This story appears in the December 28, 2014 issue of Forbes. Subscribe
By Stephane Fitch and Kristin Kloberdanz
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With their younger son off finishing college and their older one out on his own, Linda and Lee Sussman found their four-bedroom house near downtown Boca Raton, Fla. too quiet. But the couple, now in their mid-50s, didn't want to downsize to, say, a luxury condo. Instead, they sold the old house for $430,000 and moved last year into a $731,000 newly constructed home with a backyard pool overlooking the lake at Parkland Golf & Country Club in the northernmost reaches of Broward County.
"The backyard is phenomenal. We see water, wrapped by water all around. It's like being on a peninsula," marvels Linda, a retired art teacher who appreciates a good view. Sure, Lee, a golf-loving financial planner, has to drive an extra 7 miles each way to his office. But the supermarket is close by, and it's just a short stroll to the Parkland clubhouse, with its spa, restaurant, lounges, tennis courts, pools and fountains. "It feels like a Disney resort,'' Linda says. Get this: At 3,300 square feet, the empty nesters' new home is bigger than the one where they raised two sons.
"Nobody moves to a smaller house," crows Robert "Bob" Toll, the 73-year-old cofounder and executive chairman of luxury home builder
The suburbs, McMansions and Horsham, Pa.-based Toll Bros. are all staging a comeback. Bob and his younger brother, Bruce, started building homes in 1967 and were mass-producing luxury housing by the time they took Toll Bros. public in 1986. The company survived the housing bust with a 60% staff cut and $2 billion in writedowns. Now with excess inventory depleted and 130 home builders having disappeared, Toll and the other remaining players are enjoying a gale of resurgent demand.
Toll sold 5,300 luxury homes in its fiscal 2014 year ended Oct. 31--more McMansions spread over more states than any other U.S. builder. Customers typically get 3,000 to 7,000 feet of enclosed space on a lot that may be scarcely larger than that. After picking from models with names like Artisan, Tuscana, Wimpleton and Zinfandel, they spend thousands or even hundreds of thousands more on "custom" options--from higher-end
For 2014 analysts expect Toll to report $345 million in net earnings, or $1.87 per share, on sales of about $3.9 billion--more than twice 2012 revenues but still well off its $6 billion revenue peak in 2006. Toll's stock, which traded as low as $15 in 2011, is now back around $35.
Veteran independent housing analyst Ivy Zelman figures that if the recovery continues at its current pace, housing starts could approach their precrash annual average of 1.5 million a year by 2016. If that happens, Toll Bros.' revenues could again hit $6 billion, with profits doubling to $3.60 a share, she estimates.
"There's a huge pent-up demand for suburban housing," says Zelman, whose firm found in a survey of 3,000 consumers that owning a house in the suburbs remains a central part of the American dream, even after the housing crash. "They want the picket fence, the backyard, the community, the good schools--we don't think that's changed," she says. Zelman points out that official census data on household formation is always a year old and looks to the declining unemployment rate among Millennials (down to just over 8% after peaking at 14%) and their rising average age as evidence that the large generation born after 1980 will soon start forming more households and having kids--the usual trigger for a move to the suburbs.
Maybe they'll just rent? The average cost of renting began a steady rise in mid-2010, at a point when home prices were continuing to fall. As a result, on average, it's now less expensive to own a home in the U.S. than it is to rent the same one. Anyway, renting just isn't the American dream. In an Urban Land Institute survey last year, 69% of 18-to-35-year-olds who expect to move in the next five years said they planned to own their next home.
Talk of a suburban comeback is, of course, at odds with a large antisuburban chorus, which has been particularly loud since the housing bust. The suburbs didn't collapse simply because lax lending allowed too many folks to buy houses they couldn't afford, suburban skeptics say. Instead, they insist, other less-cyclical economic and demographic forces are at work that favor cities over suburbs, particularly the farthest-out ones.
An early leader of the chorus was New York University professor Richard Florida, who years before the housing bust began arguing that cities are better positioned to compete for a growing "creative class" of workers and that the sprawling exurbs, with poor access to such workers and jobs, are entering a structural decline.
In a new column on Forbes.com, Florida offers the latest refinement of his views, namely that "America's crabgrass frontier--like its cities--is divided into haves and have-nots." The haves are walkable, close-in suburbs with good schools and access to mass transit; the have-nots are exurbs filled with poor and working-class folks who have been "priced out of gentrifying cities and closer-in suburbs" and pushed further from the best jobs and "knowledge networks." The problem, he adds, is that there's now a huge oversupply of large-lot, remote suburban houses and a shortage of the "kinds of walkable transit-served suburbs people, especially young families with school-age children, want to live in."
Another line of attack on suburbs--that they're energy hogs--is set out by Christopher Steiner, author of the 2009 bestseller $20 Per Gallon. He points to a study by researchers at UC Berkeley that found the average household in Naperville, a far-western Chicago suburb, has a 149% larger carbon footprint than the average one in Chicago's 60610 Zip code, on its near north side, where residents may not drive cars for days or weeks on end. Current low gas prices, Steiner warns, may simply encourage the wrong sort of suburban building and "increase our future liabilities for both carbon emissions and energy costs."
Then there are those who contend that many Millennials simply don't want to move to the sticks, even when they start families. "Millennials hate the burbs," Leigh Gallagher declared in her 2013 book, The End of the Suburbs. "And they hate cars even more."
For a while, at least, it seemed like the population might be moving the suburban skeptics' way. According to the U.S. Census Bureau, in 2011, for the first time in a century, the rate of suburban population growth fell below the growth rate of urban centers. There's some disagreement about what those census numbers really showed.
Perhaps, but even using the standard U.S. Census definitions, a new report in May showed suburban growth in the year ended July 1, 2013 once again outpacing urban gains in more than half of large metropolitan areas. A look at the full 2010 through 2013 period shows the core city grew more than the suburbs in only 6 of the nation's 51 metropolitan areas with over 1 million people, Joel Kotkin, a professor of urban development at Chapman University, points out in a new column on Forbes.com.
Similarly, another recession-born trend--toward smaller new homes--has also reversed. The average size of newly built homes, after shrinking from 2,479 square feet in 2007 to 2,422 in 2009, hit a record 2,662 square feet in 2013, the Census Bureau reports. Average size has likely been inflated in part by the fact that the high end of the new home market has staged the strongest recovery. Still, the rebound undercuts the notion that affluent buyers have seen the LED light and given up on their McMansion dreams.
The end of the suburbs? "People have predicted that after every recession since 1973," chuckles Bob Toll. "They say nobody wants big houses anymore. Now we're all supposed to want to live in jewel boxes. They're always right--for about 15 minutes."
Yet even Toll agrees with one point some of the "new urbanists" make: What suburban buyers want (and what he's gleefully selling them at a premium price) is evolving and becoming more, well, urban-like.
In the large, fluorescent-lit '70s-era Sausalito, Cal. studio of design firm SWA Group, about 50 landscape architects and urban designers toil at their computer screens as future suburban subdivisions--including Toll's--take shape. Joe Runco, managing principal at SWA, says the final product is far different from 20 or even 10 years ago. Builders are now asking for a wider mix of housing types, densities and price tags and giving high priority to making communities walkable, with interconnecting bike trails, community parks and eco-recreation opportunities. Buyers still want their own castle on their own plot of land, but they want it surrounded by social and natural escapes and near "a town center where they can gather and work,'' Runco says.
Andres Duany, the architect/urban planner who in 1980 designed Seaside, Fla., the first town to completely incorporate the new urbanism philosophy, also sees a marked change. "The suburbs are getting better and better, and that's the damnedest thing," he says. Duany is an outspoken critic of the suburbs, circa 1950 and circa 1970, but not circa 2014. "I visited a McMansion a couple months ago, and I hate to say it--I really, really, really hate to say it--but I want to live in it. It was like a European villa in Capri."
Some of these new subdivisions are being built on the casualties of the bust. Toll Bros. picked up, from a regional developer, the 818-acre Parkland Golf & Country Club development, where Lee and Linda Sussman live, paying $32.5 million in 2010. At that point it had a half-finished golf clubhouse (built with defective Chinese drywall) and 469 houses, some unsold. Along with a completed clubhouse (the bad drywall was torn out) and a Greg Norman-designed golf course, the Toll plan called for 400 additional homes selling for up to $1.5 million, on lots averaging 14,000 square feet. So far 741 homes in the development have been sold.
But a golf course isn't central to suburban developments these days--other amenities are. In Dublin, Calif., 35 miles east of San Francisco, Toll Bros. has densely packed homes within walking distance of an even more important draw: award-winning schools. Richard M. Nelson, a Toll Bros. regional executive, notes impact fees levied on the company's new homes have helped the Dublin school district build some new schools and upgrade others. The higher prices of the Toll homes, he boasts, "put Dublin on the map as a city that was equal, if not better, than its neighboring cities,'' he says. At Toll's Baker Ranch development, 19 miles east of Newport Beach, Calif., no home is more than a four-minute walk from one of the development's community green spaces and swimming areas. Shopping and restaurants are a five-minute drive. The nearest office park and medical center are 10 minutes away.
Walking paths are all well and good, but why, the urban and environmental advocates complain, do they all have to be so far from the city, the central core of a metropolitan area ? The truth is that many buyers (and particularly Millennials) would love to live in suburbs that are closer to the city--if they could get the house they want at a price they could afford there. That's difficult--and even more so because (according to a Trulia survey) younger buyers value newly built houses even more than their elders do.
"In a way, the attack on suburbia is class warfare,'' says Kotkin, who credits sprawl with allowing middle- and working-class families to live in comfort instead of being relegated to crowded apartments in the urban core. "If you made people live the way new urbanites want us to live, we would see a birth rate like Japan's," he quips.
While prices in the toniest downtown urban neighborhoods and inner-ring suburbs are spiking, prices of farther-out suburban housing have been rising slowly and steadily, which should ease first-time buyers' anxiety about getting burned on their big investment.
Bob Toll himself has nothing against cities: He owns an apartment in Manhattan, and a small division of his company is dedicated to building high-rise luxury condos. (A three-story penthouse at a new Toll Bros. building on Park Avenue in Manhattan is for sale at $40 million-plus.) But like Kotkin, Toll plays the affordability card. In fact, he argues, middle-class buyers would be better served if more states followed the lead of Texas and did away with most land-use regulations, allowing builders to build where buyers want to live, as they can in Austin, Dallas and Houston. "Can you say that New Jersey, with all its zoning and land-use laws and public comment periods on every development, has delivered something significantly better than Texas has done for its people?" Toll asks rhetorically.
While Toll Bros. has long been active in Houston, Dallas and San Antonio, under current CEO Douglas C. Yearley Jr. the company has recently reentered Austin, with its enviable mix of tech job growth and relatively inexpensive housing.
"Texas is an incredible state," says Yearley, 54. "I know so many people who've relocated there from the East and Midwest who just love it. It's affordable. It provides tremendous job prospects. Everything is new, from the public parks and town centers they're building to indoor-outdoor shopping environment. Infrastructure is new. The tax burden has been eased." Yearley puts the company's activity in the state among his top three priorities for the next few years.
They may not like Toll Bros. and its McMansions, but some urbanists agree that current zoning in much of the country is counterproductive. "It's crazy to build town houses surrounded by parking lots 50 miles from downtown. You've got the worst of both worlds. We've got to find a way to densify our suburbs and allow housing closer in,'' says Benjamin Ross, author of the new book Dead End: Suburban Sprawl and the Rebirth of American Urbanism. "I think at this point there is this enormous market demand for new urbanism, but there is a lack of supply, which is a drag on the whole economy," he says. "There is just such a shortage of nice walkable places with transit access to downtown. If you had more of those places you'd be building more. What is being built is very high end [like Toll Bros.]. If you had more open places you could build for the middle market."
Another smart academic on Toll's side is economist Enrico Moretti, of the University of California at Berkeley, author of the 2012 book The New Geography of Jobs. He complains that in most of the "brain hubs"--places like New York, Boston and San Francisco--"the NIMBYs and the leftists have allied to pass laws that make building new housing incredibly tough, not just in the suburbs but downtown, too." The behavior is self-defeating, he says, not only because it makes it difficult for the locals to buy, but also because it keeps outside talent from moving there, leaving employers hunting for workers in a smaller, less-qualified labor pool.
Moretti has a new economic study undergoing peer review now that estimates the size of the economic harm caused by the restrictive land-use rules that big cities have embraced since 1960 and that Bob Toll and so many other home builders bemoan. Moretti's preliminary numbers show that if big cities relaxed these restrictions to the national median level, it would add more than $1 trillion to the economy--a 9% to 13% boost. He, too, cites Austin as a model of what can happen with permissive zoning: Its housing market is significantly more affordable, and its population has grown more quickly than in other brain hubs.
Even the far out new suburbs aren't the inefficient, energy-gobbling wastelands their critics assume. Many of the new developments are green from birth, incorporating energy-efficient topography, natural water usage and solar panels. With family cars capable of getting 50 miles per gallon and the average new car eking out just 250 grams of carbon per mile--a 20% reduction from the existing fleet--suburbanites are no more harmful to the atmosphere than city dwellers, argues Wendell Cox, the author of War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life and a noted critic of restrictive zoning. In fact, he says, as cars get more efficient, they could emit less greenhouse gas than public transit does.
Cox is a longtime defender of the car-based culture and an affiliate of conservative thinks tanks. Yet even sprawl critic Steiner concedes "technology, in the form of supercharged solar panels and hybrid and electric cars, could eventually bail exurbia out."
Even if energy waste can be reduced, what about time lost to long commutes? It turns out that with jobs following people to the suburbs, sprawl hasn't guzzled as much time as the critics suggest. In all but 9 of the 100 largest metro areas, the share of jobs downtown declined during the 2000s, a 2013 Brookings Institution study found. The result is that some people are commuting from city to suburb or suburb to suburb, and the average one-way commuting time nationwide has been steady for 14 years at around 25 minutes. Suburbanites who work downtown spend only 9 minutes longer than city dwellers to get to work and suburbanites who work in the suburbs spend only 48 seconds longer. In fact, a good number of those with 45 minute plus commutes are city dwellers who rely on public transit to get across town or out to the suburbs.
There's also the promise of telecommuting, which experienced an 80% leap between 2005 and 2012, according to the Census Bureau's American Community Survey. "I think the future is the smartphone city," says Peter Gordon, professor emeritus in the University of Southern California's Sol Price School of Public Policy. "We're connected now in 1,000 new ways. People were talking a while ago about death of distance, the death of cities--all of us living on individual mountaintops. That didn't happen, but I think people are doing the newest forms of networking as a complement, not a substitute. And as they do more electronic communication, I think it's possible they'll spread out even more."
But Sandra Rosenbloom, director of the Innovation in Infrastructure Program at The Urban Institute and a professor at the University of Texas at Austin, urges caution. "We are always hearing stories about how telecommuting works very well for high-priced people," she says. "But the people who work at McDonald's can't telecommute. It's really an elitist thing."
In 2008, with the media competing to identify the hardest-hit suburb, the New York Times branded Mountain House, an hour east of San Francisco, "the most underwater community in America''; almost 90% of residents had mortgages for more than their homes were worth, the Times reported.
Today homes in Mountain House are selling like gangbusters, with a median price of $517,000, up more than 15% from a year ago. As with a Toll development (although it's not one) the community has a connected network of bike trails (in this case abutting a creek that winds through town) and a series of neighborhoods, each surrounding a top-ranked elementary school. A mix of housing prices and sizes appeals to a variety of ages and lifestyles, even to longtime city dwellers like Geof Empey and his husband, Peter Dailey.
Back in 2005 Empey shelled out $830,000 for a 1,181-square-foot, two-bedroom, one-bath, single-family house on a hill overlooking The Castro, the famously gay, hip neighborhood in the heart of San Francisco. (After falling in value, that home is now worth more than he paid.) Then, in fall of 2013, the couple surprised their friends by leasing it out and moving to a single-family home three times its size in Mountain House that they bought together for $607,000. Their monthly house payment is lower than the $3,950 rent they collect on the San Francisco house.
Empey, 43, and Dailey, 44, now spend evenings strolling alongside the creek, chatting with neighbors on the local paths. When they see children playing in the parks that seem to pop up every few blocks, they think of their own plans to adopt soon and their relief that they no longer face the threat of $28,000-a-year private-school tuitions for their future children. Empey, a software developer, and Dailey, a real estate agent and advertising manager, figure that a house like theirs in a San Francisco neighborhood with a good local public school would cost at least $2.9 million and in any event be hard to find. "I can't believe this exists," Empey recalls thinking on his first glimpse at their new town. "This is it. This is where we should be."
