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Smart Growth: The Business Opportunity for Developers and Production Builders

Background

The benefits of smart growth are well defined, but less discussed are the business decisions needed to bring smart growth projects to market. As a result, investors, developers, and home builders may not have all the necessary tools to decide whether to invest in smart growth development models. Smart Growth: The Business Opportunity for Developers and Production Builders provides eight white papers that present a "business case for smart growth" to assist those considering whether to pursue smart growth projects.

This effort is aimed particularly at developers and builders who are active on greenfield sites. While infill development and development in existing communities have always and will continue to play a key role in smart growth, most growth and development takes place on new land. There is consumer demand for smart growth master-planned communities, but greenfield developers and builders may not be as familiar with compact, mixed-use community design as infill developers are. Developers who understand the business reasons to provide smart growth products can create environmental benefits and still satisfy their business goals. Though much of the information in the white papers is relevant to infill and rural developers, this effort is intended to assist large-scale developers and production builders of master-planned communities who may consider building smart growth projects.

These papers grew out of a gathering held in 2007 at Kentlands, a smart growth community in Gaithersburg, Maryland. EPA invited land developers, production builders, land acquisition officers, marketing vice presidents, investors, designers, demographers, trade organization representatives, and other real estate professionals to participate in the discussion. Many participants had experience developing and building smart growth projects. A few were skeptical of new development models. Others were there to learn and look for new business opportunities to bring back to their companies. During the gathering, real estate experts presented white papers on relevant business points for real estate investment, with particular attention to their application for smart growth projects. Out of these discussions came several refinements to the white papers, along with a new paper that compares construction efficiencies of production-built houses in smart growth and conventional master-planned communities. These papers are presented below.

EPA thanks all of the participants who contributed their time, knowledge, and experience by suggesting the relevant business points to examine, refining the white papers, and sharing their on-the-ground experiences.

The Business Opportunity for Developers and Production Builders

The eight points below, and the eight white papers they correspond to, build upon each other to lay out the business opportunity for developers and production builders:

  1. Smart growth developments are definable real estate products. They offer residents a range of conveniences in compact, mixed-use, and walkable places. (See Placemaking: Creating the Product)

  2. Consumers want this product. (See The Market for Smart Growth)

  3. The supply of the smart growth product is low, creating a big demand gap, which provides a significant opportunity for developers and production builders. (See The Emerging Smart Growth Real Estate Market [coming soon])

  4. Existing smart growth developments have shown over the past 10 years that the consumer is willing to pay a premium to live in one of these communities. Among other things, this premium confirms market acceptance of the product and can minimize risk for investors by showing prospective homebuyers the strength of their investment in a home in a smart growth neighborhood. (See The Market Acceptance of Single-Family Housing Units in Smart Growth Communities)

  5. Projected demographic changes and growth trends show that the magnitude of the current opportunity will likely grow over the next 30 years as household make-up and lot and housing preferences in the United States change and population grows. (See America's Coming Housing Opportunity [coming soon])

  6. Land infrastructure costs to plan and develop smart growth communities are definable, measurable, and competitive with conventional suburban communities. Infrastructure costs in a smart growth development compare favorably with infrastructure costs in conventional developments. (See A Comparative Analysis of Infrastructure Costs in Smart Growth and Conventional Suburban Communities [coming soon])

  7. An analysis of design and construction techniques used in home construction finds more cost efficiencies in the smart growth prototype than in a prototypical conventional suburban unit, especially when using the typical tools of production builders-stock plans, stock materials, and stock components such as doors and windows. (See Production-Built Homes: The Cost Advantages of Smart Growth)

  8. When selling smart growth communities, builders and developers can market the benefits of living in a safe, convenient, accessible community and are able to distinguish their product from the conventional housing market. (See Branding and Marketing Smart Growth Communities)

These eight business points are discussed further in the white papers found below. These papers are meant to help real estate professionals understand the business opportunity of smart growth projects. The papers are presented in an order that defines the smart growth concept, translates the concept into development guidelines, defines the market for smart growth, and then looks at development and construction issues associated with horizontal infrastructure costs, phasing, vertical construction, and sales and marketing. There are no special smart growth formulas. The papers apply traditional real estate analysis to the smart growth product. Many of the papers offer metrics and methods that developers and builders can use for their own project analyses.

The Papers

Placemaking: Creating the Product (PDF) (5 pp, 59K,About PDF)

In this paper, Victor Dover of Dover, Kohl & Partners Town Planning discusses how things that make smart growth neighborhoods smart also make them desirable-and command a premium from homebuyers eager for the benefits of living in such a community. To create an attractive product that meets consumers' needs, developers and builders must understand the design elements of a smart growth neighborhood and how those elements create the features that one-third of homebuyers say they want. Smart growth neighborhoods begin with great streets-wide enough to allow for appropriate traffic circulation, narrow enough to allow safe, convenient interaction among neighbors, and interconnected so that people have choices for getting from one point to another. Homes are oriented to the street, garages are in the back, and the public realm-the streets, sidewalks, pocket parks, and other portions of a neighborhood that are shared by the community-is designed and built so that new construction enhances the overall community. Smart growth projects have a mix of uses so those residents have places to walk to and not just through. Smart growth communities also have a range of home types, which not only provides additional choices to the consumer but allows the homebuilder and developer to be more responsive to the market through project phasing. The paper concludes with a summary of the benefits homebuyers look for when buying in smart growth neighborhoods. Placemaking means including the design characteristics that allow homeowners to realize these benefits-a key point for high-production builders and developers. Good design and placemaking create the product, and this paper succinctly describes the elements that distinguish smart growth neighborhoods from conventional subdivisions.

The Market for Smart Growth (PDF) (10 pp, 82K,About PDF)

Gregg Logan, Stephanie Siejka, and Shyam Kannan of Robert Charles Lesser and Company, LLC, reviewed studies of consumer demand for smart growth and found that about one-third of today's homebuyers would prefer to purchase a home in a neighborhood that incorporates the principles, design, and goals of smart growth. The studies cited in this paper include preference surveys conducted by the housing industry, the authors' national real estate advisory firm, academic researchers, regional and metropolitan organizations, and smart growth proponents. The diversity of interests supporting these studies is a good indicator that the findings are sound. Based on these studies of market demand, consumer demand for smart growth would translate into more than 600,000 houses out of the approximately 2 million new housing units built in 2007. However, the current supply of housing units in smart growth neighborhoods lags significantly behind demand. As household demographics and preferences change, demand for smart growth products is expected to continue growing. In particular, empty nesters and singles without children are both rapidly growing household types that prefer attached homes with nearby amenities. This paper identifies the disparity between existing supply and unmet demand that presents an enormous business opportunity for developers and builders looking to expand their market share by creating a smart growth business line.

The Market Acceptance of Single-Family Housing Units in Smart Growth Communities (PDF) (13 pp, 228K,About PDF)

Mark J. Eppli, Professor and Bell Chair in Real Estate at Marquette University, and Charles C. Tu, Associate Professor of Real Estate at University of San Diego, found that when given a choice, people are willing to pay more money to buy a home in a smart growth project than a similar house in a typical suburban development. These are the conclusions from the authors' landmark work on housing premiums in the Urban Land Institute's 1999 publication, Valuing the New Urbanism. Those conclusions are reconfirmed in this paper, using a new data set that tracks sales in two smart growth communities in Maryland-Kentlands and Lakelands-from 1997 to 2005. In this study, the authors also find that housing premiums in smart growth communities are sustained or increase over time. Evidence that smart growth projects maintain long-term housing premiums confirms market acceptance of and demand for smart growth, which can make local officials feel more secure about approving such projects and can encourage developers and builders as well. Because the premiums are measured against conventional suburban housing, the study suggests smart growth products are more desirable and appreciate better than conventional housing. For developers and builders, housing premiums can help set prices for subsequent phases within their existing smart growth projects and for their subsequent smart growth developments. Purchasing a home is the largest investment many people will ever make. Knowing that the premium for houses in smart growth communities will hold their value over time can provide a measure of confidence when homebuyers are considering whether to invest in a home.

Smart Growth & Conventional Suburban Development: An infrastructure case study completed for the EPA (PDF) (9 pp, 1.4MB, About PDF) Link to EPA's External Link Disclaimer
Jonathan Ford, P.E.

This paper contains a study of two case study projects comparing conventional suburban development (CSD) and traditional neighborhood development (TND) infrastructure costs. When comparing CSD scenarios to alternative TND designs, the study found that infrastructure costs for the TND scenarios were consistently less than for the CSD scenarios.

Production-Built Homes: The Cost Advantages of Smart Growth (PDF) (27 pp, 1.3MB, About PDF)

Jason Miller, MFA, CNU, the editor of both TNDhomes.com and TND Series Vols I – III, tackles the issue of home construction. Production home builders have been reluctant to move into the smart growth market because of the perception that building a home in a smart growth community or traditional neighborhood development costs more than building a home in a conventional suburban development. This paper aims to refute that myth by making an objective comparison of the two development types. Making some basic assumptions about production building techniques (both types of houses use stock plans, stock materials, and stock components), the author finds that in almost all cases, the smart growth product is either cost neutral or more cost efficient than production-built conventional suburban units. The analysis provides builders with a first-hand look at how construction issues and design choices for smart growth housing can translate into a cost-effective product. Understanding the basic similarities in construction of production-built smart growth houses and conventional suburban houses can allay concerns about costs and may give a competitive edge to production builders seeking to expand their business lines and their market share.

Branding and Marketing Smart Growth Communities (PDF) (7 pp, 98K, About PDF)

Jackie Benson of J. Benson Marketing writes that while builders and developers must understand the technical details of the amenities that make up smart growth communities, the brand that they are selling is much more than the sum of the amenities. A smart growth community is a different type of product than a typical suburban development. Developers of new smart growth communities don't just sell a new home-they sell the safety and convenience of living in a neighborhood with walkable streets, sidewalks, and pocket parks. Successful marketing strategies highlight how a compact community means less time driving back and forth to schools, shopping, and work; a variety of housing types means more homes to choose from and a community that folks can live in during different stages of their life; an interconnected street network means better access to more places and reduced congestion at major intersections; and well-designed parks and trails means more opportunities for recreation, interaction with neighbors, and a greater connection to the natural environment. Builders and developers that successfully package the benefits of good placemaking with good environmental stewardship will demonstrate the value of their communities not only to homebuyers, but also to municipalities that are increasingly interested in making sure that new development is environmentally sound and good for the community as a whole.

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