December 19, 2011
What Can Builders and Developers Expect for 2012
After several difficult years for the industry, many in real estate are looking to 2012 with much anticipation. Will this year bring the return of the for-sale market, or will rentals reign? What features will emerge in home design, and how will buyer demographics change? Below, Chicago-area real estate experts weigh in on what ten trends to expect in what all agree should be a very interesting year for the industry:
- A Nation of Landlords: After years of waiting for the for-sale market to rebound in order to move up, many homeowners will become landlords in 2012 by renting their current home in order to move to a new home, said Brian Brunhofer, president of Meritus Homes. “This is a concept buyers have become far more comfortable with as they’ve seen the attractive rents they could get from their current home. It allows them to make a move they may have been putting off for years,” he said. “It’s a smart option for many of our buyers, as they can hold onto their current home rather than sell at a loss, while still being able to move into a larger house that better suits their needs.”To help new homebuyers adjust to their role as landlord, look for more builders in 2012 to follow in the footsteps of Chicago-based Lexington Homes, which has a program with Marketplace Homes that allows buyers to purchase a new home while leasing their current one. The program works by providing a “guaranteed lease” for an existing home for up to six years. Homeowners will receive the guaranteed rental payment every month, even if there is no tenant. Marketplace will do all the legwork finding tenants, as well as cover the home’s utilities, maintenance, and repairs. And if Marketplace Homes sells the home during the term of the lease, the owner will get 100 percent of the asking price.The landlord trend is something MACK Companies, the Midwest’s largest redeveloper of foreclosed properties into single-family rentals, sees as the fastest-growing aspect of its business in 2012. The company’s Real Estate Cash-Flow & Appreciation Program (RECAP) gives investors who want to own real estate – but don’t have the time, expertise or knowledge of property management – the opportunity to purchase already redeveloped, tenanted and cash-flowing properties. “With the number of foreclosed properties expected to hit the market next year, we see an even stronger demand than this year among real estate investors to become ‘hands-off’ landlords,” said Jim McClelland, CEO of MACK Companies.
- Rentership Society: Recent census data shows a continued decline in homeownership rates. “We see this downward trend in homeownership rates continuing into 2012 and beyond. We are in the process of a shift from an ‘ownership society’ to a ‘rentership society’,”McClelland said. “That means good things for the rental side of the market in 2012 and beyond. We predict single-family rental homes as a particularly bright spot, driven by the millions of families who either lost their home to foreclosure or simply can’t secure a mortgage. And we’ll see more investment in distressed single-family homes to rehab them as rentals, both from individuals and REITs.”“Even people who have the means to purchase will continue to rent, and we’ll see not only a rise in occupancy rates, but also an increase in retention,” said Anthony Rossi, president of RMK Management Corp. “People are unwilling to take the risk of purchasing in this climate and find renting a much safer and easier option.”Fifield Companies is optimistic about the rental market for 2012 and beyond, too. The firm recently broke ground in downtown Chicago on K2, a 34-story apartment tower of 496 units, and announced a new seven-story, 247-unit apartment development at 1340 S. Figueroa in downtown Los Angeles. “With the shift from home ownership to rental, as well as positive job growth in downtown Chicago, the city continues to absorb 2,000 new rental units per year,” said Randy Fifield, vice chair and principal with Fifield Companies. The demand for rentals in downtown Los Angeles is also strong, especially the area surrounding 1340 S. Figueroa, noted Fifield. The project is directly across from the Los Angeles Convention Center and just a block away from the Staples Center.
- Economics of Owning (Buy Now or Pay More Later): There are many optimists out there who say 2012 could mark the much anticipated bottom for the for-sale market. Historically low interest rates and deeply discounted home prices make purchasing more attractive than ever, but they can’t last forever, warns John Wozniak, president of J. Lawrence Homes. “There are a number of economic factors that point to a potential housing recovery in the next couple of years, and when that happens, prices and interest rates will rise,” he said. “And something else to consider is that builders have significantly slowed the rate of building, which means there are fewer new homes available. When the market rebounds, demand will outpace supply, further driving prices up. The next 12 months will probably offer consumers the best buying opportunities for a new home in a decade. But after that, prices will go up and buying power will diminish.”Another important factor to consider, said Jeff Benach, co-principal of Lexington Homes, is that it is now cheaper to own a home than to rent one in most markets. “For some people, owning a home is the American dream. But for others, it simply makes the most financial sense given their current situation,” he said. “Renters are crunching the numbers and finding that, in many cases, it is actually cheaper for them to buy a home, even when putting down the minimal amount required, like 3.5 percent with an FHA mortgage or 5 percent with a conventional mortgage. Not only is their mortgage less than their rent, but they also aren’t throwing their money away anymore. In 2012, we’ll see more people forgo their lease for a mortgage to take advantage of the historically low housing prices and interest rates – while they last.”Both builders are so confident in the for-sale rebound that each has new communities in the works for 2012.
- Location Tops the ‘Must Have’ List: In the “boom” days pre-2007, buyers were more willing to sacrifice location for more space or high-end features, but that is no longer the case. Homebuilders say location will be what drives new-home decisions in 2012 and beyond.“It’s not enough for a home to have a good location, it has to have a great location, or buyers won’t even consider it. They want transportation, retail conveniences and good schools or the home is off their list,” Benach said. “Today, buyers who don’t even have kids want to be near good schools. And the days of buyers willing to accept a long commute to work or the grocery store are over. Buyers want to run out for ice cream and still have it be frozen when they get home.”
- Concentrating on Kitchens: “Of all the rooms in the house, our buyers spend the most amount of time planning their kitchens, which is natural,” said Brian Brunhofer, president of Meritus Homes. “However, the focus is no longer about making a grand statement with their kitchen, but in creating a smart, functional and efficient kitchen. Buyers are spending far more time really thinking through how the space can best function for them instead of picking the trendy counter color or the largest refrigerator possible.” Wozniak agrees. “Features like pantries, workstations and eating space have become very important to our buyers and I predict we’ll see an increased focus on the kitchen, just as we are seeing an increase in dining at home.”
- Secondary Bedrooms Second to None: As predicted by Chicago real estate experts, 2011 saw a change in buying habits, with more buyers saying they were selecting a home for the long-term. As a result, 2012 buyers will be paying more attention to features like secondary bedrooms.“A home with small secondary bedrooms or not enough bedrooms will be a deal breaker for buyers in 2012,” Brunhofer said. “Before, buyers would rationalize that once they outgrew their home they could just move. But now that buyers are purchasing for the long haul they want that extra bedroom space. We are especially seeing growing interest in a first-floor bedroom – not necessarily a master suite, but a space that gives potential bounce-back kids or extended-stay foreign relatives more privacy. It’s also a good space for an aging parent or grandparent who needs single-level living.This will be true for the townhome market, as well, predicts Jeff Benach, co-principal of Lexington Homes. “Buyers want to know a maintenance-free townhome will still work for them as their lives change and their family grows. Because townhomes have become a single-family home alternative for many buyers, we offer many of the same high-end bedroom options as you’d find in a new-construction single-family home,” he said.
- Streamlined Space: While some have said the dining room is dead, and others say we’ve seen the last of the living room, those past predictions point to this floor plan trend for 2012 – streamlined space. “Buyers are interested in open-concept plans with a more simplified and streamlined design,” Wozniak said. “Buyers want the flexibility of a great room or an open layout, rather than specific, individual spaces. That way they can carve out the space to function in a way that suits them best, now and in the future. It all goes back to buyers wanting a home that will work for the long-term.”
- Smaller Apartments, Bigger Amenities: Multi-family experts say we’ll continue the trend of seeing more space dedicated to common amenities and smaller individual units in new-construction rental buildings in 2012 and beyond. “You could see a new building next year that’s the same size as one from 10 years ago, yet how the space inside those buildings is used is very different,” said Steven Fifield, president of Fifield Cos.“We found ourselves ahead of this trend last year with Alta at K Station, which opened with 32,000 square feet in common amenities,” said Fifield. “The lifestyle concept was extremely successful, and we expect to see more developers emulate it in 2012 and beyond. In fact, we’re planning to top ourselves with K2 at K Station.” Scheduled for completion in 2013, the 34-story K2 apartment tower will include a two-story entrance and lobby with a floor-to-ceiling window wall showcasing views of Chicago’s Loop, a two-story fitness center, two lounge/party areas, a 70-foot lap pool surrounded by a sundeck and cabanas for outdoor massages, a business center, theater room and a dual purpose yoga studio and basketball court.
- Renovations Rule:Whether buying or renting, people will have little interest in homes that are not renovated, said Rick Croce of Smykal Renovations. “That means if you’re a seller, you need to make the investment in not only replacing things like a roof and windows, but also giving the home a facelift to make it more modern,” he said. “People are looking for open floor plans, well-designed kitchens and attractive baths, so it is worth considering making such renovations to your home before putting it on the market – even if you don’t plan to sell for a few years.”The same holds true for the rental market, McClelland said, whose company manages more than 500 single-family rentals in the Chicago area. “While rental demand is high right now for single-family homes, quality still counts. People aren’t interested in old, outdated homes. It’s important that smart renovations are made before trying to rent a property in order to find a good tenant and top dollar for your rental income. On average, we invest $50,000 into each of our redeveloped properties to bring them up to new-construction standards.”Rossi, Sr. agrees. “While our occupancy rates are very high, we still want to remain competitive. That’s why we are continually renovating and improving our 26 properties under management and we have several large renovation projects at various communities in the works for 2012.”
- The Human Touch: “People love social media, but there is no replacement for person-to-person contact,” Rossi, Sr. said. “People want to feel that connection, to have an actual person to go to with issues or to rely on for information. I predict we’ll see more transparency and less ‘mass email’-type of interaction in the real estate industry in 2012. Personal relationships will be very important.” To encourage more personal interaction and make it easier for people with busy work schedules, RMK’s rental communities are open late two nights per week so the staff is available to answer questions, accept packages, discuss renewals, or just visit.
“As a family-owned company, we put a huge emphasis on creating a personal connection with all buyers,” Brunhofer said. “That is actually part of why we recently launched a corporate Facebook page. It gives us even more opportunities to connect with homebuyers on a real-time basis, share photos of our team and homes under construction, ask and answer questions, begin a relationship with interested buyers and continue to foster friendships with current residents.”
Brunhofer added that he wouldn’t be surprised to see more builders beef up their sales force in 2012. “From day one we’ve had our sales centers staffed seven days a week, but I know that wasn’t the norm for everyone in 2011,” he said. “Budgets were tight for builders this year, but I think many of them realized you can’t make a sale if you’re not there to answer the door or phone. This business isn’t just about building homes, it’s about building relationships.”
What Can Builders and Developers Expect for 2012