WSJournal. (Candle) Toll Brothers Goes Condo

Suburban Builder Sees Growth in City Living; 'Tired of Mowing the Lawn'

Toll Brothers Inc., TOL +3.81% which made its name building sprawling suburban homes in affluent communities, also wants to be known as a major player in the nation's luxury condominium market

Toll's City Living division, which has 10 condo developments under way in New York City, is scheduled to announce on Wednesday its first condo development in the Washington area. Toll also is considering developing in Miami, Los Angeles, San Francisco, Seattle and Vancouver, British Columbia.

"There are a number of markets where they can enter and have impact that are a logical extension for their condo product," said Robert Curran, a home-building analyst with Fitch Ratings. "This is a gem of a business for Toll."

Condo construction is highly fragmented, with a number of small companies with a minor presence. But if Toll's expansion plans play out, it could be one of a handful of national companies that have become brand names in the condominium world, alongside Trump Organization, which has built 10,000 condos in New York and has 5,000 in other cities; New York's Related Cos., which has developed more than 2,700 units in New York; and Related Group in Miami, which has built about 22,000 units, mostly in Florida.

Having a name brand is "a huge help when we're selling because people have heard of us," said David Von Spreckelsen, president of Toll's New York City Living division. This "is something that distinguishes us" from other developers, he said.

The strategy is to cater to younger professional buyers eschewing the large suburban home and to aging baby boomers, including many who purchased Toll homes in the past and now are ready for a smaller residence or a second home.

"Baby boomers are downsizing and getting tired of mowing the lawn, and many are looking for a place where they don't have to drive for everything," said Christopher Leinberger, a Washington urban land-use strategist and partner in developer Arcadia Land Co. "The home builders in this country have been slow in getting into this market, but once they do, they find that it is a large market with pent-up demand."

Toll, based in Horsham, Pa., started its City Living brand just as the housing bubble was inflating in 2003, when it purchased Manhattan Building Co., a Hoboken, N.J.-based condo builder. It entered Philadelphia in 2005 and opened its first Manhattan tower in 2006. City Living now makes up about 10% of company revenue by units delivered and could eventually rise as high as 15%, said the company.

For builders, going vertical is vastly different from building individual houses. Land in cities is pricey, competition can be fierce for the best-located spots and the approvals process can be time-consuming. Building condos also takes longer than a single-family home, leaving the developer at risk should the market sour before completion.

But the payoff can be worth the risk. The Touraine, a high-end development being built by Toll on Manhattan's Upper East Side, sold 21 of its 22 units in less than six months with an average selling price of more than $4 million, the company said. That price, more than $2,500 a square foot, is well above Toll's fourth-quarter average unit selling price of $582,000. The first residents are expected to move in this spring.

Not all developments were so easy. In 2009, a weak market forced Toll to cut prices by 25% on three-bedroom units at its massive 450-unit Northside Piers in Brooklyn, N.Y.

Toll now focuses on smaller developments that contain about 100 units. In December, Toll paid $121 million for two Manhattan parcels, one in Midtown and one in SoHo. These could total about 200 new condos, though plans aren't finalized. Last year, Toll paid $30 million for two town homes on Park Avenue that it is razing and building 11 condos expected to command higher prices than the Touraine.

The first development in the Washington area will be located in downtown Bethesda, Md., and will include a seven-story building with 60 luxury condos. Construction should start this fall and sales will begin in spring 2014, said Stephen Alfandre, the area's director of acquisitions for the City Living division.

Condo sales in the Washington-area market increased nearly 30% from the prior year, while prices of new units climbed 3.7%, according to Delta Associates, a real-estate research and consulting firm. Across the market, the number of new, available condos for sale has fallen to the lowest number since Delta started keeping track in 2003.

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