While the metro-area housing market appears poised to improve in 2013, at least one big problem looms on the horizon. A lack of developable lots may suffocate new home construction, according to Wally Remmers, vice president of Arbor Custom Homes.

“The lot shortage is very real,” he said. “I’ve been in the industry a long time and I’ve never seen anything like this … We’ll be in the situation over the next 12 to 24 months where there won’t be enough lots for the amount of buyers that will be in our market.”

The simple reason is that no one has developed land for home construction because of the recession. Remmers said that when the economy fell apart, much of the land went to banks. Over the past few years, banks have sold that land to developers at significant discounts, and builders have added housing.

Now, little exists for new construction.

“That’s actually a subject of considerable concern for us,” said Jon Chandler, CEO of the Oregon Home Builders Association. “There’s not much in the pipeline in any place in the state … the foreclosed inventory has been burned through, not much has happened since and the banks are not lending money. So we’re kind of stuck.”

Chandler said that even if development were to start today, the process to secure necessary permits and entitlements could last two years. And while banks have begun lending for home construction, they still believe land development is too risky.

John Satterberg, president of Community Financial Corp., a financial institution specializing in construction and land development, said he is aware of the looming lot shortage. Community Financial has made several development loans over the past year and Satterberg said money is available for the right place, the right borrowers and the right product.

“Single-family houses are selling like hotcakes,” he said. “We’re seeing multiple offers … 60 days prior to (construction) completion. It’s a really good market right now.”

With that said, Community Financial prefers to make loans to builder-developers rather than parties looking to develop lots on spec. Developers should come to the loan table with at least 20 percent cash in hand, he said.

The lot shortage shouldn’t be a problem for Arbor Custom Homes. The company is in the process of acquiring entitlements for 700 new units in the North Bethany area – an undeveloped neighborhood with a master plan adopted by Washington County. Arbor hopes to break ground in May or June 2013 on developments that include 125 single-family homes, 131 townhomes and 420 condominiums or apartments.

The company presently is developing 335 units in the Arbor Oaks neighborhood. The company has already built and sold 300 homes there, and Remmers said demand is growing by leaps and bounds.
In 2011, the company sold 30 homes in Arbor Oaks. In 2012, it sold 120.

“The difference is, in 2012 I could have sold way more than that,” Remmers said. “I just didn’t have them. I didn’t have the lots.”

Remmers said that while the company projected 350 starts for single-family homes and apartments in 2012, it has started 372 – the most since 2008. All of those homes have been sold and now the company is fervently pushing dirt to make room for more.

Arbor’s new homes will be priced between $150,000 and $500,000. Remmers said he looked forward to introducing affordable homes to the area, while maintaining its focus on luxury living.
Arbor has streamlined development in Washington County, where it sees the most opportunity for growth – especially with Nike and Intel expanding. As a result, Remmers said, Arbor has reduced its debt and increased relationships with lenders. That promises to keep the company and its vendors busy over the next year.

But for companies that don’t possess land or the ability to put a significant down payment on a loan, 2013 could be a tough year, according to Remmers.

“Banks will loan on buying a new house, or a builder to build a new house, but they don’t want to loan on land development,” he said. “It’s too risky and they’re not there yet.”

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As the person in charge of land acquisition and project planning for Oregon-grown home builder , Wally Remmers, the company’s co-founder and vice president, needs to keep a close eye on the residential real estate market.

Right now, his eye is on the North Bethany area.

“We’re really refocusing on concentrating our growth and our development into the Washington County areas now,” Remmers said. “The combination of great schools, good land holdings that we have and all the job growth that’s in Washington County, it’s just been a good situation for us and one of the reasons we’re focusing on it.”

To help narrow that focus, Arbor announced in December that it was selling much of its surplus properties – in areas like Wilsonville, West Linn, Sunnyside, Tigard and Tualatin – to two of its competitors, and .

Remmers said the company has 2,600 lots in Washington County: Construction is under way on a group of 500 lots, two groups will be released to the market early in 2012 and work is expected to start on four more groups next summer. Arbor also plans to build 193 luxury apartments in North Bethany next year.

The plan is aggressive, considering the general state of the industry.

Prices drop, sales increase

According to the S&P/Case-Shiller Home Price Indices – a leading measure of U.S. home prices – 19 of the 20 metropolitan cities covered saw home prices decrease from September to October 2011. In the Portland-metro area, values dropped 0.5 percent in October and were down 4.7 from a year ago.

Additionally, Portland State University’s Center for Real Estate third-quarter housing report found that the median sales price of homes in the Portland area had declined 6.1 percent from September 2010 to $222,500.

But while prices across the board are down, activity is up.

PSU’s quarterly report also found that the number of transactions in the Portland-metro area had increased 14.8 percent over the year, while the United States Department of Commerce reported that new residential sales across the nation were up 8.9 percent from October 2010. Commerce also reported that housing starts were up 24.3 percent from November 2010, and that the national market was sitting on a six-month supply of inventory.

For Remmers, that’s a clear signal that it’s time to get busy.

“The real significant thing in this market is that we’re sitting on a six-month supply of inventory and we’ve been there for some time,” he said. “That’s down significantly from what it was at one point in time.”

Remmers said a six-month housing supply represents a good market balance for buyers and sellers. Adding to that mix, he said, is the fact that the glut of foreclosed and distressed homes was also starting to thin out – foreclosure filings in Oregon decreased 36.6 percent from September 2010, according to PSU’s housing report.

The land crunch

Compounding all of that is a looming land shortage that Remmers believes will hit the Portland market late in 2012.

“It’s going to be an interesting time coming up here because when you say you want to do a subdivision, you don’t just walk out there and start pushing dirt around,” Remmers said of the lengthy application process that precludes any potential housing community. “It’s going to take a while to bring land to the market, even when people decide to do it, and there’s not a lot of movement, there’s not a lot of applications being submitted for new subdivisions, even yet.”

Remmers said the land shortage is because few developers were able to secure financing this year.

He said Arbor hasn’t had that problem, but it has felt the pinch.

When the recession hit, the company went from selling as many as 850 homes in 2005 to as few as 217 homes in 2010. The company responded by shrinking its operation, which allowed it to cut expenses and pay off debt.

Remmers said Arbor’s ability to stay nimble has given it an advantage over larger, slower-moving, publicly traded companies and has helped it maintain access to financing.

“I think that helped us a lot back in the boom years when things were really starting to expand and I think it’s helped us to shrink as well,” he said.

Another change the company has had to make is in the way it markets and sells its homes.

Whereas 80 percent of its business formerly came from plans and specs that people ordered after walking through model homes, 80 percent now comes from spec homes, in which the company makes the decisions about things like carpet color, countertop material and the type of window blinds. Remmers said he thinks that trend represents consumers’ general nervousness about the housing market.

“People want to see it, they want to buy it and they want to get a loan on it right now,” he said.

At least, that’s the company’s hope, and it’s gearing up for the crunch.

“There just isn’t going to be the supply out there where the buyers can shop and take their time and dicker,” he said. “They’re going to start seeing houses selling out from under them. They’re going to start seeing multiple offers coming in on houses. That’s going to change the dynamics of the business.”

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If you go

What: Five Earth Advantage-certified homes priced between $700,000 and $950,000 showcasing the industry’s newest technologies and sustainable products. The houses were built by Arbor Custom Homes, Brentwood Homes, Pahlisch Homes, Steel Creek Homes and Dreambuilder Custom Homes.

Where: In Brentwood Estates, atop Bull Mountain in Tigard. Parking is available off of Southwest Bull Mountain Road, near 144th Avenue.

When: Aug. 6-28; open daily from 11 a.m. to 8 p.m.

Price: General admission is $12; children age 10 and under get in free.

More information: .

For most people, ownership of one of the homes featured in the NW Natural Street of Dreams has naturally been only a dream.

But a focus this year on affordability and sustainability is opening the market to more potential buyers.

According to project officials, this year’s event is a response to market conditions. The five homes, on top of Bull Mountain in Tigard, are about half the size and half the price of homes built for past events. The strategy is paying off: One of the homes sold a few weeks before the event even starts.

“We want people to be wowed like always,” said Phillip Pahlisch, regional director of Pahlisch Homes, one of the builders in this year’s event. “But we also want people to see some of these features and actually feel like they could be a part of their home.”

Hallie Gentry, director of shows for the Home Builders Association of Metropolitan Portland, said this year’s event focuses on using space efficiently and incorporating technology and sustainable features. Homes this year average 4,000 square feet and range from $700,000 to $950,000; in past years, homes were as large as 12,000 square feet and ranged from $1 million to $2.6 million, she said.

“It’s about following the trends in the current economic times,” she said.

Each of the five homes has a theme. These range from Paula Deen’s Northwest Retreat to one with a French country design that, if purchased, comes with a trip for two to France.

This year, each property also has a themed accessory dwelling unit – detached living spaces that have become popular in the Portland area during the last few years. The ADU themes include an office, a media/entertainment room, a “man cave,” a bride-to-be suite and an ADA-accessible living unit.

Each builder has different reasons for participating in the Street of Dreams. While Pahlisch is promoting its return to the Portland area after building in Central Oregon and Washington since 2001, longtime Portland builder Arbor Custom Homes is showcasing its range.

“It’s our first time and we see it as an opportunity for us to get the work out about the diversity and quality of what we offer,” said Brad Hosmar, Arbor’s chief operating officer. “Plus, we get our stuff in front of 45,000 people during a down economy.”

Arbor’s home has bells and whistles – including an electric vehicle charging station, and an energy efficiency and security system that can be controlled by an iPad or smartphone.

For Tigard-based Dreambuilder Custom Homes, the pricing and location was right this year, according to President Tim Walker.

“We’ve had a lot of interest in the company over the past 18 months and we just felt like this year seemed like the right fit to show off what we do,” Walker said. “It’s a Northwest contemporary home with a clean feel. It was built by the same team I always use, so it’s a good example of what we can do here in town.”

As for Portland-based Steel Creek Homes, President Dave Hall said the company decided to participate only because the opportunity presented itself and would yield promotional potential. But as Hall was preparing to insulate the house two weeks ago, some folks looking around the neighborhood fell in love with it.

“They wanted a few things different than the original plan, so I told them if we get a good deal in place I would do it,” Hall said. “They jumped on the opportunity. It’s the best house on the block – the only one that has already sold.”

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Residential builders in Oregon are facing a mid-year reality check as sales fall short of optimistic projections made at the beginning of 2011.

Many local builders say they’ve been forced to shift their business plans in response to the flagging numbers, and are turning to layoffs, lower construction projections, and adjusted design schemes to keep their companies afloat.

“Generally, 2011 hasn’t blown our socks off,” said Brad Hosmar, chief operations officer at Beaverton-based Arbor Custom Homes. In January, Arbor had hoped to build 350 homes in 2011. The way it looks now, though, Hosmar thinks the number will end up closer to 250.

Nationally, residential construction is actually rising after several years of dismal numbers, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development announced last week. But the numbers are still relatively low, and the trend has not yet boosted builder or buyer confidence.

Still, builders are trying to focus on whatever silver linings they can find.

“The good news is that we’re still selling,” Hosmar said. With 30 homes sold in May, Arbor’s home sales are slightly ahead of their 2010 pace. “We had our best May in a couple of years.”

If employment numbers improve, Hosmar hopes consumer confidence in home buying will follow.

“There’s just no confidence that now is a good time to buy,” he said.

Builder confidence is also on the decline for the first time in six months, the National Association of Home Builders reported last week. For 20 years, the NAHB has been conducting a monthly survey gauging builder perceptions of current single-family home sales and future sales expectations. In June, every component on their survey fell.

“Typically, housing leads the way out of recessions, but this one just seems to go on and on and on,” said Jim Chapman, president of Legend Homes. “We haven’t seen the fear factor go away.”

In a typical year, Legend Homes would be building more than 400 homes, but this year the company will be in the range of 65, Chapman said. The drop off in home sales led to a difficult round of layoffs at Legend, Chapman said. Eight people were recently laid off at Legend, leaving the company with a staff of 18.

“We kept people around consciously because we valued them, but the reality is that it may be a long time – two years or better – before we get back to the point where we need that level of staff,” he said. “We’ve been smaller in the past, and we’ll be bigger in the future at some point.”

Legend’s most active property is the Villebois development of single-family homes in Wilsonville.

“There will always be people who would rather buy a new home than a used home, people who just don’t want someone else’s fingernail clippings in their carpet,” Chapman said. “We’re meeting a need. Right now there’s not much of a need, but that’s where we are.”

Residential builders across the country are trying to come up with business plans that will accommodate the current market.

“Essentially what’s going on is that builders who are financially able to produce a product at a much lower price are still doing that at a bit of a profit. Those who don’t see opportunities to make any money when building have quit building houses. They’re either remodeling or taking time off,” said Chapman. “We have revalued our land so that we’re able to build homes that we can find a buyer for.”

Arbor responded to the slow market by scaling down the amenities and square-footage of the homes they were building last year. But Hosmar said he has come to realize that even in a slow economy, his clients don’t want to buy smaller homes with more basic fixtures.

“People are still willing to pay for quality, so we’ve added some of the base amenities back into our homes to offer a higher quality product, and that resonates,” he said. “So what we’re doing is actually larger in scale than the stuff we were doing last year.”

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The Northwest District Association is worried about what may happen on Northwest Flanders Street in Portland. A developer has plans to construct a 26-unit apartment building where a 116-year-old home now sits. But residents aren’t concerned only about the potential loss of history, but also how such projects could change the face of the Alphabet District.

“Our street has a salt and pepper mix of old homes; ours was built in 1885,” said Joy Strand, who lives two lots from the proposed project site at 2124 N.W. Flanders St. with her husband, Daniel Anderson. “I hate to see that mix changing. I hate to see the street changing character and those homes going away.”

Anderson said he understands that demand is increasing for multifamily development in close-in areas like the Alphabet District, which has a high-density residential zoning designation that allows such development. However, Anderson and other residents hope the city’s Historic Landmarks Commission will protect their neighborhood’s character.

The multifamily project is being developed by Creston Homes on a property that Dennis Sackhoff, Arbor Custom Homes‘ president and CEO, has owned and operated as a rental since 2007. Sackhoff and architecture and engineering firm Otak presented a design for a 28-unit apartment building at an HLC meeting in December. After the initial design drew opposition at that meeting, the developer engaged Myhre Group Architects to provide a new design.

The new design was more favorably received by the HLC, and the project team plans to move ahead with few modifications. The architects took care to show that the building would fit with the Alphabet District’s historic character. This design is for a 26-unit apartment building that would occupy most of the 5,000-square-foot lot’s footprint, with walls closer to the property line than code allows.

Project team members have not submitted designs to be reviewed by the city, but they did ask the HLC for advice at a Monday afternoon hearing. Of particular concern was the modified setback line the design would require. To comply with the existing code, the building would need to be much smaller, the designer said.

“When you take 14 feet on either side you end up with a relatively small developable area, if indeed you develop to the full height that the base code allows,” said Don Sowieja of Myhre Group Architects. “(The reduced setback) seemed appropriate not only from a purely development standpoint but also from a historic standpoint.”

Residents noted that the new design would create a space of 5 feet or less between the new building and the historic ones on both sides. That would “jeopardize the livability of the adjacent historic buildings,” said Donald Genasci, a member of the Northwest District Association. “This is not a sensitive incorporation of a new building,” he added.

Sowieja, however, said that many of the neighborhood’s historic buildings are closely packed. He rejected concerns about the lack of sunlight and privacy that would result from buildings being so close together.

“I believe the neighbors oppose the project because they think it will encourage more development in the district, which I believe they oppose,” Sowieja said.

Few obstacles would prevent demolition of the existing home because it was not listed as a “contributing” building on the inventory of historic buildings in the Alphabet District, though some people say it’s worth saving.

“Under the ugly asbestos shingles is a lovely building built in 1895,” Genasci said.

Residents are most concerned about the pattern that could develop if the setback code were ignored for the project at 2124 N.W. Flanders St.

“Unless the houses are protected through the historic district, you’re going to see a huge turnover of single-family houses turning into multistory flats,” Genasci said.

But Sowieja asked the HLC on Monday, “Is there any way for an applicant to have any certainty regarding the precedent concern prior to submitting and going through the entire process? If a particular project is being evaluated not on its design merits but its role in the district and the precedent that might set, that seems different than complying with the code.”

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The forecast for single-home construction this year is grim. Some predict the fewest new home sales since the mid 1960s. Home prices and new home inventory have dropped in postrecession years for the first time since World War II.

But of Beaverton is optimistic.

After building nearly 275 homes in 2010, Arbor plans to approach 350 this year, near the company’s annual average through its 22-year history.

“We truly feel that we’ve hit bottom with all of this and are starting to get a better perspective of what’s going to happen moving forward,” said Brad Golik, a spokesman for Arbor, the area’s largest home builder based locally. “We aren’t going to build 800 homes, which is our record for a year, but there are definitely some opportunities out there.”

The biggest impetus, for the company’s increased production, according to Golik, is because of greater prospects for new jobs near some of the company’s property. He said workers are starting to return to full-time employment and receive bonuses – actions that can influence home-buying decisions.

“Job creation is a factor in this as well, due to the new Intel (fabrication) plant that is expected to bring a lot of new jobs to the area,” he said. “Our niche has always been the Sunset Corridor, so we believe that if we can get some projects moving now we can meet that demand.”

The new plant at Intel’s Hillsboro campus is expected to lead to the creation of 1,000 permanent high-tech jobs with an average annual salary of $120,000, according to Intel. Golik said Arbor has a good relationship with Intel and hopes to help meet housing demand.

Another reason Arbor is building more homes this year is because it acquired several bank-owned sites over the last few years. Two are Indigo Ridge at Cooper Mountain in unincorporated Washington County and Ridge Crest in Happy Valley.

“We have good relationships with a few of the banks so we’ve acquired sites from them as well as signing on to be the builder for the bank to build out other bank-owned developments,” he said.

While other builders are moving forward with new developments, none are doing so at the same rate as Arbor. Randy Sebastian, president of Renaissance Homes, plans to build 150 homes this year, significantly fewer than the 300-350 average of years past. He said the production decrease allows his company to be profitable and not excessively leveraged.

Rudy Kadlub, CEO of Costa Pacific Communities, in September 2010 announced that his company was planning on turning out 35 homes in the Villebois community in Wilsonville by early 2011. But after a dismal autumn, he now says there is no timeline to finish the homes.

“We have about six homes for sale right now and we aren’t going to start building new homes until we sell about half of those,” Kadlub said. “We still have the land, and we think things will get better, but after (the) fall we aren’t going to go forward with them now.”

Despite poor housing numbers through the fall and into winter, Golik said Arbor is confident moving forward.

“We have 21 different neighborhoods and we plan to turn out three next year, starting with Trillium Woods in Lake Oswego in January,” Golik said. “Things aren’t great, but they are going to get better.”

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