Building housing in the Bay Area can be a full-contact sport
Since 2005, Katia Kamangar has seen SummerHill Homes and Apartment Communities grow into a regional development powerhouse that has done its best to stay relevant and competitive in the ever-changing Bay Area real estate market. Today, as the Executive Vice President and Managing Director of the two groups at SummerHill, where she leads all new community development activities of the two groups, she has a clear view of the market, and where it is heading. While there are considerable headwinds in the region stemming from a lack of available land, increasing construction costs and escalating development fees, the market fundamentals continue to be strong.
Over the past three years, construction costs have increased close to 45 percent.
Here are her thoughts on the industry and year ahead.
2017 was another truly impressive year for housing developers and owners. Did the year play out the way your organization had anticipated it would?
Overall, the year was good for SummerHill. We secured several new development opportunities for our future pipeline, both rental and ownership, and despite a significant number of rain days last winter, are delivering over 140 new for-sale homes and newly completed apartment buildings in Santa Clara and Seattle.
Are you seeing the momentum from the second half of 2017 go into 2018, as well?
Our business is driven by the strength of the employment market. Despite the market volatility of recent weeks, the employment market still looks strong, and the inventory of housing is at an all-time low, so we remain optimistic about 2018.
What are some of your major initiatives in 2018? What is exciting and what will be challenging about those in the year to come?
Our biggest initiative for 2018 is installing infrastructure at a 26-acre assemblage of land we acquired next to Lawrence Caltrain station in the City of Santa Clara. With demolition and grading finished we still have months of infrastructure work ahead of us before we can start building housing. It’s an exciting master plan where we have 994 housing units of which about half are ownership and the other half are high-density apartments. The project also has 40,000 square feet of commercial space and six acres of new public parks, all within walking distance to Caltrain.
The challenges that remain are the significant increases in labor costs we have seen these past several years, the tightness of the labor market for construction and sizable increases in fees in nearly all jurisdictions where we have projects. In a very competitive land market, these dynamics are difficult to forecast when underwriting new residential projects and can make even a good business plan quickly become something that will be more challenging to finance.
How is your product changing? What are you doing to differentiate your organization and what you create from that of what others are doing in the region?
We continually strive to bring high-quality housing to the market, a product that is innovative and addresses today’s changing lifestyle choices. We use architects that we have long-term relationships with but who can also challenge our thinking with new and innovative housing forms. On the for-sale side, our homes are increasingly more contemporary in style with large kitchen islands, simple and clean lines in terms of the interior finishes, and spaces that are more flexible to accommodate a variety of living styles. On the apartment side, we continue to design amenity-rich common areas with a lot of pizzazz. Most of our residents work long days and seek a luxury living environment for the hours they spend at home; convenience for working out in a state-of-the-art fitness center, a spacious lounge to relax and entertain in and amenities such as pet grooming and secure bike storage. Rooftop decks with views are highly desirable and more and more we’re also designing spaces to accommodate those that work from home.
SummerHill also has a home building entity, and you manage that aspect of the organization, too. How are you finding home building in the Bay Area with today’s land scarcity?
Securing land opportunities continues to be very competitive in the Bay Area with many listed sites receiving up to a dozen offers. Our land acquisitions group is very experienced and has cultivated relationships with land sellers and the broker community for decades, which helps us, along with our track record of successfully entitling challenging in-fill sites and consummating land transactions.
Construction costs have been steadily increasing since the Great Recession, and the acute challenges associated with that have been evident in this region, as well. How would you characterize what you see on the construction side? Are you worried that the costs have increased too much? How are you mitigating that?
Over the past three years, construction costs have increased close to 45 percent. These significant cost increases, coupled with the scarcity of labor overall, are big challenges to our business. One thing that certainly helps us is that we have been around a long time and over the years have cultivated relationships with contractors and subcontractors that we trust to deliver the quality we need and can rely on them to bid on our projects.
At the same time, cities have been actively increasing their fees, as well, adding a significant cost load to developers like you. How has this impacted your work, and do you see a way to work around that with certain municipalities?
We have experienced firsthand significant fee increases in most of the cities we work in. While we understand that fees will continue to rise, some of the largest fees that come in the middle of a project going through a City approval process are the most problematic for us builders. We forecast our business plan at the beginning of the entitlement process, and it can take 18 to 24 months, or even longer in some instances, to secure City approvals. Significant fee increases during that time can jeopardize our ability to get financing for a project once we do finally secure our approvals. We engage in public hearings on the larger fee increases and significant new fees with the goal of informing city decisionmakers of our perspective and the challenges and to encourage them to choose a phased in approach in order to maintain their housing pipeline.
Similar question with regards to below-market-rate housing. The momentum is shifting in some communities where these requirements are exponentially growing. What is your take on these and what challenges and opportunities do regulations like that pose?
The fact that our region’s housing production has not kept pace with new job creation over several decades has caused us to reach a crisis in housing and affordability levels, and affordable housing has become a top priority in most Bay Area jurisdictions. With the passage of SB 1505, most cities are implementing new on-site requirements for affordable units in new rental projects.
While we support increased affordable housing creation in our region, the way in which we go about making the region more affordable can take on many formats, and we have seen some new and creative efforts in that regard. The challenge we see in implementing increasingly high affordability requirements in market-rate projects is that doing so will drive down land values. While some might say that tempering run-up land prices is acceptable, the unintended consequence is that parcels of land that would otherwise have transacted for future housing sites, might not transact. This will be particularly true for properties that are currently in office use. With reduced land valuations from residential developers, these landowners are more likely to retain their current uses if residential redevelopment doesn’t increase their land value.
The other thing we’re doing in select locations is designing smaller ownership housing in an effort to bring the price point down through design. While a typical new townhome is 1,400 to 2,000 square feet, we are looking at homes that are predominately 2 bedrooms and in the 800 to 1,200 square foot range, which is expected to significantly lower the price of these new homes.
In Silicon Valley, there are former commercial and industrial sites whose time has expired. Do you see the cities thinking about ways to repurpose those for housing? Where are some opportunities for this in the region?
In our viewpoint, older commercial and light industrial sites are the most likely areas to convert to housing and mixed-use in the coming years. Many such areas exist in close proximity to big employment centers on the Peninsula, making them ideal for housing. Land is scarce for housing, and many of these sites have buildings that are at the end of their useful life. A number of cities have identified these types of areas for future residential and mixed-use conversion and have implemented Specific Plans to help guide development in an orderly manner. For example, our Nuevo project is part of the Lawrence Station Area Plan, which is a specific plan created by the City of Santa Clara to guide redevelopment of a 45-acre area mostly in light industrial use. The city of Mountain View is doing the same in the East Whisman and North Bayshore areas of the City, and we expect this trend to continue.