and extensive expertise, the big builders promise to give a boost to the nation's resurgent urban neighborhoods.

By Christopher Palmeri in Los Angeles


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