Home Builders Venture Into Urban Areas

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Home Builders Venture Into Urban Areas
July 29, 2014 3:54 p.m. ET

A top executive of Lennar Corp. recently joined with officials from Weehawken, N.J., to celebrate the completion of the home builder’s newest condominium complex, a luxury building across the Hudson River from New York City.

The 74-unit building—which will feature hotel-like amenities, including concierge services, a lobby lounge with a fireplace, gyms and yoga rooms, gathering areas and catering kitchen—is the first of a five-building, 660-unit master-planned community in Weehawken called the Avenue Collection. Condos at the first building range in price from $1.1 million to $2 million. Construction of a second tower with 103 luxury condo units is under way.

The nation’s second-largest home builder by revenue may be better known for $300,000 single-family homes. But in 2011, the company branched out into the rental market and has since increased its investments.

The Miami-based company’s multifamily division has spent about $1 billion to develop 18 apartment communities nationwide, 13 of which are still under construction. What’s more, according to a July report by Zacks Investment Research, Lennar is planning to spend $3 billion to build 12,000 apartments over the next four years.

Ten years ago, it was rare for a national home builder to venture into the condo and apartment market or to build in or near big cities, preferring to construct single-family homes for middle-class families in suburbia. But as demand increases for luxury condos in or near urban areas, national home builders are chasing those affluent buyers and their dollars.

Craig Klingensmith, Lennar’s Northeast division president, credits global buyers and Manhattan’s resurgent real-estate prices for interest in Lennar’s new luxury buildings in New Jersey. Lennar bought the Avenue Collection properties in 2008, but it first tested the waters, building 35 new luxury units in 2011 at its other master-planned condo community in Weehawken, Henley on the Hudson. “We sold that building relatively quickly, and it gave us confidence to start on the Avenue [Collection] project,” he said.

Lennar and other builders have said that their core business remains focused on the single-family suburban home, but they are ramping up their presence in the multifamily sector.

Toll Brothers Inc., the 13th-largest home builder and one of the first national builders that turned to condos and apartment buildings, reported that revenue from its multifamily and high-rise tower businesses was more than 20% of the company’s total sales last year, up from less than 3% in 2000. And with more than 4,000 units in the pipeline—from new rentals in suburbia, urban high-rises and high-density student housing—the company is diversifying across the market.

“We are currently looking to expand our urban for-sale business into Boston, San Francisco and Miami,” said Fred Cooper, a senior vice president. “We’ve also been expanding our high-end rental business in both suburban and urban markets in the Boston to D.C. corridor and are exploring the metro San Francisco area as well.”

At Lennar, multifamily revenue accounted for only $14.7 million of $5.93 billion of total revenue last year. That revenue is expected to increase as its projects are completed in the next year, according to Zacks Investment Research, which notes that Lennar’s multifamily revenue in the second quarter climbed 51% over the year-ago period.

Beyond Lennar and Toll, other national home builders expanding into the multifamily market include KB Home, PulteGroup Inc. and Hovnanian Enterprises Inc.

Of the $331 billion spent last year to build new housing, multifamily construction accounted for $32 billion, or 9.6%, compared with $15 billion, or 6.1%, in 2011, according to the National Association of Home Builders.

And that percentage is increasing. Housing consultant IBISWorld Inc. estimates that by the end of this year, construction of new condo and apartment buildings will have increased at an annual average rate of 28% since 2009.

During that same period, construction of single-family homes is estimated to have risen 14%.

“Many traditional home-building firms, enticed by these high growth rates, have diversified their operations into multiunit construction in order to expand their revenue,” said Omar Khedr, research analyst at IBISWorld.

In the West, particularly California, IBISWorld estimates that the number of new apartments and condos under construction rose faster than anywhere else, increasing 47% in 2012 and 20% in 2013.

And much of the construction is happening in or near cities. “The suburban markets aren’t seeing the same interest in spec-house development that we saw” a decade ago during the housing boom, says Jonathan Miller, president of real-estate consultant Miller Samuel Inc.

Last September, Los Angeles-based KB Home entered San Francisco with plans to build its first condo there, a 74-unit luxury midrise building. Then in April, the company bought more property there to build 81 luxury units. Those two properties are among KB’s nine new multifamily condo communities, almost all of which it began building last year and mostly in California.

“These land-constrained areas are close to employment centers where demand for new housing far outweighs supply,” said KB Home CEO Jeffrey Mezger. Mr. Mezger said those dynamics are translating into prices for new homes that “are well above local market averages.”

Write to Max Taves at max.taves@wsj.com

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