Are Small Houses Coming?

When is Less More? Are Small Houses Coming?

big-house-little-houseA data team from Realtor.com analyzed 1.8 million listings of single-family homes and condos for sale in major metropolitan areas to see which cities have
the smallest homes, and which have the largest.

The Northeast has many of the nation’s smallest homes, which Realtor.com attributes to the region’s high population density, and the fact that it “has more homes from a time when people just built smaller. The top 5 cities for smallest homes are Jersey City, N.J., Honolulu, Hawaii, Detroit, Mich., Des Moines, Iowa, and Yonkers, N.Y.

Meanwhile, sprawl and spreading out is a common trait in the Southwest. The top five cities when it comes to share of biggest homes are Aurora, Colo., Plano, Texas, Scottsdale, Ariz., Colorado Springs, Colo., and Gilbert, Ariz.

Keep in mind this data is all existing homes and really does not speak to any trend about whether or not people are building  smaller or not. More of the areas with the smallest homes are the highly dense urban areas. I do believe that building more with less is becoming trend.

Doing more with less – A trend

Today I want to focus on a trend. This trend has been evident to me since I have been in business, mostly in the manufacturing sector. In the business of real estate we have deviated from this trend in the United States in a major way a few times over the past 90 years. There has been, however, a pervasive tendency and a movement in a certain direction, which I have been witnessing and profiting from since I have been in business.

This trend simply this: do more with less. Where are the small homes? They will be where new homes are being built in large numbers.

To do more with less has always been a goal in manufacturing, if not in housing. The deviations from this mantra were short lived and no more than fads (remember fins on automobiles? McMansions?). This is because to do more with less and to value engineer is sometimes contrary to current fashion, or emotional wants, and occasionally we will see extravagances outside of this trend: In houses, look at the McMansion; in automobiles, look to the Hummer.

I believe we are now entering a more resolute period where the United States residential and commercial real estate markets will rejoin the trend to economize land, resources, infrastructure, and construction materials. In order to understand the effects of this trend, we need to understand the inner workings of the commercial developer.

How do Commercial Developers Buy Land?

The price per acre or per square foot means nothing to a developer of a commercial shopping center, an office building, or indeed a residential development, until there is a definition of yield. Yield in a shopping center will give the developer an idea of how many square feet of rentable space he will end up with when he is done developing. After he balances parking requirements, city set back requirements, height restrictions, common area needs, and water retention and rights of way, he will come up with a total rentable (or salable) square feet he can build on this property. In order to maximize his profits he must maximize the number of square feet he can build and sell. What he winds up with is a yield number that is expressed as a land load number.

Every square foot of building will have a land load. The property may have been sold to him for $28 per square foot; but his land load may be $80 per square foot. (Every square foot of salable building has a load factor of $80). This is before he goes vertical.

This load factor is treated differently by different types of developers. The hotel developer wants to know his cost per “key”; the hospital developer the cost per “bed”; the residential developers talks of cost per developable units (du’s). The higher the yield is, the more that the developer can pay in total for the land.

The land comes with other burdens, however, that will come into consideration. Internal infrastructure is expensive as are county and city concurrency issues. The developer must add to the cost of the load factor such items as impact fees, road construction, utility hook ups, and municipal set-offs such as fire and emergency medical surcharges.

High Density Versus Sprawl

In the spirit of doing more with less, the developer of homes, whether it be a retirement homes, or a first time home, must optimize his yield. This optimization leads him to higher density projects and less suburban sprawl. This optimization will, logically, lead him to where the infrastructure like roads and utilities exist, and where the allowable density is already approved.

Environmentalist and some ill advised county commissioners think that high density is not good for the city or for the environment. They are wrong.

Consider these two alternatives:

  1. House on HouseWhistling Woods Retirement Home Developers can take 100 acres of green space and build a gated single family retirement home community and build these homes on half acre lots. With roads and other amenities needed, Whistling Woods Retirement Home Developers winds up with 100 acres of land supporting perhaps 60 retirement homes. Whistling Woods needs to run sewer, electric, water and phone lines to each home. He needs fire department services for this community and a roving security car and a gate attendant.
  2. Smart Guy Retirement Home Developers, on the other hand, buys the same 100 acres. He builds three story buildings on thirty of the acres and has 300 living units. Under some of the buildings there are retail stores, others have offices. Seventy of the acres are left untouched and natural. Smart Guy Retirement Home Developers must build fewer utility lines, less roads, needs no security cars or gate, and because of the mixed use, even the residents need fewer cars.
Better use of Land

Better use of Land

Infill Option

In the boundaries of the city there are parcels of land that we can infill. Infill developers look for parcels of land surrounded by homes. These infill parcels already have the sewer, water, and other infrastructure needed like roads and fire services. In the area off McGregor Boulevard in Fort Myers we have builders, developers, and investors buying older homes, tearing them down and building new. We recently sold a house on Bougainvilla, brand new built on a lot that formerly had an older, less efficient home. Infill lots are potentially a bargain because many of the costs associated with what is called “green field” developments have loaded costs on them for infrastructure that make them cost prohibitive. Furthermore, parcels of property like this already have the entitlements (Zoning, etc) that “Green field” projects do not. This saves money as well as time. Some of the densities of “urban core” properties within city limits have density allowances as high as 125 du’s per acre. This is smart growth and should be supported.

Because of the attractiveness of infill economics, you will begin to see tear down developments: developers buying old, rundown areas and rebuilding them. You saw this in East Fort Myers with Oasis and there are other projects in the same area that are being evaluated for redevelopment.

Land, What is it Good For?

Land; wars have been fought for it, nations built with it, and blood shed on it. Land gives us fuel, food, water, shelter, and security. With the return of World War II veterans and their insatiable need for housing, the United States began its long love affair with suburbia. Furthermore, with the decline in agricultural business and the emergence of the automobile as the major source of transportation; living in the suburbs became the American ideal. For the United States, at least, this was a reversal of the long term trend of urban growth. The decline of the small farmer and the increase in manufacturing headquartered in the cities brought urban growth in the past, but since mid last century we have seen urban populations decline.

This decline is reversing with the return of the high dollar costs per gallon of gasoline, the high cost of infrastructure for development, and the increasing desire by Americans to preserve land while being close to medical and other services.

What Does all this Mean?

Look for the trend back to urban living. Look for smaller retirement homes on less land. (Look for bargains, by the way, that buck this trend as sellers turn to the cities and higher density living). There will be more infill projects and more homes closer to services like medical facilities, schools, jobs, and mass transportation. Developers and residents alike will be “doing more with less”.

Prices on multi family and single family projects continue to be attractive. Many land parcels were purchased when exit strategies included sale prices that no longer exist. Load factors of $30,000/du for multifamily are unrealistic except in the most prime of locations.

The exit strategy for any developer is THE primary consideration. They make their money when they buy, not when they sell, and many developers already blew it with their buy PLUS their exit strategy is out the window. Furthermore they are clobbered by misguided environmentalists that think high density is bad for Florida, undercutting their economics of scale.

Florida is again in a net growth mode. But I see more infill, more multifamily housing and, of course, doing more with less.

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