Homebuilders adapt to a different time

Housing starts in the Chicago metropolitan area during 2014 increased 17 percent over 2013 by one measure and 19 percent by another, making builders optimistic that 2015 will be an even better year for this industry, which creates jobs and stimulates local economies.

“The Chicago area was somewhat unique. During 2014 we saw a decline in new-home construction in many markets around the country but the Chicago area's numbers were up pretty significantly,” said Chris Huecksteadt, regional director for Metrostudy, a housing market research firm based in Elgin. “We recorded 5,708 housing starts in the 12-counties we monitor, compared to 4,865 starts during 2013.”

Dodge Data and Analytics, based in New York, quantifies the increase differently, by dollar volume. It recorded more than $4.29 billion in residential building contracts in a 13-county area around Chicago during 2014, up from $3.6 billion the previous year.

“Much of this is due to the national builders constructing homes on lots that have been written down to a price point that is below their replacement value in places like Pingree Grove, Oswego and Huntley,” Huecksteadt said. “You could not buy a parcel of land and develop it into lots at the price they are selling these lots. They are giving them away in the communities on the fringes of the metropolitan area so that they can redirect their efforts to smaller, infill parcels closer to the city where they can sell homes at a better profit.

“The recession we just experienced, in effect, halted the urban sprawl here — at least for the present time,” he said.

The large, national builders have decided huge developments, which might take ten years to complete, are too risky and are generally redirecting to smaller communities of 50 to 75 houses where they can build and be out in a year or two, Huecksteadt said.

“Caution” is the watchword with buyers, too. The millennial generation, those born in the 1980s and 1990s, are also slow to become first-time buyers.

“There is lots of fence-sitting still going on,” he said. “Many millennials saw what happened to their parents and hesitate to buy a home because of that experience. They are also marrying later and changing jobs every few years, so they seem less inclined to get tied down. Buyers also seem less willing to commit to a long commute in order to get a bigger house.”

Huecksteadt said the industry had gotten away from the old “location-location-location” mantra for awhile and now it is back, with builders “taking another look at the old suburbs and even watching for teardown possibilities, feeling that that option is better than buying a cornfield on the fringes and then hoping the buyers will come.”

So builders are concentrating on buying land in closer-in suburbs like Glen Ellyn, Hawthorn Woods, Naperville, Elgin and Lisle, Huecksteadt said. They believe there's more demand to build 20 homes in Hawthorn Woods than to build 100 homes in Marengo.

And those suburbs are generally thrilled to see the homebuilders showing an interest, once again. Hoffman Estates, for instance, now has two single-family communities on the drawing board. It is the first time in several years that new subdivisions are planned for that village and both are relatively small, compared to the huge master-planned communities of the boom years. Bradwell Estates will feature 17 single-family homes and M/I Homes of Naperville has proposed 81 single-family homes for 37 acres of former farmland.

“We are thrilled to see new-home construction coming back because when that happens, the rest of the retail economy naturally follows. New-home buyers then need to buy furniture, home décor, hardware, etc., and the sale of everything increases,” said Kevin Kramer, economic development director for Hoffman Estates.

“You need 'rooftops,' as they call them, in order to encourage national stores like Walmart and Starbucks to build stores in a community. So when a community attracts new-home construction, the national chains take notice and consider locating there, too. That is one of the ways new homes add to a municipality's bottom line,” Huecksteadt said.

National Association of Home Builders statistics agree. They indicate that for every 100 new single-family homes built, in the first year alone, $21.1 million in local income is generated, as well as $2.2 million in taxes and other revenue for local governments and 324 local jobs.

The annual recurring benefit from building those 100 homes is $3.1 million in local income, $743,000 in taxes and other revenue for local governments, and 53 local jobs.

Lexington Homes, for instance, has started building townhouse communities in Park Ridge and Palatine in recent months and is planning to open another later this month in Rolling Meadows. Each one is centrally located in their respective established municipality.

“We are concentrating on the suburban fringe and on the city,” said Jeff Benach, co-principal of Lexington Homes. “We're done competing with the nationals on large, far-out suburbs and feel that doing infill is a niche for us. Often they tend to be townhouses but we will build either townhouses or single-family.

“I believe that we are unique in that Lexington Homes is still pretty much the only developer that is building a low-rise product in both the city and suburbs, as well as mid- high-rises wherever opportunities come up. We do plan to focus on and exploit that advantage,” he said.

K. Hovnanian Homes President Andy Konovodoff said the market is telling his company to purchase small parcels closer to Lake Michigan that can accommodate no more than 50 to 75 units with plans to sell through them in a year or two.”

“We bought up a rare farm in Lisle and are building Arbor Trails. We also bought an old hardware company headquarters in the Sauganash area of Chicago and plan to open there and we have several small assemblages of lots going in Arlington Heights and Palatine,” he said.

Other than building duplex-style townhouses in an age-restricted community in Sugar Grove, the company is confining its efforts to single-family homes.

“What we even considered fringe markets back during the boom — west of Route 47 and south of I-80 — simply isn't ripe for today's market. Most builders need volume. They need to be able to count on making 25 to 35 deliveries per year and that isn't possible right now. The time will come when we head out that way again, but that time isn't now,” Konovodoff said.

K. Hovnanian has also made the strategic decision to widen both its geographical area and its price range.

“We range from selling homes for $225,000 in Oswego to selling homes for $1.1 million in Lake Forest,” he said. “We have something for everyone across our 12 current communities.”

Orleans Homes invested heavily in land during the downturn, purchasing ready-to-build lots from banks, investors and other builders during 2012 and 2013 so it would be ready to hit the ground running when the market turned around, said Bob Meyn, vice president of sales and marketing for Orleans' Midwest Division.

“Now we have moved on to purchasing property where lots have been platted and zoned, but not yet developed and are starting to move on to acquiring property that is totally un-platted and undeveloped, including infill locations in Cook County and the city of Chicago. We will continue to seek them out as they become available,” he said.

Today Orleans has seven active communities in the Chicago area and expects to open three more soon.

“We have a very mixed bag including single-family, townhouses and duplexes in places as diverse as Glen Ellyn, Elgin, Kildeer, Oswego and Hawthorn Woods, costing between the $220,000s in Oswego and the $600,000s in Hawthorn Woods. But the majority of our units sell in the mid-to-upper $400,000s,” Meyn said.

“We are not yet at peak levels but the first-time buyers are finally starting to come out and everyone will benefit from that,” he added.

Airhart Construction is happy to remain in DuPage County communities like Wheaton, Winfield and Oak Brook where they have done business for years, said Court Airhart, president. Instead of rethinking its locations, the builder spent the recession rethinking its floor plans and amenities, making them even more appealing.

“The bigger, better concept of housing is no longer leading the charge,” Airhart said. “Size is no longer our buyers' first question like it was back in 2002 and 2003. Now they are more concerned with amenities, flexibility and if the home is designed to make their lives easier.”

For instance, it used to be that the laundry room and mud room were the same space. Today, buyers are willing to sacrifice bedroom space to get a second-floor laundry room and they want a true mudroom with benches, hooks and charging stations, Airhart said.

“The ergonomics of a house is of primary concern to buyers today. They also aren't willing to put in a luxury tub that they will never use. They would prefer a nicer shower. Similarly, buyers are no longer willing to drive further west to pick up 1,000 more square feet that they don't need. They know they will just have to spend more to heat and cool that additional space. Instead, they would rather put in more amenities like hardwood floors throughout the first floor,” he said.

Ryland Homes has always been careful not to put all of its eggs in one basket, said Division President John Carroll. It makes sure it is both geographically diverse and market diverse in terms of whom it tries to attract.

“We make sure that we never compete with ourselves. If we have two communities located close together, like in Hampshire and Huntley, we vary the product mix and appeal to different buyers,” Carroll said. “When we are builder higher-priced homes, we build small neighborhoods. But when we build less expensive homes, we need more volume to make it work, so those communities are larger.”

Ryland is currently restarting a number of communities begun by other builders and is continuing to finish out its own subdivisions, many begun before the downturn.

“The reasons those communities were started are still solid. The economy is different and the marketing is different, but the locations will still attract buyers. They are places with good value and good schools where buyers are not pioneering in any way,” Carroll said.

Ryland is building in the collar counties of Lake, Will, McHenry, Kane and Kendall in “mainstream suburban” communities like Yorkville, Aurora, Elgin, Crystal Lake, Volo, Round Lake, Huntley, Shorewood and Hampshire.

Later this year it plans to restart Remington Glen, a townhouse community in St. Charles that was begun by another builder. It also plans to begin building in Crown Pointe, Indiana, in a South suburb and it may start two or three active-adult communities, Carroll said.

“We closed 546 homes in 2014 and at that rate, we have a lot of lots to replace every year. Therefore, we plan to open 12 new communities in 2015. But we are now only opening an average of one model (home) per community. The economics no longer support huge model parks in every location. People recognize, however, that they are getting a good value and most are willing to take a road trip to other Ryland communities to see the various models or make use of our 3-D renderings, digital tours and 360-degree photography,” he said.

William Ryan Homes “only does what buyers want us to do,” said Debbie Beaver, vice president of operations. “They no longer want to drive a great distance. They want to live in the closer suburbs because their lifestyles are more important to them than their homes are now. Living in the middle of nowhere is no longer appealing,” she said.

In 2015, William Ryan Homes plans to open communities in Hawthorn Woods, Addison, Bartlett, Volo and Romeoville and it recently opened a community in Hampshire. The largest of the communities features 75 lots on which homes remain to be built.

“William Ryan has never taken on huge projects. We never want to get too far ahead of ourselves,” Beaver said. “We gain efficiencies by using the same 13 plans in all of our communities but tailoring our amenities to the location. The same house might have hardwood floors and granite countertops in Barrington, for instance, but vinyl floors and laminate countertops in Elgin. Our core construction is the same everywhere and it is phenomenal.

“We are expecting 2015 to be good and we are budgeting for growth, not through selling more houses per community but through selling a consistent number of homes in more communities,” she said.