Toll Brothers Defends Itself

[MarketStEl]

I'm sure some of you have much the same reaction I do to news that Toll Brothers City Living is undertaking another new development in the city proper. I'm thrilled that "America's Luxury Home Builder" is betting on its home region's core city in a big way, yet at the same time disappointed that the development in question looks like it would be just as home in the Philly 'burbs as it would be in its urban setting, if not more so. Especially since the publicity materials Toll Brothers City Living produces feature ultra-stylish high rises on the cover. Those, I found out, are in Manhattan, where Toll has also had success building for urban luxury buyers.

I took up this point with Brian Emmons, Toll Brothers' vice president who heads the City Living division, at the Coldwell Banker Preferred Old City holiday party, and he invited me to speak with him in more detail later. That interview produced what I would consider a decent defense of Toll's building practices in the city - I've certainly seen plenty of evidence that what Emmons says is the case is the case in this city. You can now read it here:

A reminder from Toll Brothers that Philly is not New York - and neither is New York | Philadelphia Real Estate Blog

A quote I couldn't use in the article, because he let it slip at the office party and it really wasn't germane, should also remind you that while real estate development and sales make lots of people rich, the wealth is neither universal nor uniformaly spread:

I had told Emmons at the party that I wished I could afford living in the homes his company builds. "I wish I could afford to live in them too," was his reply. And he's VP of the division, remember.

Anyway, offered to you as food for thought and reaction. While you may not like it, does Toll's defense make sense to you?

[carloss]

Very interesting read. So, to summarize:

1. Shareholders
2. Construction costs
3. NIMBYs

We all know NY real estate fetches a lot more per square foot than here. Still, this seems lopsided:

“In Philadelphia, it costs about $250-$300 a square foot to build this kind of place,” [Emmons] said. Meanwhile, luxury homes in the city sell for about $200-$300 a square foot.

You do the math. Toll Brothers did. “When it costs that much to build it, and that doesn’t even include your carrying costs, you’re upside down before you even build it.

“When you look at our New York products, you see a lot of great high-rises. Those are selling for $1500-$3000 a square foot.”

“The market can sustain it there,” added Toll Brothers City Living marketing executive Todd Dumaresq, who is based there.

Seriously? That's a tenfold difference in sale price. And if the cost of building a luxury home in Philly is equal to or greater than what it will sell for, why build anything here at all?

I'd also take issue with the implication that the problems of 10 Rittenhouse et al. were attributable to premature speculation that was somehow unique to Philly, when in fact this kind of speculation was happening everywhere before the housing bubble burst. Otherwise, good reporting all around.

[raider.adam]

Good write up. Boils down to costs and neighbors.

[Naveen]

Nice piece. Seems like our market has to mature quite a bit before some of the more ambitious high-rises become viable.

[Jayfar]

And if the cost of building a luxury home in Philly is equal to or greater than what it will sell for, why build anything here at all?

I think he's talking about the cost of building the kind of residential that Toll has been avoiding, rather than what they are actually building here.

[MarketStEl]

Very interesting read. So, to summarize:

1. Shareholders
2. Construction costs
3. NIMBYs

I'm going to wager that of those three, 1. may be the most important of all.

Shareholders in the US have become very short-term-focused: What have you done for me this quarter? If you have to produce results like this in real estate, it becomes difficult to try to make a market where none existed.

We all know NY real estate fetches a lot more per square foot than here. Still, this seems lopsided:



Seriously? That's a tenfold difference in sale price. And if the cost of building a luxury home in Philly is equal to or greater than what it will sell for, why build anything here at all?

I'd also take issue with the implication that the problems of 10 Rittenhouse et al. were attributable to premature speculation that was somehow unique to Philly, when in fact this kind of speculation was happening everywhere before the housing bubble burst. Otherwise, good reporting all around.

Jayfar pretty much had it right. What Toll builds in the city costs a good bit less than $250/sq. ft. (And looks like it.) I'll also wager that what it builds in New York costs more than $300/sq. ft. One respondent to a share of this article on Facebook repeated a line about residential construction in Philadelphia I had heard before: "New York construction costs, Baltimore rents." That makes it difficult to build high-end housing of the kind that would justify the price premium.

Well, it was worse in Miami, whose downtown was chock full of see-through high rises when I visited there in the summer of 2008, right before the bubble burst. But still, if you think of the high rises that went up in the last 10-12 years, only one of them - the Symphony House - really sold well. Maybe 1706 Rittenhouse Square, but it is actually a very small project in terms of number of units, for each floor is a single condo. The St. James is a rental; the others are addressed in the article. I don't think the ratio of projects built/projects that sold their units was anywhere near as low in NYC during that same time period.

And thanks for the compliment.

[raider.adam]

Shareholders in the US have become very short-term-focused: What have you done for me this quarter? If you have to produce results like this in real estate, it becomes difficult to try to make a market where none existed.

But not everyone, I would even wager few, try to make new markets when they partake in business. Most are probably just looking to make money in existing markets. I think laying it on the shoulders of shareholders is probably a bit unfair. How many sole-proprietors look for nothing more than to just flip properties?

[MarketStEl]

But not everyone, I would even wager few, try to make new markets when they partake in business. Most are probably just looking to make money in existing markets. I think laying it on the shoulders of shareholders is probably a bit unfair. How many sole-proprietors look for nothing more than to just flip properties?

Those people aren't builders or developers.

And sure, a privately held builder can have the same sort of focus Toll Brothers has. But there are builders and developers out there who - well, maybe not "make markets where none existed," but certainly take on projects with a long-view rather than a near-term payoff.

[raider.adam]

Those people aren't builders or developers.

And sure, a privately held builder can have the same sort of focus Toll Brothers has. But there are builders and developers out there who - well, maybe not "make markets where none existed," but certainly take on projects with a long-view rather than a near-term payoff.

I am sure the majority of non-publicly traded builders, whether they are just themselves shielded by an LLC or a larger company, are looking to just make money now and not at projects that pay off 10 years down the road.

I would guess, even without shareholders, Toll Brothers would still be a conservative developer, because that is what they are. That isn't to say it is bad. It is just to say they make money turning out housing widgets. It makes money and people buy the product.

[eldondre]

I am sure the majority of non-publicly traded builders, whether they are just themselves shielded by an LLC or a larger company, are looking to just make money now and not at projects that pay off 10 years down the road.

I would guess, even without shareholders, Toll Brothers would still be a conservative developer, because that is what they are. That isn't to say it is bad. It is just to say they make money turning out housing widgets. It makes money and people buy the product.

what toll brothers hints at has been debated as to its impact on the economy. the need for a short term return often causes decisions that aren't necessarily in a firms long term interests. If you can make more by waiting for ten years, is it not a better avenue? it's the same rationale that drives stock buybacks over long term investments, etc. carnegie steel was a private company. it was also the rationale for taking BNSF private. there's a lot to be said for it.

I'm curious, and maybe MSE knows, how much does it cost in Philly vs, say, Chicago?

[MarketStEl]

I am sure the majority of non-publicly traded builders, whether they are just themselves shielded by an LLC or a larger company, are looking to just make money now and not at projects that pay off 10 years down the road.

More likely true than not, but look for a buzzword when you read announcements of new developments: "transformative."

These are usually developments that push the envelope in some way. Bart Blatstein's big NoLibs projects fall into this category, and were indeed described that way by him. And the process that led to their construction was quite long, probably longer than the fight over Stamper Square - but that's in part because Northern Liberties' civic group has a very experienced zoning committee that has a very strong vision of what the neighborhood should be and a pretty highly developed aesthetic sense as well. Sure, no developer is going to bet the farm exclusively on developments of this type, but there are several who are willing to stick their necks out as Blatstein did here.

[raider.adam]

what toll brothers hints at has been debated as to its impact on the economy. the need for a short term return often causes decisions that aren't necessarily in a firms long term interests. If you can make more by waiting for ten years, is it not a better avenue? it's the same rationale that drives stock buybacks over long term investments, etc. carnegie steel was a private company. it was also the rationale for taking BNSF private. there's a lot to be said for it.

I'm curious, and maybe MSE knows, how much does it cost in Philly vs, say, Chicago?

Except I don't think anyone is able to point out that Toll Brothers has a negative long term outlook. They are making craploads of money and have been for decades.

More likely true than not, but look for a buzzword when you read announcements of new developments: "transformative."

These are usually developments that push the envelope in some way. Bart Blatstein's big NoLibs projects fall into this category, and were indeed described that way by him. And the process that led to their construction was quite long, probably longer than the fight over Stamper Square - but that's in part because Northern Liberties' civic group has a very experienced zoning committee that has a very strong vision of what the neighborhood should be and a pretty highly developed aesthetic sense as well. Sure, no developer is going to bet the farm exclusively on developments of this type, but there are several who are willing to stick their necks out as Blatstein did here.

You don't think it is telling that people can seem to only keep referring back to a single example to try to make a broad generalization? (And even then you mention how the impetus wasn't from Blatstein.)

[BarryG]

More likely true than not, but look for a buzzword when you read announcements of new developments: "transformative."

These are usually developments that push the envelope in some way. Bart Blatstein's big NoLibs projects fall into this category, and were indeed described that way by him. And the process that led to their construction was quite long, probably longer than the fight over Stamper Square - but that's in part because Northern Liberties' civic group has a very experienced zoning committee that has a very strong vision of what the neighborhood should be and a pretty highly developed aesthetic sense as well. Sure, no developer is going to bet the farm exclusively on developments of this type, but there are several who are willing to stick their necks out as Blatstein did here.

They transformed a huge piece of Northern Liberties into an underused college quad surrounded by struggling retail & restaurants, then added some big-box stores you have to enter through a parking garage. 2nd Street and Girard Ave still have many vacant and blighted storefronts. Great transformation. It's really a perfect example why developers don't want to--and usually shouldnt--listen to the neighbors.

[Naveen]

One respondent to a share of this article on Facebook repeated a line about residential construction in Philadelphia I had heard before: "New York construction costs, Baltimore rents." That makes it difficult to build high-end housing of the kind that would justify the price premium.

I think that line is the most pertinent factor, not shareholders. Until the Philadelphia market can sustain lots of high-end prices, why would Toll build here. They are obviously very good at building what sells. If 30 story luxury high-rises were selling well, that's what they'd be putting forward. And to echo Adam, regardless of shareholders, Toll is conservative by nature.

I also don't think any of that is bad. Center City and adjacent neighborhoods still have lots of empty or underused space that prices won't rise until more of those spaces have been filled in. So let them get filled in.

[raider.adam]

I also don't think any of that is bad. Center City and adjacent neighborhoods still have lots of empty or underused space that prices won't rise until more of those spaces have been filled in. So let them get filled in.

Correct. We don't need a Guggenheim Home on every corner. Most people just want to buy a house that fits their budget.

[Naveen]

I'd also add that regardless of whether or not Toll is conservative because of shareholders or their own culture (or both), one thing we do know about Toll is that they are adept at selling higher-end homes. The fact that they are choosing to build in Philadelphia is a very positive sign for our market.

[MNG1324]

They transformed a huge piece of Northern Liberties into an underused college quad surrounded by struggling retail & restaurants, then added some big-box stores you have to enter through a parking garage. 2nd Street and Girard Ave still have many vacant and blighted storefronts. Great transformation. It's really a perfect example why developers don't want to--and usually shouldnt--listen to the neighbors.

However, without neighborhood imput Bartman wanted to build a large strip shopping center there anchored by a Kmart, Payless Shoes, etc. So the neighborhood association(and I hate having to type this given what generally happens with neighborhood groups) was actually instrumenatal in this development ended up as it did.
But in reality Bartman is difficult to deal with and wouldn't have built anything unless it made him a ton of money. He never pays the full amount of contracts and is constantly ending up in court. Erdy McHenry in the end quit or was fired during the building of the Piazza. Liberties Walk and the townhouses he built near Liberties Land are cheap modular throw away buildings. His south Philly strip malls are what they are and he flipped them at the right time. Bart is brilliant at making money but i wouldn't call him visionary at all.

[eldondre]

Except I don't think anyone is able to point out that Toll Brothers has a negative long term outlook. They are making craploads of money and have been for decades.

of course, toll brothers did sit on the naval home for decades. seems like they probably picked it up on the cheap. I think the shortcomings of the project (why would anyone prefer to have a deck overlooking a parking lot instead of the beautifully landscaped gardens they're paying to maintain) are outweighed by the benefits (a quality project near huge employment centers that offers an in city location with a sort of suburban feel). of course, had a different development torn down the walls and built larger buildings, would it have failed?
I saw some of their "luxury"products in collegeville, pretty unimpressive but people don't seem to care much. interiors were always nice though. that's their schtick I guess and as you point out, it has done them well. I'm still curious about a cost comparison to chicago.

[raider.adam]

Construction Costs By City

[Naveen]

Construction Costs By City

Is it me or is that link weird?