Debunking the TND ROI myth

I used to work for a home plans publisher that regularly shipped me off to The International Builders’ Show, where I rubbed shoulders with mainstream developers and tried to sell them on the merits of traditional neighborhood development (TND). Inevitably, most of the developers would scoff at the idea, claiming their market wouldn’t support it and, therefore, their efforts and investment wouldn’t pay off—a view I continue to hear from developers who have never waded into the waters of TND.

Obviously, there is no foolproof way to challenge the assertion that TND delivers a lower ROI than conventional suburban development (CSD)—unless, of course, some enterprising developer/physicist manages to build examples of each in exactly the same market and exactly the same space at exactly the same time. Further complicating the argument is the fact that development returns are contingent on their individual financial structures, which are always tailored to unique circumstances; this frustrates any attempt at meaningful comparison.

But it’s not like there’s no evidence pointing toward TND’s investment potential. In 1995, American Lives, Inc., conducted a study on consumers’ attitudes toward elements of TND (e.g., pedestrian-oriented town centers, smaller private lots with larger public spaces, narrow streets). The study concluded that one-fifth of Americans accept most or all of the features of TND, and half like the image while harboring some concern over increased density.

In their 1999 housing study, Valuing the New Urbanism, authors Charles Tu and Mark Eppli reported that properties in Kentlands, a TND in Gaithersburg, Md., were selling for $30,000 to $40,000 more, on average, than those in the neighboring CSDs. And while developers, investors, and lenders are typically tight-lipped about their ROI numbers, many have experienced annual lot appreciation rates from 20 to 40 percent, versus less than 10 percent for CSDs.

Above-average appreciation is a story I’ve heard from virtually every developer in the dozens of TNDs I’ve visited over the past decade. Several have reported significant appreciation during the earliest phases of construction—some even before construction began. This doesn’t surprise me. Once the elusive “market” sees what it wants, it is relentless in its pursuit, rapidly driving up property values. The numbers don’t lie; they point toward a significant number of families who want to live in a neighborhood, rather than a typical subdivision. And they are willing to pay more for the opportunity.
So why aren’t more developers building TNDs? With each new report of the popularity of neotraditional neighborhoods, why do these communities still comprise only around five percent of the total construction efforts in the U.S.? The answer lies in part with the simple fact that it will always be easier, and often lucrative, to subdivide greenfield sites into single-use housing developments, then throw up houses that are often built to last for 30 years and one day. There’s a fear factor, too, associated with venturing into unknown development territory.

But developers’ fears are mostly unfounded, since, with the proper market study and execution, a TND can deliver the kinds of numbers to which a mainstream developer has become accustomed. According to market analysis firm Zimmerman/Volk Associates, Inc., in Clinton, N.J., abundant factors support TND development—all of which can favorably affect a developer’s bottom line:

Relatively higher densities in TNDs enable a lower land cost per unit. Public spaces created by traditional neighborhood planning—the trade-off that allows higher densities—also serve as substantial amenities for the community.
Lower up-front infrastructure costs are required prior to building and selling the first units, compared with a conventional subdivision. The first construction phase in a TND can offer the full range of housing types in one area, rather than in separate “pods” for each housing type, each with its own associated infrastructure.
Greater product flexibility throughout the neighborhood enables quick response to changing market demand.
The market can be deeper than just “new home buyers.” TNDs offer a new construction alternative that conveys the diversity and pedestrian orientation of typically highly valued older neighborhoods. Many resale buyers find these aspects of community lacking in conventional subdivisions and master-planned communities.

Amidst the good news comes a word of caution, however. Developers who choose to pursue TND must make their attempt a whole-hearted one. Many don’t know how to use the principles of TND to their financial benefit; many include only selected elements and end up with a “hybrid” that is neither TND nor CSD, only an awkward mishmash of parts that have no chance of contributing to a whole. And buyers, whether they’re consciously aware of it or not, can tell the difference—and they think about those differences as they’re sprinting away.

Those developers who manage to build successful TNDs, however, should be able to claim their share of an enormous untapped market of American families who are seeking a better place to live. Admittedly, more comprehensive and targeted research is necessary to learn more about the depth of the TND market and its potential ROI—research that is currently under way (I've completed a white paper that relates to this; I'll post some info from that as soon as I get the go-ahead from my client). But initial results show that the market for traditionally planned communities is real, and that families are willing to pay more to live there.