The $65 billion U.S. multifamily construction sector is under siege.
Escalating costs for building products and materials, financing, and construction services have become the single biggest determinant of what gets built, where it gets built, what the final product will look like, and in what form it will be sold to the consumer.
“Contractors can pick and choose jobs, and they can name their price,” says John Lahey, AIA, managing principal at Chicago design firm Solomon Cordwell Buenz. “We're talking double-digit annual increases, and it doesn't take many years for that to get out of hand.”
All is not lost, however. Many condo projects that were in the pipeline (especially those at the high end) are moving along. The rental sector is responding to the pent-up demand from consumers locked out of the single-family market. Urban mixed-use (MXD) and transit-oriented developments (TOD) are going gangbusters across the country. Best of all, designers, contractors, and developers are putting their heads together to make condominium and rental projects succeed.
As recently as a year ago, multifamily developers could be sure of selling or renting virtually anything they put on the market. Today, projects are being redesigned, value engineered, or put on the back burner, sometimes indefinitely; for-sale projects are being reworked as apartments. Rising interest rates and escalating prices for concrete and steel are partly to blame, but it's the squeeze from contractors that's causing the most pain in the multifamily market.
“Construction costs have gotten so bloody high, it's tough to make projects pencil out,” says Rick Hammann, AIA, NCARB, managing principal with WDG Architecture, Washington, D.C.
Despite gloomy reports about single-family sales, total multifamily construction will be up 3.7% this year, to $67.35 billion, from $64.97 billion in 2006, according to Reed Construction Data analyst Jim Haughey, PhD.
In Chicago, “The long-term trend for mixed-use and high-density urban residential is positive, and it's going to be positive for a long time,” says SCB's Lahey. “It's not wildfire like it was awhile back, but it's still going strong. In my 24 years here, we've never had such a sustained run on urban housing as you see today. Condo is not dead, and rental has been resuscitated.”
Jim McLean, Midwest EVP/COO for New York-based Tishman Construction, concurs. “A lot of people who weren't developers were jumping in,” he says. “There's been a lot of press about the whole condo market being dead, but not here in Chicago,” where developers are “still bullish” on condos, especially in the $250-500,000 range.
Tishman is working on several local condo projects, totaling $119 million: as CM for the Marquee Michigan Avenue (214 units, $47 million) and owner's rep on Park View East (140 units, $28 million), both for Sedgwick Properties Development Corp.; and as owner's rep for Vision on State (253 units, $44 million) for Renaissant Development Group LLC, with local design firm Pappageorge Haymes as architect.
The Chicago rental market is “improving significantly,” says McLean, pointing to a recent $104.3 million construction loan from GMAC Financial Services and Teacher Insurance and Annuity Association to Habitat Co. for the 420-unit, 46-story Grand & Kingsbury tower just north of the tony East Bank Club in River North. Chicago's James McHugh Construction is the GC.
In the Washington, D.C., market, it's a mixed picture as to whether rentals are displacing condos. In a single parcel in Southeast Washington, D.C., JPI Development, headquartered in Irving, Texas, went condo for 448-unit 70 Eye Street, but switched to rental on 100 Eye Street. WDG's Hammann, who's firm designed the project, says JPI's investment partner, General Electric Capital Services, saw 100 Eye Street as “a good income property, near the new baseball stadium,” and decided to hold onto it.
Conversely, says Hammann, half the 670 units in the Rockville (Md.) Town Square mixed-use TOD, two blocks from a Metro station, were supposed to be apartments, but developers Federal Realty Trust and Ross Development and Investment and Danac Corp. took the whole thing condo last year. Half the condos have been sold.
Across the Potomac in Arlington, Va., apartment occupancy rates are in the high 90s, according to Jim Turner, VP of construction for Vienna, Va.-based Kettler, owner's rep for One Metropolitan Park, a massive 3,200-unit mixed-use complex to be built in eight phases over 20 years. “In general, the DC condo market is slowing down, and everybody is looking at the apartment side,” says Turner.
One Metropolitan Park sits within a couple of blocks of both the Pentagon City/Fashion City and Crystal City Metro stops. The project was designed by Robert A.M. Stern, with WDG as architect of record. Phase 1, an 18-story tower, is currently under construction by general contractor BE&K Building Group, Birmingham, Ala. Even though the project will be entirely rental, says Turner, it is being built to “high-end condo specification”—granite countertops, stainless-steel appliances, rooftop pool and bar, fitness center, theater lounge, billiards room, and cybercafé.
On the Left Coast, the Los Angeles scene is “very submarket specific,” says Kevin Ratner, president of Forest City Residential West. “Condo projects on the west side of the city are not going to change to apartments,” he says. “The supply is constrained, so condos will go forward, and prices will do well.” In downtown, however, new condo projects are hitting a softening market and rising costs: “They're not going to work.”
“We're pretty much an apartment builder,” says Ratner. “It's in my DNA to build and hold. If we can make apartments work, we'll always lean toward them.”
Defying his genetic heritage, Ratner is forging ahead on two high-rise condominiums—1100 Wilshire, a 228-unit conversion of a never-occupied downtown office building, with local design firm Johnson Fain, Irvine's A.C. Martin, and Seattle's TCA Architecture; and the Mercury, a 23-story deluxe condo in Koreatown, across from a Metro station. The 238 units range in size from 740 to 1,500 sf and up to two bedrooms/two baths. One-bedroom units are going for $400-600,000. The Mercury is a conversion of the 1963 Getty Oil Company headquarters.
Another Los Angeles developer has reversed direction the other way. “Historically, we did a lot of apartments, but we found they have become financially unfeasible,” says Charles Quarles, president of the Bedford Group, which specializes in urban infill. Quarles says prospective tenants can't keep up with the higher rents required by construction costs that he says have gone up 30% in the last year or so. So he's switching to condo.
“Our feeling is that there's enough pent-up demand [for condos], if they're priced right,” says Quarles. “We're in the middle market,” with such projects as Bedford Parc, in LA (172 units); Toluca Lake (Calif.) Terrace (22 units); and Thomas Berkley Square, Oakland (88 units). His 41-unit Athens Terrace townhouse development, which sits on the edge of the city's Watts neighborhood, is 100% sold, at $350-440,000 per unit.
Winston Chang, AIA, project director in Perkowitz + Ruth's Studio 111, Los Angeles, says that as recently as four months ago, projects were on hold or dead; now activity is picking back up. Two-bedroom condos in the 950-1150-sf range are still moving. “A few months ago, people were buying 1800-sf lofts at $600/sf, and that seemed like insanity,” he says. Today, he says, the challenge is to be able to do a 1500-sf loft condo at $550/sf.
In the Bay Area, Jeff Hoopes, EVP of contractor Swinerton, says there's been “a complete change” in the condo market in just the last six months. “In San Francisco, you're going to pay $650-700/sf to build a project (including land), so you have to sell at $1,000/sf to make your money back. That's tough, so people are edgy.”
Swinerton is currently working on the 41-story, $80 million 399 Fremont in San Francisco, for Irvine's Fifield Realty Corp. (Keating & Khang, Pasadena, architect); Santana Row, a $250 million shopping center with condos in San Jose (with Architecture International, Mill Valley); and Century & Wilshire, Los Angeles, a $100 million, 23-story tower for Woodridge Capital LLC with architect Fields Devereaux, both of Los Angeles.
Hoopes says two condo projects he's aware of probably will go straight to apartments because vacancy rates throughout California are so low (3.8% in Oakland, 3.5% in San Diego, and 3.2% in Orange County). “Rental rates have gone up substantially in the last year or so, especially with job growth,” says Hoopes. “Developers will hold properties as apartments, and then as the cycle changes, they'll go to condo.”
Moving up the coast to Washington State, Ming Zhang, AIA, senior design partner with MulvannyG2, Bellevue, says his firm's work over the last five years has been almost exclusively in luxury condominiums rather than rental. “In this area, the condo market has become the luxury housing market, more so than single-family,” he says.
Condos in the Pacific Northwest price out at roughly twice as much per square foot as single-family, and empty nesters in their 50s and 60s are trading their 3,000-sf houses for 1,500-sf condos.
Current MulvannyG2 projects include Bellevue (Wash.) Towers (with GBD Architects, Portland, Ore.), a 1.4 million-sf, twin-story, LEED-registered condo (542 units) for Gerdling Edlen Development Co., Portland; Towers on Capitol Mall, 800 condos plus an InterContinental hotel, for SACA Development, Sacramento, Calif.; Seneca Towers, Seattle (two towers: seven stories and 24 stories), for Levin Menzies & Associates; and the 30-story Escala, in Seattle, with Thoryk Architects, San Diego, for Lexas Companies.
Forest City's Ratner warns that switching project types can be tricky. “If a condo doesn't work and you switch to apartments, your return is not going to be as good because you've paid more for it,” he says. “If you sell out a condo building at less than you expected, you'll never get a chance to make it up, whereas in apartments, you can put a map on it and wait and see if the market improves.”
Design: Putting more value in less space
Multifamily developers are coping with higher construction costs chiefly by downsizing units. “Five years ago, the smallest rental unit would have been 725-750 sf, now it's 650,” says Sanford Steinberg, AIA, Steinberg Design Collaborative, Houston. “We used to shoot for 1,000 sf average, now it's 900.” He says 550-sf efficiencies are being introduced in Sunbelt markets that never had them—“for the Gen Y kids coming out of college.”
For condos, Steinberg says 800-sf one-bedrooms and 1,600-sf 2BRs are selling, but 1,000-sf units “are sitting there.” He says his next condo project will probably have some 600-sf efficiencies for young professionals whose parents are helping with the deposit. “It's all about cost,” says Steinberg.
In Southern California, Jonathan Watts, AIA, LEED AP, who heads Cuningham Group's Urban Living Studio, says projects that were offering units in the 800-1,900 sf range are now running 600-1,400 sf. “That makes packing in the kitchen and bedrooms very difficult,” he says.
Gaining a feeling of spaciousness to make up for reduced floor area is “a game of inches,” says SCB's Lahey. Installing flat-panel TVs can eliminate the old entertainment wall. “You might gain a foot across in a tight unit,” he says. It's important to minimize circulation—no more hallways—so connections are made from room to room. The kitchen merges into the living room. Bedrooms are accessed off the living areas. “People want a more open environment today, and that help us make the unit feel bigger,” he says.
People also want a space for their computers, even for laptops, says Lahey: “In a two-bedroom unit, you don't want to give up one bedroom for an office.” Better to build a workstation area into the kitchen, or provide a 6x6-foot space elsewhere. “We even put them in pantries,” he says.
Enhanced daylighting helps, but it can be tricky. “Use the glass line on rooms that really need it, to get the maximum amount of light into the unit,” says Lahey.
MulvannyG2's Zhang is using sliding glass panels in interiors for the 198 condos in Seattle's Olive 8 project, being built for R.C. Hedreen Co., with New York's Gluckman Mayner Architects. “They're like Japanese sliding walls, so you get a sense of much bigger space,” he says. “They give you the ability to change the space inside the unit, and the more flexible the space, the more buyers like it.”
Another trend: Move one of the bedrooms inboard, away from the façade, and install transom glass, or even a whole sliding wall; then enlarge the living room/dining room along the exterior wall. “The bedroom is where you sleep, so put the light where it counts,” says WDG's Hammann.
MulvannyG2 design principal Warren Pollock says developers have to use their marketing skills to sell smaller-sized condos. “They have to explain [to potential buyers] that the unit is a certain size, but they're taking ownership of other amenities,” he says. “The party room becomes a spare room in your house.”
SCB's Lahey says consumer perception is paramount. “The $250,000 unit has to feel like a million dollars, and the million-dollar one has to feel like two million,” he says. “People want value.”
Getting the amenities menu right
WDG's Hammann says apartment and condo residents, particularly young urbanites, are looking for open plans and new kitchen features: “cleaner” kitchen lines, more exposed to view, with no wall between the kitchen and dining area; more built-in cabinetry; counter-depth refrigerators with 24-inch cabinets above and side panels to encapsulate the fridge; plain islands—no built-in range or sink—with just a clean slab of granite.
To hold down costs, OZ Architecture's Kelly Davis says his firm is setting a basic level for finishes, appliances, faucetry, door hardware, lighting fixtures, and plumbing, and letting buyers go up if they want. “I'm surprised how much you can bring the cost down, maybe 2-5% per unit,” he says.
Another strategy: “Go basic, except for the master bathroom and the kitchen,” says Davis. “Focus on one or two things.” The Denver firm's current projects include the $70 million Colorado Crossing, a planned two-million-sf residential/retail/office mixed-use project in Colorado Springs, for Sunshine Home Development (with civil engineer Rockwell-Minchow Consultants, structural engineer JVA Inc., and mechanical engineer RKMI).
Contractors and CMs, too, are using their massive purchasing power to help developers control costs.
“Because we're a big national builder, we can bring leverage in appliances, cabinetry, countertops, and fixtures,” says Tishman's McLean. Tishman buys bulk quantities of basic but high-quality cabinetry from various Canadian makers; condo purchasers have the option to upgrade.
Swinerton is sourcing cabinets, lighting, stone tops, tile, and wall coverings from China. “You have to find the right plant, set the spec, and manage the quality, but some of the stuff is better than in the U.S.,” says Hoopes. Chinese cabinets cost 40% of the American-made equivalent, even with the shipping. Swinerton is also purchasing curtain wall and glazing from Canadian manufacturers, says Hoopes.
But you can't skimp too much, especially with condos, says MulvannyG2's Pollock. “In Seattle, we have people who are buying their second downtown condo, and they want to know, What's the [amenities] package? What equipment is in the exercise room? Is there a movie room with luxury seating?”
Saving via technical innovation
Building Teams are using technical innovations to achieve savings in multifamily projects. Some ideas are fairly straightforward, such as using PVC instead of costly copper pipe. Other innovations are more elaborate.
For The Element, a 50-condo loft under construction in LA's Marina Loft District for John Laing Homes, architect Jonathan Watts and structural engineer Lawrence Ho of Englekirk Partners are using an innovative precast concrete moment frame. “The concrete is precast off-site, which cuts construction time by 8-10 weeks,” says Watts. The system also exceeds code requirements for a five-story building.
Brit Perkins, AIA, LEED AP, a principal with EDI Architecture, Houston, says most of his work these days involves cutting 10-15% in costs from what he calls “dead condo” projects and converting them to rental. “We are seeing a surge in rental projects as land prices fall due to the slowdown in condominium construction,” he says.
Perkins uses two methods to achieve savings: first, changing the structural system for concrete buildings from column-and-plate systems to tunnel form, or concrete bearing wall, systems; second, replacing central mechanical systems with split mechanical electrical heat pump systems using balcony-mounted through-wall condensing units.
EDI's current tunnel form projects include Verde, two 36-story apartment towers in Orlando, Fla., seeking LEED certification; Legacy Town Lake, a 31-story green apartment tower in Austin, Texas; and Dadeland, a 10-story urban block with rental units, in South Miami.
John Sheridan, EVP at Chicago's James McHugh Construction, says that, with costs up 5-10% across the board in 2006, “It took us a good year of working through the details to make the numbers work on the Elysian,” a 60-story, 53-unit luxury condo with 188 hotel rooms, in Chicago.
Other McHugh projects in Chicago: The Regatta at Lake Shore East, 52 stories, 325 units, 675,000 sf; The Chandler, 650,000 sf, 283 units; 50 East Chestnut, 34 full-floor units, 220,000 sf; 600 North Lake Shore Drive, two towers, 480 units, 1.1 million sf; and Kinsey Station, 350 units, 445,000 sf.
For high-end condo projects like these, it's difficult to make big changes in exterior walls. “There are certain things you can't take out, such as exposed concrete,” he says. “You may want to go from curtain wall to window wall to reduce costs, but the cost of aluminum and glass is going up, too.”
McHugh is also employing more of a design-build approach toward MEP and fire-protection systems: giving the subcontractors the original design or an outline spec, and allowing them to become the designer of record for these technical systems. “This is not new, but now it's more driven by costs and liability,” to have the subcontractor take on the responsibility for the design and building these systems, says Sheridan.
Contractors are also helping developers save on materials. Senior project manager Bill Heath of HOAR Construction, Birmingham, Ala., has been working with Atlanta architect Cooper Carry for joint developers Barron Collier Cos. and the Lutgert Cos. on The Mercato, a 55-acre mixed-use residential/office/retail project in Naples, Fla.
Heath says the scheduling of materials is crucial these days. “If you don't submit your bid on time for the precast for the parking deck, can you get the materials? We can play that support role in the design phase and have an impact on the materials, especially for something with this level of complexity,” he says. “We've saved the client thousands if not millions already.”
Construction managers can also play a role in helping developers hold down costs, says Tishman's McLean. “Our approach allows the developer to be involved in the buyout of all the trades and to help them make decisions about amenities and construction types,” he says. Should the project be poured-in-place or post-tensioned, precast façade or masonry? “We get in at the preconstruction phase and work with architect and developer for 5-6 months prior to breaking ground to put together a project that still meets their pro forma,” he says.
For Sedgwick Properties' Marquee Michigan Avenue in Chicago, “We took it from poured-in-place to precast for portions of the façade and saved maybe a half million” on a $47 million job.
Multifamily: The years ahead
Multifamily construction faces a lingering problem: liability. “There's a magnifying glass on costs, schedules, and quality,” says Tishman's McLean. “Word of quality issues spreads very quickly in the marketplace.”
Perkowitz + Ruth's Chang says his firm contracts roofing, acoustical, and quality assurance consultants to reduce risk—a practice that the firm's top client, Champion Development Group, Los Angeles, encourages.
At James McHugh Construction, every job has a detailed QC component to eliminate problems like creaking wood floors or mold. A warranty manager is assigned to handle any complaints for a full year after project completion. And it's working: “The insurance carriers are seeing that the QC program is bringing costs way down,” says McHugh's Sheridan.
Yet while multifamily development may be meeting the needs empty nesters and young professionals, one important group is being left out: families with children. Forest City's Ratner notes that even though this demographic accounts for less than a fourth of the population, “It makes for a very different community when you have families.”
Scott Knudson, AIA, worries that many projects have become too “frou-frou”—“a canned product, the Starbucks/Gap kind of thing for the upper-middle-class. They're catering to young adults and seniors, not to families.”
Knudson, VP of design with Wiencek + Associates, Gaithersburg, Md., says lower-income neighborhoods need a mix of affordable housing with community services, libraries, cultural and arts facilities, youth programs, and active green space for children. “The principle is to enliven the streetscape for family living,” he says.
But making urban living feasible for young families is not going to be easy, given rising costs. “How do you attract families to create full cities?” asks Frank Wolden, design principal with architect Carrier Johnson and a former city redevelopment director in San Diego. “Affordability is a whole new issue.”
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