In real estate, builders are doing more with less. Also: The “Performance Home”

Dated: April 14 2019

Views: 308

In real estate, builders are doing more with less. Also: The “Performance Home”

 

Today I want to focus on a trend.  This trend has been evident to me since I have been in business, mostly in the manufacturing sector.  In the business of real estate we have deviated from this trend in the United States in a major way a few times over the past 90 years.   There has been, however, a pervasive tendency, indeed a movement in a certain direction, which I have been witnessing and profiting from since I have been in business.  This trend simply this:  do more with less, but do it better.

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To do more with less has always been a goal in manufacturing. The deviations from this mantra were short lived and no more than fads (remember fins on automobiles?). This is because to do more with less; to value engineer; sometimes is contrary to current fashion, or emotional wants, and occasionally we will see extravagances outside of this trend: In houses, look at the McMansion; in automobiles, look to the Hummer.

 

I believe we are now entering a more resolute period where the United States residential and commercial real estate markets will rejoin the trend to economize land, resources, infrastructure, and construction materials.  To understand the affects of this trend, we need to understand the inner workings of the real estate developer and then; the builder.

 

How do Commercial Developers Buy Land?

 

The price per acre or per square foot means nothing to a developer of a commercial shopping center, an office building, or indeed a residential home until there is a definition of yield.  Yield in a shopping center will give the developer an idea of how many square feet of rentable space he will end up with when he is done developing. After he balances parking requirements, city set back requirements, height restrictions, common area needs, and water retention and rights of way, he will come up with a total rentable (or salable) square feet he can build on this property. In order to maximize his profits, he must maximize the number of square feet he can build and sell.  What he winds up with is a yield number that is expressed as a land load number.  Every square foot of building will have a land load. The property may have been sold to him for $28 per square foot; but his land load may be $80 per square foot.  Every square foot of salable building has a load factor of $80. This is before he goes vertical.

In the single-family home market we talk about houses, or developable units (du’s) per acre.  How many homes can be built per acre? Therefore, we see more “zero lot line homes” and homes with side windows 14 feet from the next house’s side window.  It isn’t because the developer is cheap, its because the consumer is.  They simply cannot or will not pay for more land.  The developers will build what the consumers will buy.

 

This load factor is treated differently by different types of developers. The hotel developers want to know his cost per "key"; the hospital developer the cost per "bed"; the residential developers talk of developable units (du's).  The higher the yield is, the more that the developer can pay in total for the land.

 

The land comes with other burdens, however, that will come into consideration. Internal infrastructure is expensive as are county and city concurrency issues. The developer must add to the cost of the load factor such items as impact fees, road construction, utility hook ups, and municipal set-offs such as fire and emergency medical surcharges.

 

High Density Versus Sprawl

 

In the spirit of doing more with less, the developer must optimize his yield. This optimization leads him to higher density projects and less suburban sprawl. This optimization will, logically, lead him to where the infrastructure like roads and utilities exist, and where the allowable density is already approved.

 

Environmentalist and some ill-advised county commissioners think that high density is not good for the city or for the environment.  They are wrong.

 

Consider these two alternatives:

 

•1.       Big Boy Developers can take 100 acres of green space and build a gated single family home community and build these homes on half acre lots. With roads and other amenities needed, Big Boy winds up with 100 acres of land supporting perhaps 60 homes.  Big Boy needs to run sewer, electric, water and phone lines to each home. He needs fire department services for this community and a roving security car and a gate attendant.

•2.       Smart Guy Developers, on the other hand, buys the same 100 acres.  He builds three story buildings on thirty of the acres and has 300 living units. Under some of the buildings there are retail stores, others have offices. Seventy of the acres are left untouched and natural.  Smart Guy must build fewer utility lines, less roads, needs no security cars or gate, and because of the mixed use, even the residents need fewer cars.

How does this translate to Single Family home building?

In doing more with less, developers are building smaller homes with greater functionality and superior efficiency of not only space, but of recourses like water, electricity and labor. Maintenance costs are lower, components last longer, and the homes functionality will conform to the changing needs of the owner.  Success is designing and building truly efficient “Performance Homes” is a matter of degrees, not just direction. True success is the sum of many small decisions, not just one of direction.

I like the term “performance home”.  A home built with every small detail considered and executed well.  From layout and functionality to energy efficiency and component integrity.  A home that not only performs its functions well but is accountable.  There are very few builders that can accomplish this in the sub $300,000 price range.  MK Homes is one that has done it.

Ill give you one example of how they were able to do more with less, execute it well, and be accountable. The home is full of other examples of this but your must see it to understand it scope.

Click on the link below to see the home, but here is one area that should give you a small inkling of the thoroughness of the total design:

The home is cooled by ductless a 23 SEER AC system.  But to optimize the efficiency of these already very high performance units, the house must be well insulated with zero leaks, have thermostatically controlled transfer fans (the MK house has 6), and the placement of the units must be logical and accurate based on needed air flows and internal activity and heat sources. In this home air flows were modeled, modified and then monitored. ( held accountable). MK put 8 temperature and humidity sensors throughout the house and those sensors will stay there for a year to monitor the accuracy and efficacy of the system. This will also allow for minor changes in future homes.

The point I am trying to make here is that it is not enough put high SEER AC units (the macro decision – or the Direction) but all the details must be planned and then executed properly (the degrees).

Here is a link to the home info.


Folks this is an excellent execution of the trend of doing more with less. This is a rendering, the first model is ready to deliver in two weeks.

Gregg

 

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Gregg Fous

Real estate has been my passion since I took my first Al Lowery class on real estate investing in the 1970’s. I vowed during that class that I would buy one property a year. Over the next five ....

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