Real Estate Development

Finding—and Sometimes Building—a Sense of Place in Suburban America

Since the 1960s, baby boomers have driven a migration to the suburbs, where a simple calculus has been at work for a very long time: the farther one moves away from an urban center, the better value one gets for one’s money—more house, more yard, more space. But with that space came a kind of void, a decenteredness of the sort that novelists write about. Over time, the suburbs and the mall—that de facto civic space with its strange admixture of indoor fountains and retail outlets—fell out of favor.

It’s not hard to see why. Negative investment in infrastructure has created commuting nightmares for suburban residents. Large-scale financial meltdowns—the dot-com bust and the Great Recession—have led to stagnant incomes and tighter credit, putting home buying on hold for millions of people. Indeed, nearly one-third of all suburbanites who live outside the nation’s 11 most-populated cities were renting in 2014.124 E-commerce has put a dent in mall culture that is still playing itself out. Dead or dying malls and shopping centers populate the American landscape like big-box ghost towns (cue the tumbleweeds and lonely harmonica). Millennials, shaken by a vision of home foreclosures and impatient with the commute from the suburbs, seem to have decided that, since they are renting anyway, they might as well move to where the action is. According to a recent Nielsen survey, 62 percent of millennials surveyed prefer to live in the kind of mixed-use communities common in urban centers, and 40 percent of millennials say they’d like to live in the city soon—and so our current era of urban infill unfolds.125

Or so we like to think. A closer look at the actual demographics of American life, in fact, tells a very different story. Recent research suggests that the urban infill phenomena looks practically puny against the backdrop of larger suburban phenomenon.126 Young people, for instance—those aged 25 to 35—may perhaps feel the yen for urban living, but most (75 percent) still actually live in the suburbs.127 Everyone else—almost 80 percent of populations in America’s 50 largest metropolitan areas—live, in fact, in the suburbs, too, and that includes baby boomers, who, contrary to reports about seniors flocking back to cities, have yet to do so in substantial numbers. In fact, people 65 or older were at least 10 percent less likely to live in urban neighborhoods in 2014 than in 2000, according to one recent analysis.128 As for where most Americans work? It’s mostly in the suburbs—where at least 67.5 percent of Americans spend their working days and where, between 2010 to 2014, more suburban jobs have been created than have jobs in the city.129

“A number of national, regional, and local developers are still very much focused on building communities outside the urban core, which provide the same level of comfort and attractions of city centers.”

The truth about the suburbs is probably more nuanced than many have supposed. There are probably many different “suburbs” emerging in America, each with its own distinct set of needs. And these emerging needs are suggesting real estate opportunities for developers willing to reimagine suburban spaces. “A number of national, regional, and local developers are still very much focused on building communities outside the urban core, which provide the same level of comfort and attractions of city centers,” notes Akerman’s Cecelia Bonifay. “These new, reimagined suburban communities have all of the local-sourced restaurants, they’ve got the farm-to-table ethos in place and they’re walkable. They’re near transit hubs. They have good schools. They have open space. There’s a big difference between the notion that everyone is moving into the urban core—which in many ways is hype—and the reality on the ground of reinvented suburban centers, which I think are a compelling investment bet—be it mixed-used projects with office and retail components, or sustainable communities developed around green, or energy-efficient concepts. The reinvention of suburbia has paved the way to a wave of construction across the country.”

Indeed, a new era may be under way—with the reinvention of the suburbs. If the suburbs are growing, in other words, they’re also dramatically changing, too. A building and development boom is transforming suburban hubs—often near transit connections that offer mixed-use facilities— housing, office, retail, and entertainment—and this has helped many suburban areas, in effect, find their center—establish their sense of place in the years to come.

Dead malls are being completely retrofitted and repurposed, for instance, the walls are coming down, replaced by main streets and pedestrian walkways because walkability is a key theme in many such reimagined places. South of Los Angeles, Hawthorne Plaza mall, for instance, abandoned since 1999, has remained an empty relic popular with urban explorers and film crews looking for a postapocalyptic landscape. But now, a $500-million development has been approved for open-air retail, offices, and residences.130 Elsewhere, Continuum Partners in suburban Lakewood, Colorado, eight miles west of Denver, demolished the old Villa Italia mall and replaced it with Belmar, which includes office space, apartments, and open-air green space. Now Lakewood has a 22-block center—a place with open-air concerts, a “living, breathing, vibrant thing,” says Larry Dorr, Lakewood’s finance director. About 4,000 of Lakewood’s residents are within walking distance of Belmar, which generates $200 million a year in retail sales and contributes 2.5 percent of Lakewood’s sales tax revenue.131 This same story is being repeated across the country, according to Ellen Dunham-Jones, a professor of architecture at Georgia Tech, who has studied how dead malls are being reinhabited, redeveloped, or turned into green space to provide “the downtowns that those suburbs never really had.”132 Dunham-Jones points to Voorhees Town Center, in Cherry Hill, New Jersey—about nine miles from Philadelphia as a good example of redevelopment. Half of an old mall was torn down—(“right-sized,” Dunham-Jones says) and turned into a new town hall with a new main street.

Elsewhere, communities are forming in suburban spaces that are being reimagined as sustainable farming centers. So-called agrihoods are an adaptation of a planned-community idea that first emerged in mid-nineteenth-century Riverside, Illinois, where city people could surround themselves with gardens and a sense of country living.133 Today, developers are reimagining suburban living—golf courses being replaced with raised garden beds, and communities being built around ideas of localized, sustainable energy and food (farm-to-table) production in planned community agrihoods like the Agritopia in Gilbert, Arizona, the Serenbe development near Atlanta, and Prairie Crossing in Grayslake, Illinois. Some of these agrihoods are scaling up in size. In east Orange County, Florida, for instance, Orlando developer Dwight Saathoff is planning a $1-billion, 1,200 acre project that will feature 2,900 homes and community gardens.134 A similar agrihood in Davis, California called the Cannery is a 100-acre project built on formerly industrial land, and features 547 energy-efficient homes and a 7.4-acre community farm. More than 200 such agrihoods exist or are being developed nationwide, suggesting a durable trend.135

“Suburban spaces are being reimagined as sustainable farming centers.”

Major developments are being made in the medical office space across the country—and many of these projects are taking place in the suburbs— giving communities an identity around the medical space. “Outpatient care center and home healthcare subsectors have been expanding fastest for the past decade,” according to a recent report on the sector, much of it happening in suburban communities.136 Tavistock Development’s Lake Nona Medical City, outside of Orlando, Florida, is one of the more ambitious attempts to build a community around medical services, according to Bonifay. “They’ve built a new medical school, hospital facilities, and research units,” says Bonifay. “It’s out in the country, but they’ve started their own downtown center.” The facility includes residential living, a town center with a commercial and retail component, and two new hotels, according to Bonifay. “It’s very ambitious—with a multidecade plan to continue to develop—and the United States Tennis Association just relocated its national headquarters out there,” she says.

“Senior living built around medical office facilities, planned-community agrihoods will address the ongoing realities of American demographics.”

So much of this type of suburban development—senior living built around medical office facilities, planned-community agrihoods—will address the ongoing realities of American demographics—that more people are likely to live in suburban settings in the foreseeable future, but they will want places that sell experiences rather than goods, that combine housing and retail to satisfy consumer demand for places that offer convenient, car-free shopping, and that feature employment hubs, entertainment, and recreational activities.137 The suburb of the near future may be one in which the distinction between city and suburb loses its meaning.138 For those who are shaping this future, the reimagined suburb may be the next wave of economic growth in the United States. “The future,” says one observer, “belongs to the urbanization of the suburbs.”139

Development versus the Sea

The Time Is Now for the Sector to Speak Out and Take Action

Another split-screen—if not schizophrenic—narrative has emerged of late regarding real estate and sustainability issues. On one hand, climate change and the impact of global warming and rising sea levels on real estate have become preoccupying concerns for the insurance and reinsurance sector. By one estimate, 1.9 million homes in the United States—with a combined value of $882 billion—are at risk of being under water by 2100. And nearly half of that risk is in Florida, where a projected $413 billion in residential housing stock is vulnerable to sea level rise, according to Swiss Re, a reinsurance company that, like many other reinsurers, has been raising the alarm about the catastrophic effects of climate change for more than a decade.140

But when asked about the likely near-term significance of sea level rise, Akerman Survey respondents tend to downplay the issue, with only 17 percent of them ranking climate change and sea level rise as the most-important or second-most-important sector megatrend. This deprioritizing is probably due to the timescale invoked in the survey question itself. A global trend whose signature pace has been, for most, too slow to distinguish from the vagaries of seasonal weather events could easily—and perhaps rightly—be discounted by sector observers. After all, the Akerman Survey question did ask about the significance of sea level rise—over the next three years . Other recent surveys have had similarly tepid responses to the risk of sea level rise.141 Perhaps questions about the long-term significance of climate change on the sector are in order. For now, however, the calculus seems to be that near-term gains in real estate will continue to be made within the life span of newly developed building stock—at least until the waters rise.

The risk of sea level rise has been part of a current, ongoing public discussion. With more than 120 square miles of land in New York State lying less than six feet above the mean high tide, putting at risk more than $100 billion in property, regulatory frameworks in the city of New York, in fact, require developers and building permit applicants to consider future flooding risks that in some cases could include sea levels rising up to six feet by 2100.142 In Virginia, the Mitigation and Adaptation Research Institute was established in 2014, and at Old Dominion University, the Center for Sea Level Rise, a two-year pilot project in Hampton Roads, Virginia, is hoping to develop a preparedness and resilience program that can be used as a template for other regions.143 In Miami Beach, Mayor Philip Levine was elected, in part, on a platform that promised to help protect the city’s estimated $27 billion in real estate assets that are vulnerable to rising sea levels. Task forces have been assembled. Experts from the reinsurance sector have been brought in—and they have been particularly effective in foregrounding the risk of a business-as-usual stance against sea level rise. “Look, the science is clear,” says Akerman’s Neisen Kasdin. “There’s no question sea levels are rising. If you live in Miami, you cannot deny it, because we are actually living the effects of the rising sea, particularly in Miami Beach.”

“The costs to the real estate sector of doing nothing about climate change have already arrived—and promise to only get worse.”

How these local realities will intersect with the new Trump administration remains unclear. The selection of Scott Pruitt to head the EPA—a climate change skeptic and the state of Oklahoma’s attorney general, who is currently suing the EPA’s attempt, through the Clean Power Plan, to restrict CO2 emissions by the electrical power sector—suggests, among many other things, that a period of sector-wide environmental deregulation is ahead. For real estate and other sectors, this will likely mean a relaxation of CO2 emissions constraints. Whatever one might think about this, the costs to the real estate sector of doing nothing about climate change, according to Mark Way, a sustainability specialist at Swiss Re, have already arrived—and promise to only get worse.

South Florida, for example, could expect annual losses from storm-related events to reach $33 billion by 2030 as compared with $17 billion in 2008, according to Way. The short version: it’s not all bad news—but you can’t sit on your hands. Way told a group of executives in South Florida, in fact, that losses could be reduced by 40 percent if the region took action to reduce the risk to vulnerable areas. “These kinds of issues cannot be left for another 10, 20, or 30 years’ time,” said Way. “Business and government must work collaboratively to find meaningful solutions to the very real threat of sea level rise, as this is one of the most important issues facing us today,” notes Akerman’s Ellen Berkowitz. Countless studies are available on the effects of sea level rise, whether they be from an environmental or a planning perspective. All these data points are only going to help retrofit and formulate viable solutions for our coastal communities, provided corporate and government leaders come together to devise solutions.

“Miami Beach is raising the level of the city infrastructure in anticipation of the rising sea levels.”

“If we can put a man on the moon, then we can figure out a way to keep Miami Beach dry,” Bruce Mowry, Miami Beach’s city engineer, told a reporter recently.144 That adaptive work is ongoing and continuous, according to Kasdin. “The Purdy Avenue, Sunset Harbour area, and West Avenue—their roads have been raised now. Miami Beach is raising the level of the city infrastructure in anticipation of the rising sea levels.” Nobody knows how much it will cost to save Miami Beach real estate from the rising sea. A city official guessed that it might be as much as $50 billion and that this was probably a low guess, yet compared with the potential risk of losses—and when factoring in the economic gains generated by adaptive technologies and associated sectors to protect against such losses—a more sanguine view emerges.145 “I trust the invisible hand,” writes economist Matthew E. Kahn, in a recent article in the Harvard Business Review. Kahn suggests that the risk of potential losses due to sea level rise will spur adaptive measures of the sort that will not only save Miami Beach but also induce the growth of entire economic sectors that focus on adaptation. “Self-interest,” Kahn writes, “is a powerful force nudging all asset owners—whatever their political affiliation—to adapt.” Kahn foresees developers using modular materials in flood-risk areas that can be disassembled “like Lego pieces,” when the high waters come, and he notes that much of Manhattan is on higher ground that faces little risk of flooding. Adaptive markets will be born, says Kahn, and entrepreneurs who develop products and services will be rewarded. “Market-driven adaptation,” says Kahn, “will allow these coastal cities—the jewels on America’s hem—to continue to thrive.146

As far as sea level rise is concerned, the split-screen narrative in Florida seems particularly acute. On one hand, Florida—and the region of South Florida in particular—is seeing a level of real estate development that is unique in the United States. It’s a hot market fueled by growth across all real estate sectors in the South Florida economic megazone and by foreign investors with serious, near-term jitters about the global economy who are looking to park their currency in U.S. real estate. All of this has created about as big a building boom as one can find—anywhere—and most of that boom lies along Florida’s 1,197 miles of coastline, where three-quarters of the state’s 20 million people live and where four-fifths of the state’s economy is generated.147 A third of the 2.4 million people in the four southernmost counties in Florida live less than four feet above the high tide line.148 And here comes the sticky part. Against this near-term real estate growth comes a disquieting second narrative: long-term scientific studies suggesting that much of the southern coastline of Florida upon which so much depends may be submerged by rising sea levels by the end of this century.149

Miami, for example, ranks second in a list of global cities vulnerable to rising seas.150 But the sea’s advance in South Florida is also uniquely problematic because the geology underlying most of South Florida is made of limestone so porous that building levees or seawalls at ground level won’t answer the flooding problem. The seawater will simply move underground, as it’s already doing.151 Second, there’s no place to retreat to “higher ground.” Miami-Dade County’s average elevation is six feet above sea level.152 Flooding from “king tides,” moreover, which used to be an occasional nuisance, may soon become a new, waterworld normal.

And it’s not just sea levels that climatologists are worried about—they point to increased high temperatures, for starters (the number of 95+ degree days could approach 76—two and a half months of scorchers per year—by 2039) and an increased intensity and frequency of tropical storms and hurricanes.153 But if we keep strictly to the matter of the long-term prospects of sea level rise, then according to the Intergovernmental Panel on Climate Change (IPCC), with continued high emissions of greenhouse gasses, melting ice caps will raise ocean levels in South Florida (and nearly every other coastal region in the world) by just under three feet by the end of the century.154 Recent studies, however, have revised the IPCC’s 2013 report, which didn’t take into account the current, rapidly deteriorating state of the West Antarctic Ice Sheet, and which two separate teams of researchers recently concluded had transitioned into “irreversible decline.”155 Taking that into consideration, a recent paper this year in the journal Nature suggested that global sea rise may actually be more than double the IPCC’s projections—or more than six feet of sea level rise by 2100, if current high levels of emissions continue.156

This odd set of affairs—lots of people buying buildings that may one day soon be inundated—is one of the biggest open secrets in real estate, a secret that dare not speak its name, the sober, party-spoiling reminder, jangling its keys and pointing to its watch and threatening, in effect, to splash water—a lot of saltwater—onto the heady business going on. New buildings continue to rise along the eastern seaboard despite these predictions, including a study cochaired by former New York Mayor Michael Bloomberg, hedge fund billionaire Tom Styer, and former U.S. Treasury secretary Henry Paulson, that predicts that by 2050, $152 billion in coastal property that is not at risk today could be flooded by high tides.157

Amid—and apart from—the tendency to pitch the conversation in the key of catastrophe, many in the real estate sector feel that the time has come to have a frank conversation about climate change and sea level rise. The real estate sector, after all, will never be a simply passive victim of climate change. Its role in energy consumption is well documented (40 percent of total U.S. energy consumption comes from residential and commercial buildings), as is its role in energy waste (the average commercial building wastes 30 percent of its operating energy).158 But increasingly, building owners and developers are realizing that there are positive—and profitable— actions that can be taken. Indeed, within the past five years alone, the cost of smart-building technology has dropped, enabling commercial, residential, and industrial owners and developers to actively contribute not only to reduce CO2 emissions but also to improve efficiencies, reduce operating expenses, increase tenant satisfaction, raise rents, and even significantly contribute to energy generation and distribution—all at financially realistic returns on investment.159

“How will the sector continue to adapt to the likely increase in real estate losses from sea level rise?”

Four key questions seem to emerge from all of this: How will the sector continue to adapt to the likely increase in real estate losses from sea level rise? How far into the future is it reasonable to continue to develop properties in coastal locations without incurring both the financial and—it must be said—the reputational risks of selling land soon to be inundated? What nearterm building efficiency and sustainability measures can be taken to reduce the nearly 40 percent of CO2 emissions caused by the heating, cooling, and operation of buildings in the U.S.? And finally, and perhaps farthest into the future, where will the new coast of the future be located? These and other questions need to be broached, and the real estate sector will serve itself well by joining in that discussion with two other important groups—insurers and lenders, for instance—that are the ones that will likely decide, as sea levels continue to rise, whether to finance development or to pay for losses.

Millennials, Generation Z, and the Future of Real Estate

Real estate markets are shaped by the arrow of time—by the progression and succession of generations through life’s phases and mile markers: school, career, first car, marriage, first child, home buying, retirement. The state of the economy is a force, too, in shaping aspirations. In each stage, as people often say about every conversation in New York City, the secret subject is real estate—the where and the how of it. How people will make their dwelling as they make their living and the whims and aspirations of each generation are things that have been studied to a fare-thee-well. We’ve ascribed to demographic cohorts the generational names by which they are discussed and analyzed: the Greatest Generation, The baby boomers, Generation X, millennials, Generation Z (there’s a scramble now in the Greek alphabet for the monikers that will follow Gen Z). We do this, of course, because in real estate, demography is destiny. In this regard, millennials and baby boomers have long occupied a first position of concern. A number of markets will find themselves at the mercy of the decisions made by these two groups, since millennials (those now aged 19 to 35) and baby boomers (aged 55 to 64) compose 19 to 22 percent of the population in the United States. Their real estate decisions will shape the market for the next decade.160

For a sense of scale, millennials represent 77 million people spending $600 billion annually (and are projected to spend $1.4 trillion annually by 2020).161 Over 41 million Americans are in their 30s, with another 21 million turning 30 in the next five years.162 Interest rates are expected to remain low, an obvious boon to home buyers. Not surprisingly, the real estate sector has been waiting for the next shoe in the life-cycle mile-marker spectrum to drop, as it were. And it has—but not quite as expected.

“In the next ten years, millennial-headed households are expected to increase two million a year, reaching 40 million households by 2025.”

You could call it a bit of a quiet spell for millennial buyers—or millennial delay. While one key indicator for the market—the share of existing-home sales to first-time buyers—has risen from an anemic 25 percent a few years ago to a healthier 32 percent in 2016, housing stock inventory remains tight.163 This helps explain, in part, why homeownership for 30-somethings was the lowest (35.2 percent for those under 35 and 58.4 percent for those aged 35 to 44) of all age-groups measured by the U.S. Census in 2016 (compared with 79 percent homeownership for people 65 or older and 74.9 percent for baby boomers).164 Tellingly, the homeownership rate for middle-class families has been falling steadily, dropping by 4.3 percent during the past five years.165 And homeownership for millennials decreased 5.7 percent from 2009 to 2015. Two years ago, 65 percent of Americans owned their own home.166 At the end of the third quarter 2016, that figure was 63.5 percent. And while this may seem to represent a tide going out, faster for millennials than for others, the residential single-family sector is projected to be the second-most-active market in 2017 according to this year’s Akerman Survey. That may, in part, be attributable to the anticipated scale of the home-buying market as millennials age. And when millennials, at long last, decide to buy a home, they will make up a major market. In the next 10 years, millennial-headed households are expected to increase two million a year, reaching 40 million households by 2025.167

More recently, single-family housing starts increased 37 percent from February 2016 and December 2016, as the U.S. economy slowly improves, and residential housing construction has seen its best period of activity since late 2007, with the single-family-housing sector contributing significantly to a brighter picture.168 What’s more, some observers say that the generation following the millennials—those who are now 13 to 17 years of age, or Generation Z, will be favorably disposed to homeownership. Members of Generation Z possess three important home-buying qualities. First, Generation Z prizes the stability that owning a home signifies: nearly all of them surveyed (97 percent) say they will one day own a home. More than this, they seem willing to sacrifice important things if it means that by doing so they would realize their dream of homeownership: 53 percent would be willing to give up social media for a year, for example, and do twice as much homework if it meant they could own their ideal home—a sharp distinction from a kind of millennial ambiguity about homeownership.169 Second, Gen Z teenagers possess something that really distinguishes them from millennials: financial awareness. Gen Z is simply smarter about money, and about saving for the future, than any other cohort, including that of their parents. Three in five teens have already begun saving, and Gen Zers plan to own a home, on average by age 28, or 12 years from now.170

The Gen Z generation is smaller than its predecessors—but at 26 percent of the population, they’re nothing to sniff at, and they wield $44 billion in buying power—today. They’ll soon be graduating from college (with about half the postcollege credit card debt of millennials) and making their own progress through the mile markers of life’s journey—but they’ll also be a generation who has been saving for the future, a practical generation that wants to cut loose (but that doesn’t want to stray too far afield): nearly half of those surveyed want their future home to be in a suburban neighborhood, close to where they grew up.171