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The Downtown Industrial-To-Residential Land Rush
John McManus / BUILDER / July 13, 2015
On the face of it, Pulte’s move speaks to a tactical opportunity to snag a chunk of Milpitas’ 437-acre ” transit area specific plan,” one that syncs with Pulte’s urban infill programming skills in the Northern California area, and its pocketbook. The Bay Area corridor, from San Francisco to San Jose, is on fire, and big builders with a stake in the ground in Northern California are throwing their weight around big-time as they try to secure a 2015-2016 ramp-way to a more normally functioning market by, maybe, 2017.
What we find intriguing below the surface is 1. that despite Pulte’s already deep pipeline of lots, it bellied up aggressively for this opportunity, and 2. that builders seem to be gravitating more to industrial-to-residential conversions as they play out the transition period from almost exclusively a higher-end “A” lot focus, to a future “C” lot program in the outer ring suburbs aimed at the lower-end new-home purchaser.
Lets take up the second issue first, the trend toward converting industrial downtown tracts to residential. Back a couple of months, we heard a number of home builder/residential developer types in conversation say that the cost and risk factors involved in assembling commercial/light industrial land positions in close-in or downtown locations were less imposing than attempts to turn distressed or blighted residential tracts into new homes and communities.
Have a look at the work of Lovett Homes/InTown Homes‘ downtown Houston sites as an example. The developer/builder Frank Liu is playing out a relatively visionary plan that involves assembling light-industrial tracts in walkable proximity to Houston’s medical and university centers, as well as its downtown cultural and culinary draws, and he’s building urban communities that bring suburb-style aesthetic and amenities notes to the heart of the city.
On a per-square-foot basis, assembling light industrial parcels are far less expensive for the most part than equally sized lots in urban residential districts that may need a radical makeover. What’s more, soil and other land mitigation costs and permitting are a proficiency–part political skill and part engineering and technical expertise–that residential developers can cultivate as they go.
Meanwhile, the flow and force of demand for urban, walkable, affordable communities is one of global residential real estate’s macro trends, and is expected to sustain itself as structural changes occur on both the industry side of the equation and the family-formation side. Here, the Urban Land Institute takes up the long-view trends that are driving densification and urban development, noting that demand in the inner-rings, close to jobs centers, eds and meds are likely to be a continuing seismic shift away from the world’s legacy agrarian roots.
But industrial-to-residential development is not without its downside. We’re seeing only a few miles from Pulte’s Milpitas acquisition the dark and imbalanced implications of industrial-to-residential. Cities feel that tilting the playing field too far in favor of residential is a sure-bet way to ensure the depletion of jobs formation in the years ahead. What’s uncertain is the effect and future impact that the secular, structural shifts in industries are going to have on the places that work occurs.
Just as homes and livability are changing inside the box, so too are factory spaces and what occupational focus takes place in them.
Meanwhile, companies like Pulte are looking at their current land pipeline–owned and controlled, suburban, urban, and in-between, and recognizing that for the next “leg” of the recovery, they’re going to need closer-in tracts, positions that give them nimble-ness with respect to age and price-tier segmentation, and positions they can build through in a relatively short time horizon.
So industrial-to-residential tracts will continue to be hot land acquisitions in the coming months as builders large and small look to deploy capital resources where there’s a fairly high level of assurance that end-home buyer demand is building rather than waning.