As new housing construction sinks to record lows across Massachusetts, a few national giants are grabbing an increasingly larger share of a shrinking market.
Homebuilders Pulte and Toll Brothers and mega apartment builder Avalon Bay have established a significant and growing presence here, emerging stronger than ever after a recession that sunk many smaller, local builders.
Not long ago little-known entities around here, the trio of major builders has rolled out dozens of major condo, single-family home and apartment projects over the past decade or so, with more on the way.
The success of the publicly traded home builders comes at a time when new home construction is scraping bottom in Massachusetts, with the number of building permits issued each year having hit record lows.
Yet the rise of the giant home and apartment builders here in the Bay State may actually be a mixed blessing for state’s troubled housing market.
In fact, the rise of the mega builders is a reflection of the messed up way we approach new housing development here in Massachusetts, with only builders with deep pockets able to bankroll their way through the NIMBY-dominated permitting process.
“Massachusetts is historically at the bottom of the barrel among states in housing starts,” said John Smolak, a real estate development attorney who serves on the board of directors of the Massachusetts Association of Home Builders. “That has been an historical trend and I don’t see that changing.”
A quick look at a map of Massachusetts, especially the eastern half of the state, is revealing, with more than 50 developments open or under construction by Pulte, Toll Brothers and Avalon Bay.
On the ground here since the 1990s, Avalon Bay has amassed the largest local portfolio, with more than 34 upscale rental projects, from the newly opened Natick complex to a new tower under construction at the Prudential Center in Boston.
Pulte and Toll have been doing business for years in Massachusetts, but have started to gain significant traction over the past few years.
The two big developers are now seeking buyers for new town homes, condo and single-family homes in 16 new developments scattered across Greater Boston.
Most are targeted at upscale buyers and renters.
Toll recently just rolled out plans to build half-a-million dollar homes in Methuen and is seeking buyers for $800,000 addresses in Cohasset. Pulte has just about sold out its South Natick Hills townhome community, featuring units $300,000 and up and is now looking to drum up interest in its $600,000-plus Legacy Farms homes in Hopkinton.
Let’s do some rough math here. If each project averages about 200 units, and that’s probably an undercount, those 50 developments probably account for as many as 10,000 homes, condos and apartments.
Let’s Not Get Picky
In a state starved for new housing, and which has seen an average of just 5,000 homes built over the past few years, we can’t really afford to get too picky about who’s building it.
However, as the big developers gobble up land and building sites, the little and mid-sized builders are finding it harder to compete.
In fact, many smaller builders and contractors simply vanished during the recession, either moving out of state to greener pastures, quitting to work for larger developers, or moving on to other lines of work, notes Tom DiPlacido, a long-time Wrentham-based home builder.
It can take three years to get a 50-home or condo project approved by local officials in various Massachusetts towns, a long stretch in which a builder has to draw upon his own savings and capital, he noted.
No bank in the world will lend money for the innumerable architectural drawings, engineering and traffic studies and legal fees that builders too often have to shoulder in order to please various, part-time petty bureaucrats on the local planning, health or conservation boards.
It can cost hundreds of thousands, even millions of dollars in such “soft costs” before a builder can get permits to start construction. And that’s if things don’t take a wrong turn and the plan gets rejected or mangled, a potential disaster for a small builder.
“It’s a roll of the dice that a lot of small builders just won’t chance anymore,” DiPlacido said.
But that’s walking around money to the national housing developers, who build in such costs in their planning and have hundreds of millions of cash reserves and loans to draw upon.
Toll Brothers just inked a $1 billion revolving credit facility with its lenders, with the ability to take out up to $2 billion. Now that’s quite a generous corporate credit card.
Meanwhile, Avalon Bay is ramping up the number of new apartment developments in its pipeline across the country, expecting to have $3.5 billion in new projects by next year. No worries about paying for traffic studies there.
Yet we can’t have a housing market – or at least a half healthy one – in which only a few, multibillion dollar players can effectively compete.
Having spent a small fortune to get their permits, the big housing developers have a vested interest in ensuring that new construction does not flood the market.
It’s the old “barriers to entry” racket that has proven so profitable for deep-pocketed companies able to corner highly profitable but hard-to-build-in markets, whether it is homes or office towers we are talking about.
We need more than just a few big builders out there, calling all the shots.
More builders mean more competition and more housing getting built.
And when it comes to corralling our crazy housing costs here in Massachusetts, only more new housing – and lots of it – will do the trick.
Scott Van Voorhis can be reached at sbvanvoorhis@hotmail.com.
