Getting the green light

There is no denying the apartment industry is on an upward trajectory as renter demand grows for a limited supply of rental housing. But some experts believe it's not just the rental market that is rebounding. A combination of rock-bottom prices and upticks in employment in select areas of the country could be a sign the condo market is rising from the ashes.

182

In January, NAHB Chief Economist David Crowe told attendees at NAHB Builder’s show in Orlando, Fla., that he expects 2011’s selling season for single-family homes to beat out 2010, with job growth providing an even better stimulus than last year’s homebuyer tax credits. Some market experts expect to see a few condo conversions later this year.

Even so, new condo construction activity will be much slower to get off the ground, as today’s stricter lending standards, the significant number of home loan defaults still in process and a shadow market of unsold units conspire to keep the for-sale multihousing sector in the doldrums a bit longer.

Nevertheless, The Bozzuto Group broke ground in January on 121 for-sale townhomes in Towson, Md., a market in which the Greenbelt-based developer, builder, owner and manager of apartments and builder of townhomes, condominiums and single-family homes already has a foothold.

Towson, located right outside the Baltimore City line in the middle of Baltimore County, is the most prominent market outside the city limits, hitting the developer’s sweet spot for urban and suburban urban infill projects.

Statistically, Baltimore residents remain wary of taking the homeownership plunge.

According to the Census Bureau, homeownership rates in the Baltimore

Washington area dropped 66 percent last summer from a high of 75 percent at the beginning of 2006.

That decrease was much greater than in the nation as a whole and has resulted in home prices so low that, coupled with today’s extremely low interest rates, one could argue it makes more sense to buy in the market then rent.

And, with price points for a townhome at Towson Green starting at around $300,000, which is entry level for the market, Bozzuto Homes President Tom Baum is optimistic that the $40 million, traditional three-story, townhouse-style development with threeto four-bedroom units ranging from 1,612 to 2,432 sq. ft. and private one- and two-car garages will appeal to a range of buyers.

The townhomes will target the same upscale demographic currently renting at recently delivered apartment communities in Towson, like the nearby 357-unit, 18-story Palisades and the 379-unit Promenade.

The Palisades, owned and managed by Southern Management Company, is a Silver LEED-certified development that opened in fall of 2010 and boasts a green roof, bamboo floors and bicycle racks. The Promenade, a mid-rise community by Houston-based The Hanover Cos., was purchased by UDR in October as part of a large portfolio buy from a partnership of Hanover Cos. and MetLife.

As its name implies, Towson Green also will incorporate eco-friendly features and will be built to National Association of Home Builders Green’s Silver specifications.

Although obtaining a mortgage has been one of greatest stumbling blocks to homeownership since the housing downturn and ensuing credit freeze, Baum isn’t seeing a qualification issue among potential Towson Green homebuyers.

“We have had several projects in the area targeted to first time homebuyers and that’s been our strongest market locally. Unlike the national economy, we have really stable employment in the Baltimore-Washington area–more than six percent–and we are growing jobs at about 45,000 a year. A lot of the younger folks in the area are employed in the high-tech industries and earn a pretty good salary,” said Baum.

He expects people also will recognize an opportunity to lock in a low interest rate before they move up. “We have been spoiled by the low-interest-rate environment and I think rates will go up over the longer term because they have been down for so long and we have to pay for all this spending that we have been putting out through the federal government. But a mid-five percent rate is still pretty darn good in the big scheme of things,” said Baum

Buyers at Towson Green will benefit from a reduced tax bill over a five- to ten-year period, because the project is located in a county commercial revitalization district and qualifies for property tax credits.

Pre-leasing success
Bozzuto announced the Towson Green project in a press release in February and saw immediate interest. “Just off of that press release we had around 1,000 people sign up on our website in the first week. We just turned dirt, but we don’t want to lose the spring market, so we rented a place in a nearby hotel to have presentations and we will set appointments to sign contracts after that. We already have the first three sessions completely booked, so we are cautiously optimistic that we may have hit on the right formula,” said Baum in late February.

In fact, the company’s first selling seminars produced more than 200 prospects, with interest coming from a range of buyers.

“Our target was really first-time buyers. For instance, in downtown Baltimore in an area called Fells Point, along the water–the cool older neighborhoods of Baltimore–taxes are so high, literally double what you pay in the county, first-time homebuyers can’t really afford to buy there.

“But, we’ve also had a lot of interest from newly married couples that need larger homes with parking adequate for a family, which is hard to find in the city, and from folks whose kids are in college. They don’t want the big family home to take care of anymore, yet they don’t want to move downtown because they have always been suburban dwellers and don’t want to move into a big city environment.

“There are a lot of hassles with urban homes, but many people don’t want to move to the suburbs either. So we offer the best of both worlds–an urban townhome environment outside of the city within walking distance of everything. The Starbucks is across the street, the mall is right up the street and the nearby university adds a young flavor to it. So you have all of that, but you are across the line and won’t pay county taxes for ten years and then after that at a lower price point than in the city,” said Baum.

Bozzuto expects to start vertical construction in May and deliver some units in the fall. “We are building in two equal-sized phases, but with for-sale housing you build based on demand,” said Baum.

Right time, right project
Bozzuto first got involved with the project in 2006, when the company was contacted by another developer who had run into roadblocks with a proposal for a high-density development on the site.

The 9.2-acre development parcel has an interesting history. It sits within an older community of homes and was once the site of 29 single-family houses assembled over the years as income properties by one owner.

“Towson University is just adjacent to the property, so he bought them up as investments to rent out to college students, but as he got older and the houses got older he decided to sell,” said Baum.

The houses had been over-rented and rundown and community residents had attempted to persuade city code enforcement officials to enforce the zoning law and reduce the number of residents in each house.

The Bob Ward Cos. purchased the entire LEED-certified, mixed-use development on 4.6 acres owned by the University of Baltimore in the heart of the city’s Mount Vernon cultural district, within walking distance of a light-rail station.

The Fitzgerald, which offers 275 luxury apartments, 24,000 sq. ft. of street-level retail and a 1,245-space public parking garage, welcomed its first residents in June 2010 and celebrated its grand opening in October. The project is a joint venture of The Bozzuto Group, Gould Property Company, NYSTRS and former Baltimore Raven Michael McCrary.

Right company
Bozzuto took control of the Towson Green site in 2006 and began working to entitle a redesigned plan, but when the market crashed in 2008, the project was placed on the back burner.

“We recognized the market wasn’t quite right, so we stayed with the property, but didn’t push forward too aggressively until about a year and a half ago, when we started pursuing the public approvals. We went in earnest on our approval process, got it approved, secured financing in November and closed on the deal in January,” said Baum.

Financing for the project included a $5.3 million ADC loan (acquisition, development and construction) and a construction loan, both from M&T Bank.

“If you follow the national building headlines and lists of concerns, there has been a chronic shortage of ADC loans, meaning the banks don’t want to lend on raw land pre-development and that has really stymied the building industry being able to put out new homes and generate jobs and so forth,” he said.

He believes Bozzuto’s reputation, built up over 23 years, and a diversified balance sheet across multiple real estate sectors–homebuilding and apartment management, construction and development–convinced the bank to underwrite the loan.

Moreover, Bozzuto has several other loans with M&T. One is Shipley’s Grant in Ellicott City, where the company has been selling entry- and mid-level townhomes. “We’ve sold 120 so far in the past three years. So, based on the pro-forma of Towson Green and our ability to perform on these other projects, the bank felt comfortable moving forward with us on this deal,” said Baum.

To help the project pencil out, Bozzuto sold a two-acre piece of the property to affordable housing developer Shelter Group, which is building a $10 million, 90-bed assisted living facility and parking lot with 45 spaces there. That community is projected to open in 2012.

“We were able to lower our cost basis on the entire property and, because the assisted living has a different zoning classification, we didn’t lose that much density,” Baum said.

Special features
Bozzuto specializes in creating flexible open plans that can be tailored to individual purchasers’desires. Towson Green townhomes offer four different floor plans that include a fourth level that opens onto an outdoor patio, which could be transformed into a bedroom suite that would add an additional 300 sq. ft. to the home.

Bozzuto has successfully employed the design concept at projects like Bozzuto Maple Lawn, where the company first coined the term “towndominium” to describe its forsale townhome development style.

Each Towson Green home is Energy Star rated and green features are aimed at reducing homeowners’ utility bills.

Amenities include a tot lot, a dog walking area and a pocket park complete with walkways and benches. The centerpiece of the pocket park and the project is a rain garden–a bio-retention area consisting of aquatic plantings that will filter storm water runoff.

Bozzuto is partnering with the Chesapeake Fund, a non-profit organization that works to reduce the amount of the Chesapeake Bay’s two biggest pollutants–nitrogen and phosphorous–flowing into local streams and waterways by evaluating a development’s output and mitigation efforts and providing design recommendations and eco-friendly landscape advice.

“We partnered with the Chesapeake Fund to figure out a way to significantly reduce nitrogen emissions from our site and one of those tools became the rain garden. We are using it as a collection system to help leach out the nitrogen in the water before it makes its way to the bay,” said Baum.

The park and rain garden use natural plantings that don’t require much water, mowing or maintenance.