By Stephen Arms, Managing Member at Marthasville Development
Community development – typified by small, scale-appropriate projects that fit within the surrounding community – has never been a simple proposition. Prior to the recession, there were numerous firms who focused on this type of development, many doing very good work. Since the recovery however, these types of community development opportunities have been hard to catalyze, because developers doing this type of work, which is usually key to their mission, have been slow to recover.
From a broader market perspective, local and regional homebuilders dominated the industry in the Atlanta region prior to the recession. Now, national homebuilders, which continue acquiring the larger local and regional builders as they seek to build their land inventories and local talent base, control the market.
Still, the successful firm needs to master many skills. Compounding the challenge of community development for many communities is an uneven recovery that has favored, as many anticipated, “A” locations with strong school districts and areas with a strong sense of place. Even these spikes in interest have been uneven, primarily favoring cities with already above-average income demographics.
The developers and homebuilders that remain active in the market are blessed with numerous opportunities and low interest rates. Yet production capacity is limited, as site and vertical construction costs are high, and financing terms (even though they’ve eased) remain stringent (lower loan-to-value requirements chief among them) no matter the attractiveness of the deal.
These challenges have forced developers to become developer/builders and have forced homebuilders to become builder/developers or have sparked joint ventures with competing firms – all arguably not bad things for the consumer at first glance, because they drive costs out of the system. However, these cost savings have not been enough to offset the other high costs of doing business. Adding to the complexity are licensing rules, stringent codes, additional approval processes and affordability requirements in some jurisdictions, among other factors. These oversight regulations are all well meaning, but they add complexity and cost to the system.
These structural changes also have the effect of slowing the production cycle. They also reduce profitability since fewer deals can be done in a given period of time (think California or other highly regulated regions). The challenges have been compounded by immigration policy, the lack of young people entering the industry and some lingering uncertainty in the broader economy. Taken together, they form a serious barrier to entry, especially for those wanting to serve the entry-level and even the middle-level markets.
So what are the options going forward? Continue the way we are going and let the market (and most likely government) work things out? Or should we in the industry take more control of how we move forward to better compete at the local, regional and national level? I imagine it will be a combination of the two.