June 8, 2014

Developers focus on niches to buck slow recovery in subdivisions

In some parts of the city, developers are digging vacant ground to install new utilities and grade new roads.

In some parts of the city, developers are digging vacant ground to install new utilities and grade new roads.

But don’t think those pockets of development for new housing reflect what’s happening broadly across the city.

They don’t.

The recession that began in December 2007 and ended in June 2009 not only slowed the pace of new home construction to a crawl, but it also had a dramatic effect on the development of land for those new houses.

The number of new housing lots planned in and on the edges of Wichita’s city limits fell 90 percent between 2007 and 2012 – from 2,180 residential lots platted in 2007 to 210 in 2012, according to information from the Wichita-Sedgwick County Planning Department.

That number moved slightly higher in 2013, to 310 residential lots platted.

Activity in the development of new subdivisions remains largely muted. Business has a long way to go to get back to normal, developers and other real estate officials said.

The pace of new home construction and sales will need to pick up a lot before the area sees significant subdivision development.

The residential development that is occurring in and around the city is largely confined to much smaller subdivisions with fewer than 100 housing lots – and a very specific group of potential new-home buyers.

Small and focused

Despite the lack of economic conditions that typically fuel new home construction, work is underway on scattered pockets of residential development in the city, but on a smaller, targeted scale.

Perfection Builders partners Scott Lehner and Jason Ronk, who started their company in 2004, are working on a number of small subdivisions in the area, including one of their newest, Courtyards at Auburn Hills, near 135th and Maple.

Lehner said they are proceeding with the 78-lot development because it targets a specific market with which they have seen success during the sluggish economic recovery: people who are at or nearing retirement and no longer have children living at home.

For that niche, they are offering what they call courtyard homes, under a franchise agreement with Epcon Communities, which is based in Columbus, Ohio. Courtyard homes are built on tight lots, feature an outdoor courtyard with privacy barriers, and offer at-grade entry, meaning few if any stairs. They are generally located in courtyard communities where no or little homeowner maintenance, such as lawn mowing, is required.

“The time is right, the market environment (for that niche) has improved,” he said. “Our biggest impediment right now is people getting their existing homes sold” in order to buy new courtyard homes.

At Perfection’s earlier courtyard home development, Watercress Village at 37th and Ridge in northwest Wichita, Lehner said Perfection has only eight vacant lots out of 83. They started that project in 2012.

“We’ve always adapted to the climate,” Ronk said. “Whatever the temperature is, we just have always tried to find out what’s missing or where to go. I would say when a lot of guys were closing their doors for the winter, we were ramping it up, just doing it other ways.”

Hutton Development, a new division of commercial contractor Hutton Construction, is making progress on its first subdivision, Frontgate, which is on Central between Greenwich and 127th in east Wichita.

Trent Banister of Hutton Development said his company has sold eight of the 38 upscale, custom patio homes priced between $250,000 and $500,000 it plans to build on the 10-acre development.

“We see a market for that and feel like we’ve hit it at the right time,” he said. Frontgate targets baby boomers and other groups of people who generally want smaller homes and no homeowner maintenance, Banister said.

“I think that there was just a real gap in the market with the baby boomer generation that wanted to ‘rightsize,’” he said. “Luckily, the market we’ve targeted has responded the right way, reassuring us that we’ve made the right call.”

Hutton Development also has acquired nearly 13 acres near the northeast corner of 21st and 127th for future residential development. Banister said plans for that site have not been firmed up.

“The goal is we just wanted to stay out ahead of the market and when (Frontgate) wrapped up we had a transition development to go to,” he said.

But these projects are the exception.

Terry Carpenter, senior vice president and construction manager for Fidelity Bank, which traditionally does a lot of development lending in the area, said the overall residential development market is slow, at best.

“There just hasn’t been the demand to plow up more dirt and (put) pipe in the ground,” he said. “I talk to builders quite a bit, and they are saying there are plenty of lots on the ground. If we stay at the same pace, we’re not going to need more lots anytime soon.”

As of the end of last year, there were 2,195 vacant, buildable lots in and on the edge of the city, Stephen Banks, a senior planner at the planning department said. That’s down 32 percent from 2007.

Timothy Nelson, Carpenter’s boss and executive vice president at Fidelity, said there are whole price points of new homes that still aren’t being built.

“In the low-end price-point, there’s hardly any activity,” Nelson said.

Gary Schmitt of Intrust Bank said until there is a pick-up in new-home building and sales – in each of past three years the number of new homes sold in the area has been between 485 and 550, according to the South Central Kansas Multiple Listing Service – he doesn’t expect to see much in the way of new, large housing subdivisions announced.

“Until that number gets back up a little higher, it’s going to be hard for a developer to invest the money in land and infrastructure needed to build what I consider large developments,” said Schmitt, Intrust’s division director of commercial real estate lending.

He said he thinks that a return to a pre-recession market, in which 1,200 to 1,500 new homes were sold a year, will be what’s needed to spur the development of new, large subdivisions.

A barrier to development may also be that lenders said they generally are asking developers to put more money down on a new development. Schmitt said, depending on the developer’s track record with new subdivisions and other factors, they probably have to have 10 percent more equity in a project than before the recession.

“I think historically we’ve looked at equity in the 25 percent range,” he said. “I think today maybe 35 percent down (is the norm).”

“We have some small, pocket projects,” Fidelity’s Nelson said. “But a large project, you’d have to have significant equity in it.”

Missing link

Developers and bankers agree about the primary factor that is needed to power robust residential development. It’s the same thing that has served as a drag on the Wichita area economy since the recession hit six or more years ago: jobs.

“You’ve got to have job creation and growth to build new houses,” Nelson said.

Lehner, of Perfection Builders, agreed that new jobs, and lots of them, are what’s needed to get people like him to do projects bigger than 80-some odd lots, and ones that cover a broader price spectrum, including entry-level homes.

“To be honest, I’m not convinced we’re ready for a big upswing yet,” he said. “There are so many variables to that picture. We kind of feel our customer niche (for the courtyard homes) is a more stable, predictable environment.”

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