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Infill in the Marketplace: Alternatives to Sprawl

By Tom Sargent
On The Ground
Vol. 1, No. 1, Fall 1994

People all over the country want to stop suburban sprawl. They pack public meetings—now forums for community grieving. In meeting after meeting individuals, who have no interest in professional planning or design, step to the podium to describe their deep sense of loss for the unique identity of the places where they live. The emotional response is to stop growth. The counter-reaction from the development community ends everyone up in the courts. Yet, stopping the growth of a city or town is unnecessary and, in fact, economically unhealthy. The issue is not growth, but where and how growth is taking place.

THE BIG PICTURE SOLUTION

The conceptual solution to sprawl is relatively simple—establish an urban limit line or "growth boundary" with an open space reserve beyond, reinvest in the older and often overlooked neighborhoods, commercial districts and downtowns, and force new development at the edges to be more compact and pedestrian oriented. The relationship between infill, reinvestment and urban limit lines is important. Infill tells us how to grow within an urban boundary. Urban growth boundaries reduce the easier development alternatives on open land and capture the value of existing infrastructure.

Despite the interest and growing political support, infill development continues to represent a negligible percentage of construction in the U.S. Most of the infill taking place today is in the affordable housing sector where low income investment tax credits and Community Reinvestment Act financing fuel an expansion of multifamily construction. The challenge from a regional and environmental perspective is how to create infill that is market rate and a viable alternative to suburban sprawl.

The next sections of this article review the three components to creating a viable infill marketplace. The first section outlines the changing nature of the housing consumer and home ownership. The second section focuses on the housing supply, outlining developers' risks and investment decisions associated with suburban and infill development. The final section describes how the consumer and supplier dynamics overlap and the role that local governments can play in affecting these dynamics to increase the volume of infill construction, redirecting growth to existing urban areas.

THE CHANGING CONSUMER

After World War II, mass production of suburban housing and related marketing campaigns spurred the consumer preference for single-family detached homes. Traditional nuclear families represented the majority of the market. However, changes in demographics and a rapidly diversifying population are changing the nature of a "household." There is increasing demand for housing in smaller niche markets with distinctly different needs than those of the traditional nuclear family (working dad, stay-at-home mom)—now less than a quarter of all households. Single parent families now represent more than 10% of all households. The average size of a household had shrunk to 2.6 people by 1989, and single person households now account for a quarter of the total. Longer life expectancies also mean a larger aging population (see chart 1).

CHART 1
Chart 1

All these changes are also leading to interest in alternative lifestyles and changing mechanisms for home ownership. Historically, consumers have expected to buy homes, with about two-thirds of Americans owning their own homes, twice the rate of home ownership of France, Germany or Great Britain. Yet in the 1970s, the median price of a home began to exceed what the evolving median household could afford. Increasing home prices, in conjunction with new demographic patterns, may explain some of the interest in new forms of shared housing.

Yet these growing segments of the market remain largely ignored by the development community. Nationally, while the number of people per household has shrunk, the average home has increased in size by almost 50% since 1 970— from 1400 square feet (s.f.) to almost 2100 s.f.. In California for the last two decades, the suburban housing industry has been building increasingly larger homes (20% increase in the last decade) at less affordable prices (70% increase since 1980) for smaller households (2.7 people vs. 3.4 in 1970) at declining densities (5.8 units/gross acre vs. 6.7 in 1970).

A larger number of households comprised of singles, working parents and single parents, would indicate a demand for higher density, infill housing located close to services, jobs and transit. Increasingly it appears that there is an imbalance in the market, where too many large single-family homes in remote suburbs are being provided that serve an increasingly smaller segment of the market. Meanwhile, other segments of the market are being under-served.

DEVELOPERS' ECONOMICS

The entire building industry is institutionalized to support sprawl forms of development and make most infill unattractive as an investment. Suburban builders are generally large corporations backed by Wall Street securities and national sources of financing. Suburban developers make money by building large quantities of houses on large tracts of open land with fewer risks than infill developers. In a suburban setting, the developer only needs to design and build several "model" homes, then can wait and build additional homes—500 or more in some subdivisions—as they are sold off the "models." Further, the suburban developer will not have to contend with any neighbors who disapprove of the project and will likely not have any site contamination or demolition requirements.

An infill developer, by contrast, has to build all the units at once, finish on schedule, and hope to sell the units as soon as possible after they are built to avoid carrying the cost of the whole development. The building process is slowed for the infill developer by neighborhood concerns, demolition and site preparation, and additional requirements that stem from the urban setting (structured parking, code requirements and other requirements ). In addressing neighborhood concerns in particular, the war stories from developers who have built infill projects are legendary. Even developers with the best intentions for creating better neighborhoods can become outcasts just for proposing change.

TABLE 1

DEVELOPMENT COST COMPARISON

Development Costs (per FAR* s.f) Infill Sprawl
Land $15-20+ $8-12
Site Preparation $5-10+
(Toxics!)
$5-10+
(Infrastructure!)
Hard Costs: Construction
(wood frame only)
$60-65 $45-55
Parking
(infill-structured;
sprawl-included above)
$15-18 $0
Soft Costs
(40% of hard costs—
includes permits,
architectural fees/engineering, etc.)
$32-37 $20-26
Contingency (5%) $6-7 $4-5
Subtotal $133-157 $82-108
Profit (15%) $20-23 $12-16
Marketing $10-11 $6-8
Total Cost $163-191/s.f. $100-132/s.f.
Prototypes  
 
1600 s.f. unit $260,000-
$305,000
$160,000-
$211,000
1100 s.f. unit $179,000-$210,000  
*Floor Area Ratio (FAR) square foot (s.f.)  
 
Typically, infill developers are working on small projects that require the same or more architectural and engineering services as large scale suburban projects. Moreover, since infill developers are most often building attached, or multifamily dwellings, they incur additional costs and risks associated with this building form. Design requirements to meet the American Disability Act, energy efficient standards and other codes, while necessary and appropriate, are usually more stringent, and therefore more expensive, for multifamily dwellings. Insurance companies refuse to insure, or place high premiums on, some forms of developer's liability coverage for condominiums and other forms of high-density residential development. The secondary market (Fannie Mae, Freddie Mac, etc.) sets the underwriting standards for most loans, and these quasi-public institutions are disinclined towards condominiums, townhouses, live-work, co-ops, co-housing and other forms of higher density living.

It is difficult to convince an investor that all these risks associated with high-density and mixed-use development can be contained.

WHEN DEVELOPERS MEET CONSUMERS IN THE MARKETPLACE

The economics from a developer's perspective remain overwhelmingly in favor of sprawl, and may explain why the supply-driven housing production system ignores new markets. Housing suppliers assume that the market will choose the larger house, and the cost per square foot of house is simply less in suburban locations, as indicated in Table 1. The table provides a thumbnail sketch of the development cost difference between market rate infill and suburban housing. A buyer with a slightly above median household income ($60,000) in the Bay area, according to standard underwriting criteria, can afford to purchase a home with a price ranging from $190,000 to $225,000, depending on interest rates, down payments and loan programs. The buying power of a prospective urban dweller is significantly less than that of a prospective suburban dweller, reflected in a smaller housing unit for the urban dweller While these costs are for the Bay area, the relationships are similar for most urban areas.

It is not actually clear that consumers would always choose the larger house despite possibly longer commutes and lack of nearby services, because there is little supply of comparably-priced infill housing available. In addition, most "affordable" programs are designed for detached single-family home mortgages. Of course, many other quality of life issues are involved in the purchase decision (perception of crime, schools, size of yards, proximity to work, etc.).

If infill housing allows consumers to choose more efficient and less expensive transportation options, then their house purchasing power is actually increased. Table 2 shows how reduced auto ownership could increase purchasing power and therefore size of infill housing, reducing the urban/suburban size differential from 500 s.f. to 300 s.f.. Lending programs that acknowledge consumer savings from "energy efficient" homes could be extended to "efficiently located" homes. Prospective home-buyers with only one car, or no cars, could enjoy increased buying power that would make it easier for them to choose the infill housing option. Neither energy efficient nor efficient location programs can actually enforce the behaviors they promote, but they can help home prices begin to reflect some of the social cost savings associated with those behaviors.
TABLE 2

TRANSPORTATION-RELATED SAVINGS

Monthly Savings from Efficient Location Inner Ring  Outer Ring 
Home Size for buyer w/$60,000 annual income ($20,000 down)  1100 s.f.  1600 s.f. 
Monthly Mortgage  $1,200  $1,200 
Monthly Commute Costs 
inner transit: $3.50/day 
outer freeway: 70 miles/day x $0.20/mile = $14/day 
$70  $280 
Actual Monthly Costs  $1,270  $1,480 
Annual savings for inner ring are $210 x 12 months, enough income to cover $36,000 additional mortgage or 200 more s.f. of house. 
LOCAL GOVERNMENTS

Local governments can encourage infill housing development by recognizing that most infill developers are small independent firms taking risks that are often not commensurate with the returns. At the same time they are fulfilling larger public objectives. Cheaper, unencumbered land will always be the focus of development activity despite overwhelming evidence of long-term public costs unless public agencies develop clear programs to direct development to areas within existing urban locations.

There are several general policies, aside from defining urban limit lines, that local governments can use to create a favorable climate for infill development. First, cities can target and map potential sites and districts where infill is needed or appropriate, and set quantifiable goals for the number of infill units desired for target areas. Those areas can then be rezoned for residential or light commercial uses that are compatible with residential infill. Cities can then provide design guidelines and desired infill prototypes for targeted districts.

Once local governments have targeted specific areas and numerical goals, they can facilitate developer and consumer roles in infill. For developers, governments can prepare performance codes that achieve the required performance (in energy, accessibility, parking, etc.) but allow for more flexibility in methods of achieving that performance. In addition, government can streamline entitlement/permit processes for smaller projects.

For consumers and the community, governments can offer education about the public benefits of infill and higher density housing. These benefits include increased property taxes generated by development improvements to property. In addition, cities can provide evidence (available) showing that higher density projects in many situations can improve property values.

Equally important are financial incentives for developing market rate infill projects and disincentive for sprawl development. Development fees can be set to strongly encourage infill and discourage sprawl, by making the differential fees for infill development drastically less. For instance, Lancaster, California has established a method of assigning development fees in expanding concentric circles out from the center of the downtown. Projects located within the close-in areas pay a minimal percentage of total fees—projects near the edge of the urbanized area pay maximum fees. A 50% to 75% reduction in fees for an infill unit in some Bay area communities could mean a reduction in development cost of $7,000 to $10,000 or more. This fee reduction would help even out the land cost differential between infill and outer-edge sprawl sites.

There are a number of other financial incentives, from land acquisition loans to infrastructure improvements, that local governments can establish for small developers and property owners who build infill projects in targeted areas. Some of these are listed below. Public agencies can also encourage local lending institutions to adjust underwriting criteria to be less restrictive for multifamily and higher density forms of development located in mixed-use neighborhoods.

CONCLUSION

While urban infill development may never occur on the same scale as suburban development does, there are a number of strategies that can encourage both consumers and developers to create a bigger market for infill. These strategies recognize that infill development provides social benefits that are not reflected in the price for creating infill and that prices for sprawl development do not reflect sprawl's social costs.

Tom Sargent is an urban planner, developer and a partner in Equity Community Builders of San Francisco. He specializes in infill development including new types of retail districts, small business incubators, alternative housing, and mixed-use projects. OTG provided research assistance for this article.

FINANCIAL INCENTIVES FOR INFILL
• Predevelopment grants and loans to explore project feasibility on tough sites. 
• Land acquisition and assemblage assistance. 
• Land acquisition write-downs and loans. 
• Advance loans against committed, but not funded, equity or debt. 
• Funding of developer reserves. 
• Loan guarantees. 
• Letter of credit to enhance developer’s ability to get a loan. 
• Publicly funded infrastructure or site improvements (streets, parks, utilities). 
• Rent subsidies for low-and moderate-income tenants. 
• Density bonuses. 
• Reduced development fees (as described above). 


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