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Law360 (September 30, 2020, 3:54 PM EDT) --
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| Rick Rubin |
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| Will Soper |
Widespread protests in urban areas, historically cheap financing for single-family homes and the global pandemic have shaped new housing trends and accelerated others.
Personal Space, Not Necessarily More Space
Downsizing had been the story of the decade in housing. The homebuilding industry took notice of empty nesters' and millennials' preferences[1] for smaller dwelling spaces, and willingness to exchange square footage and yards for public spaces and proximity to amenities. Condos and other multifamily housing became increasingly popular.
However, likely due to health concerns surrounding the COVID-19 pandemic, consumers' priorities have recently swung away from amenities and towards separateness. Indeed, recently released housing start data[2] from the U.S. Census Bureau shows that year-over-year single-family housing starts increased in July by 15.5%, while multifamily starts for the same period fell by 0.5%.
Home sales nationally have remained strong, with home purchase activity in July up 22% over the same month in 2019. In the Denver metro area,[3] single-family home prices and sales increases for July far outstripped those for condos.
Anecdotally, the pandemic is one major driver of this trend. Shared spaces such as common entrances, garages, elevators and buildingwide HVAC systems that are typical in traditional condominium construction present opportunities for COVID-19 to spread. In addition, with more people working from home, there is a higher demand for rooms wired for technology and separated from other living spaces, resulting in them becoming more common in single-family residences.
For the above reasons, townhome products are growing in popularity compared to condos as a form of multifamily housing. Townhomes may also provide more customization opportunities than condominiums, providing for the Zoom rooms employees need when working from home.
Additionally, townhomes provide considerably less shared space and fewer shared systems to promote the spread of disease. There is a general sense that townhomes lessen the need to interact personally with your neighbors — while overall space in townhomes may not greatly exceed the space provided in condominiums, much more of it is private to each resident.
Ownership and Rental Products
Record low mortgage rates are also responsible for the increase in home purchases. Average mortgage rates[4] have fallen from 3.65% on March 19 to 2.99% on July 30. Cheap money, coupled with a demand for more personal space, has taken a significant bite out of the rental market. First-time home buyers[5] in April 2020 made up 36% of the all home sales compared with 32% in April 2019.
However, some rental products are poised to capitalize on consumer demand for more personal space, especially in higher-priced markets where entry-level home prices are still out of reach for many. For example, townhouses can be built, managed and rented like an apartment community, without many of the shared-space issues common in apartments.
Some large companies have even begun building rental communities of one-, two- and three-bedroom single-family detached houses. Toll Brothers, a publicly traded homebuilding company with a national footprint, recently announced a $400 million joint venture with a private partner to build single-family home rental communities,[6] targeting Phoenix, Denver, Las Vegas and other fast-growing metro areas. Eliminating the need to save for a down payment or qualify for a mortgage may more single-family homes available as rental units.
Tiny Homes and Prefabbed Construction
While they have been a hot topic for several years, tiny homes — single-family homes with less than 400-500 square feet — have yet to fully infiltrate the homebuilding market. Tiny homes have some very vocal supporters, but it is estimated that only about 700 are built per year.[7] However, communities have found some success in using tiny homes as a public policy approach to address affordable housing concerns and provide homes for people experiencing homelessness.[8]
Traditional manufactured homes continue to lose popularity[9] as a viable housing product. Shipments of new manufactured homes have decreased by half since 2000. However, the prefabricated and modular homebuilding industry[10] has doubled in size in the past five years and accounts for $8 billion annually.
Part of this growth is due, no doubt, to an increase in the quality of prefabricated materials. In the past, prefabbed structures were easily recognizable and considered unappealing. Today, current methods and materials result in buildings that people cannot distinguish, on appearance alone, from site-built homes.
Indeed, with products ranging into the millions of dollars for a single residence, companies such as Clayton Homes Inc., a subsidiary of Berkshire Hathaway Inc., can provide high-quality structures at a lower cost than traditional site-built homes.
Zoning and Density
Beyond the pandemic, social and civil unrest with respect to racial injustice in America has dominated the national news. The homebuilding industry has not gone unaffected. Euclidian zoning — that is separating land by uses, building types and sizes — has long been accused of exacerbating racial and economic segregation.
Critics argue that density restrictions isolate the white and wealthy by requiring large residential lots that few can afford. Additionally, single-use zoning prevents a diversity of housing types[11] within the same neighborhood.
Communities have begun responding in myriad ways.
Minneapolis, the center of the large-scale protests in the wake of the George Floyd killing, has banned single-family zoning,[12] meaning property owners can now build multiple houses on lots that could formerly only have one.
Boulder, Colorado, has begun allowing homeowners in certain low-density, single-family residential zones to build accessory residential structures[13] on their lots by right. This means they can construct such units without having to go through an extensive rezoning process.
Homebuilders are also responding to the demand for additional self-contained residences on a single parcel. So-called mother-in-law suites[14] are essentially a self-contained apartments within or attached to single family homes that include kitchen facilities, bathrooms, bedrooms and living spaces.
These additions allow for intergenerational cohabitation[15] as family members age or can provide short- or long-term rental units to supplement the homeowner's income. As such, more homebuyers are demanding mother-in-law suites be included in new builds or are remodeling older homes to add them and home builders are meeting those demands.[16]
Conclusion
Homebuilders are facing unique challenges that may continue into 2021 and beyond. Permitting delays continue through the fall, as the pandemic has closed building permit counters and posed challenges for local entitlement review boards.[17]
Further, some jurisdictions have imposed construction-site rules to limit the spread of COVID-19, which include face-mask requirements and the promotion of social distancing;[18] homebuilders in jurisdictions without such rules are advised to adopt their own as it is reported that Occupational Safety and Health Administration site visits are on the rise.[19]
Finally, disruptions in construction material supply lines, such as for lumber due to the massive wildfires in California and Oregon,[20] and finishes and appliances imported from China due to the tariff wars and COVID-19-related safety concerns, add to the list of concerns the industry must deal with.[21]
However, despite its challenges, 2020 has presented significant opportunities for homebuilders. Shifting preferences and a steady appetite for new homes has driven a strong industry outlook.[22]
While many of the trends identified in this article are not new, many have been accelerated by the pandemic and social unrest of the spring and summer. Undoubtedly, these trends will fundamentally change the homebuilding industry.
Rick Rubin is a senior partner and Will Soper is an associate at Fox Rothschild LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] https://www.builderonline.com/building/boomers-and-millennials-alike-demand-entry-level-housing_o.
[2] https://www.census.gov/construction/nrc/pdf/newresconst.pdf.
[3] https://www.denverpost.com/2020/08/05/metro-denver-home-sales-prices-july-2020/.
[4] http://www.freddiemac.com/pmms/.
[5] https://magazine.realtor/daily-news/2020/05/26/more-first-time-home-buyers-are-entering-the-market.
[6] https://www.forbes.com/sites/bradhunter/2020/01/16/the-new-face-of-rental-housing--single-family-built-for-rent/.
[7] https://www.godownsize.com/tiny-house-statistics/.
[8] https://www.cpr.org/2019/03/15/while-denvers-tiny-homes-for-the-homeless-help-they-may-not-be-a-city-sized-solution/.
[9] https://www.census.gov/data/tables/time-series/econ/mhs/shipments.html.
[10] https://www.guardianbooth.com/modular-construction-industry/.
[11] https://www.bloomberg.com/news/articles/2016-01-04/how-zoning-restrictions-make-segregation-worse.
[12] https://www.reuters.com/article/us-usa-housing-cities/in-us-first-minneapolis-rethinks-housing-density-to-make-homes-cheaper-idUSKCN1RK1DX.
[13] https://bldrfly.com/news/2020/01/17/boulder-adus-explained/.
[14] https://www.neighborhoods.com/blog/in-law-suites-a-growing-trend-in-home-building.
[15] https://www.heraldextra.com/lifestyles/home-and-garden/builders-seeing-rise-in-mothers-in-law-suites/article_f75812c8-bf10-11e0-ba1c-001cc4c03286.html.
[16] https://www.nahb.org/Other/Consumer%20Resources/Types%20of%20Home%20Construction/Custom%20Homes.
[17] https://www.jchs.harvard.edu/blog/covid-19-will-delay-housing-construction-but-for-how-long/.
[18] https://www.mass.gov/covid-19-guidelines-and-procedures-for-all-construction-sites-and-workers-at-all-public-work.
[19] https://www.osha.gov/memos/2020-05-19/updated-interim-enforcement-response-plan-coronavirus-disease-2019-covid-19.
[20] https://www.ccn.com/wildfires-lumber-rpices-housing-costs/.
[21] https://www.nytimes.com/2020/03/20/business/coronavirus-construction.html; https://www.columbian.com/news/2020/aug/14/clark-county-homebuilders-scramble-due-to-shortage-of-materials/.
[22] https://www.reuters.com/article/us-usa-economy/u-s-homebuilding-surges-as-coronavirus-crisis-sparks-flight-to-suburbs-rural-areas-idUSKCN24I1OY.
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