February 13, 2013

The housing market is one of the biggest question marks of 2013. Will a resurgence in housing help pull our economy out of recession, finally? What changes have the past several years wrought? What will the emerging market look like for developers and for buyers?

Working with single-family housing projects here in Nashville, I have not seen buyer motivations change drastically- cost, the reputation of local schools, and traffic patterns remain primary drivers, though cost-awareness has certainly been heightened by the recession. Where I have seen the most change and the most adjustment is not on the buyer’s side of the housing market, but on the developer’s.

Though mortgage rates are currently hitting record lows for home buyers, that change has been somewhat manufactured by federal stimulus efforts and does not necessarily correspond to lower costs for developers. In fact, several factors are driving up development costs for many of Gresham Smith’s clients:

  • Lending Restrictions: This one is a fairly direct product of the recession- banks are less willing to fund speculative housing developments, particularly land purchases, and, consequently, developers have less access to capital. This creates a rather delicate situation, as developers must price for consumers who are more cost-conscious than ever while also generating enough profits to cover their development risks. To achieve that balance, many are developing projects in multiple, smaller increments and requesting new financial approvals for each phase. For the engineer/agency approval process, this is not the most cost-effective permitting strategy, but it is one demanded by the current financial climate.
  • Heightened Environmental Permitting: Today’s developers also face ever-more stringent environmental regulations, particularly regarding stormwater runoff. Along with more intricate construction-related soil erosion control stages and details, many municipalities are enacting stormwater runoff volume reductions in addition to stormwater quality treatment (effectively making rainwater “disappear”). Those regulations, more a product of changing federal environmental priorities than of the recession, nonetheless increase the cost of residential development.

These factors are not bad things in and of themselves, but they do contribute to a different and more costly reality for residential developers- a reality that planners and designers should be very sensitive to. Post-recession developers need design teams that will consider environmental and permitting costs from the outset, that will streamline multiple loan approvals by delivering comprehensive designs early on (preferably without charging final design fees!), and that will assist in making a more challenging, less efficient process more tolerable.

These cost factors, as well as broader generational influences, are driving growth in a few previously tangential sectors of the residential market:

  • Within the Nashville area, we are seeing a more open-minded discussion about higher density single-family development, fueled by environmental and economic concerns. Planners that traditionally enforced more land to each house are reconsidering this recipe for continued sprawl, and developers are proposing more compact, dense residential developments. Master plans with mixed uses, including smaller lots yielding a more compact, walkable neighborhood with easy access to nearby restaurants, parks, and other amenities will continue to be in higher favor. (For more on the benefits of high-density development and its impact in the commercial sector, check out Part Two of my colleague Doug Sharp’s Blueprint for a Boom Town series.)
  • We have continued to see growth in the residential infill niche market. Developers are tearing down or redeveloping existing buildings to create more modern, denser housing. For example, the Gresham Smith-led Cloverland Hall project in South Nashville converted six acres of residential lots into a 31-unit development of duplex and triplex-style housing. I expect infill projects will grow more popular as younger homebuyers enter the market. Many of Nashville’s young professionals have gravitated to housing near the downtown center, and infill projects can cater to that tendency. Although infill has many practical results in terms of reuse of existing infrastructure, these projects are trickier to design, and many times have hidden infrastructure deficiencies and construction cost surprises that arise during both the agency approval and construction processes.

These changes will certainly not happen overnight, but they are factors that designers should consider as developers and homebuyers adjust to the post-recession housing market, and they are certainly factors we are paying attention to here at Gresham Smith.

What residential housing trends have you noticed in your area? Do you see other upcoming changes in the market, as we emerge from the recession? Let us know your comments.