Toll Brothers and “the proliferation of McMansions”

An obituary for Robert I. Toll connects Toll Brothers and McMansions:

Photo by Max Vakhtbovych on

Robert I. Toll, L’66, a former University Trustee, an emeritus member of the Carey Law School Board of Advisors, and the co-founder of transformative home construction company Toll Brothers, died on October 7 at home in Manhattan. He was 81.

Mr. Toll was born in Philadelphia suburb Elkins Park, Pennsylvania, to a father who was involved in Philadelphia real estate and who had successfully rebuilt his career after the Great Depression. Mr. Toll graduated from Cornell University in 1963 with a bachelor’s degree in political science, then graduated from Penn’s Law School three years later. He briefly worked at the Philadelphia law firm Wolf, Block, Schorr, and Solis-Cohen, but then founded Toll Brothers with his younger brother Bruce in 1967. To start out, “we built two homes,” Mr. Toll recalled. “Instead of selling them, we used them as samples for the lots we owned down the street.” These sample homes landed the brothers contracts to build 20 more homes, which each sold for $17,500. Robert, Bruce, and Alan Toll were among the first postwar housing developers to recognize how trends in highway construction would allow access to swaths of farmland for housing and shopping developments. 

Over the next five decades, under Robert Toll’s leadership of the company as chair and CEO, Toll Brothers rapidly grew to become, as the company’s slogan boasts today, “America’s luxury home builder.” The company recognized shifting demographics in the U.S. during the 1970s and targeted baby boomers looking to trade upward. The Toll Brothers blueprint included targeted land purchases, appeals for quick zoning approval, and predesigned houses that allow room for personalized changes by buyers. Boosted by the proliferation of McMansions and the implementation by zoning boards of two-acre lot sizes in many American suburbs, Toll Brothers became a force in the American housing market. Today, over 150,000 American families in 24 states live in a Toll Brothers-built home. Toll Brothers appeared on the Fortune 500 list, and Robert Toll spearheaded several philanthropic initiatives, including Seeds of Peace, a summer camp in Maine for children from global conflict. His many professional honors included recognition as one of the world’s top 30 CEOs by Barron’s magazine in 2005 and as best CEO in the Homebuilders and Building Products Industry by Institutional Investor magazine in 2008 and 2009. The Wall Street Journal once called Mr. Toll “the best CEO in the housing business.” 

Did Toll Brothers take advantage of an opportunity to sell luxury homes to a growing market or help create and establish a growing market? Would they call their luxury homes McMansions or is that a term applied by others?

No matter how these questions are answered, it is clear Toll Brothers contributed to the trend of larger and more expensive homes in the United States. Over 150,000 homes is a sizable number of dwellings. The shift to large-scale builders in the mid-twentieth century is an important factor in suburbanization and housing more broadly.

Additionally, what will happen to all of these luxury homes? Will they be updated and renovated for decades? I assume a good number are situated in neighborhoods and communities where they will not be near any cheaper or denser housing. Will some become teardowns? Will at least a few be preserved? There is still more of the Toll Brothers story to tell.

Toll Brothers, smaller homes, and “affordable luxury”

Can a smaller home also be luxurious? Toll Brothers is looking to sell such an option:

In an effort to expand into new segments of the housing market that fit into its wheelhouse, Toll is putting a new focus on reaching out to the first-time homebuyer, particularly through its concept of “affordable luxury.”

Historically, luxury in the housing market has meant McMansions. However, Toll Brothers has broadened its offerings to include luxury apartment buildings, and its newest effort: affordable luxury. The affordable luxury niche (Toll won’t refer to it as a “segment”) is geared toward the millennial buyer, who is buying later in life and often has more financial resources than the typical first-time homebuyer. Currently, 37% of Toll’s offerings now have price points below $500,000, and in some areas hit $375,000. Note, however, that these are base prices, and when customization and additional amenities push the prices higher. Still, affordable luxury properties fall well below Toll’s average selling price in the fourth quarter of $857,800. The increased density (meaning smaller units/properties built close to each other) of these projects will help Toll maintain margins despite the lower price points.

During the earnings conference call on Dec. 9, Toll Brothers CEO Douglas Yearly explained the concept:

“While affordable luxury crosses all buyer segments including move-up and active-adult, this initiative is driven in large part by a growing number of millennials who are older, more affluent, and more discerning when they buy their first home. Think of it as a BMW 3 Series, a great example of affordable luxury.”

While there is a lot of concern in recent years about developers constructing few new starter homes and millennials not being able to buy into the housing market, could this plan suggest another factor at work: are younger adults expecting more out of their first home? Having a dwelling is one thing; people need a place to live and store their stuff. But, when committing to homeownership for the first time, do buyers expect the features they see all over TV and in the homes they knew growing up: open kitchens and living spaces, nice appliances, custom finishes, designer touches, plenty of bathrooms and bedrooms?

Toll Brothers says they are aiming at people who want their first home to not be just a dwelling: they want “affordable luxury.” One could argue that if people really needed first-time homes, perhaps the tiny home industry should be booming (and it is not mainstream yet). This builder believes there is a market for buyers who do not just want a home; they want a distinguished home that feels good to live in and shows well to others.

I have noted before that having smaller homes in the United States does not necessarily mean they will forgo nicer touches or be cheaper. I would guess there are a good number of buyers who are willing to trade some square footage (there is some bottom limit – many people do not want to truly live in a really small house) for luxury items in the home.

Can the housing industry survive by only catering to the wealthy?

In the short-term, it appears the housing industry is aiming at the wealthy. Can this work in the long run?

It’s possible to get rich if your business only caters to rich people. But it’s hard to have a massive and really successful industry in the United States today if you only cater to rich people. There are only so many people in the country with good credit and lots of cash sitting around. And this week, we got evidence that one of America’s largest industries may be running into trouble because its products appeal only to the upper crust. I’m not talking about jewelry or apparel. I’m talking about housing.

And yet the article goes on to provide little evidence that the housing industry will be in trouble if it continues on this path. The profit margins are higher. The big builders, like Toll Brothers highlighted in the story (as they almost always are when there is a story about luxury housing), and the big investors who swooped in during the housing crisis are doing fine. There are not that many smaller builders left. A loss in building volume would probably mean some job losses in real estate, construction, banking, and other related services. But, perhaps the housing industry in the future is leaner and aimed at the upper end?

As I mentioned in Friday’s post, if markets work as they are said to work, there are plenty of opportunities here for businesses to jump in. Newer technologies can lead to cheaper housing units and lower construction costs. There is a huge need for affordable housing so there shouldn’t be a shortage of demand (even if it may be difficult to find sites where neighbors aren’t opposed to it). Doesn’t someone want to grind out profits at a lower margin? The question moving down the road is whether the housing industry will react in such a way or not. There is no guarantee that it will.

Toll Brothers still claiming they are not building McMansions

Few people want to claim the McMansion as their own. In particular, one of the noted national builders of large homes continues to say they do not build McMansions:

“We’re not seeing any reduction in the size of homes people want,” Tim Gehman, Toll Brothers’ director of design, told Business Insider. “The sizes of homes are back to pre-downturn dimensions, and sales are booming.”…

Toll Brothers is quick to dismiss the idea that Henley homes — or any of its other luxury home models, for that matter — are McMansions.

“It has to do with proportions. Is it just the same house with a lot more space in it, or is it more smartly designed with more rooms?” Gehman said. “We pride ourselves on the quality of the design, the livability, and the attractiveness of a home. We don’t want to be so devoid of what has been historical in any particular region just to get square footage. It’s important that it lives in its environment well.”

He added: “No one likes McMansions, ever, but a well-appointed luxury home, on the other hand, is still very popular. Our buyers are savvy buyers. As much as they have different tastes, they also know that they’re buying a commodity, and they’re investing in it. Until the market in general changes its point of view on what is valuable, most are not likely to spend on what they think won’t return value.”

Two quick thoughts:

  1. I get that they don’t want to associate themselves with McMansions. But, the explanation above seems forced. What exactly is the difference between a McMansion and “a well-appointed luxury home”? To the outside observer, not much. To the careful brand protector, everything.
  2. Toll Brothers has received a lot of press in recent decades regarding McMansions. Are they the worst offenders or just the biggest builder out there? Who else is building these homes – a bunch of regional builders? I have seen little about how all those McMansions were constructed without Toll Brothers invoked.

Do architects want to work at the architectural arm of Toll Brothers?

The large single-family homes of Toll Brothers (often called McMansions) are designed by architects who work at Toll Architecture:

Toll Architecture is a national award winning Architecture and Engineering firm that includes land planning and graphic design groups.  We are a subsidiary of Toll Brothers, Inc., a Fortune 1000 company.  Our current projects range from luxury large single family homes and recreational facilities in golf course communities to urban luxury high rise condominiums.

In the rise of McMansions in the 1990s and early 2000s, Toll Brothers came to illustrate the oversized homes that many critiqued. According to those critics, one of the major downsides of McMansions is their poor architectural design or layout, whether due to a mishmash of styles or poor proportions or overly large spaces.

Yet, someone has to design these houses. Perhaps this would be analogous to responses psychologists, sociologists, and anthropologists would receive from their academic guild if they openly admitted to working for the military. Yes, academics often need to search far and wide for jobs but working for the military may be a bridge too far. Would the same hold true for architects working for a major luxury home builder who privileges profits over aesthetics?

Presenting “McMansion man”

David Siegel is wealthy and known for building the largest home in the United States (see my review of the film about its construction). Could he be known as “McMansion man”? Read this headline and story:

‘McMansion’ Man Gives Everyone a Raise

You of course remember the head of the Westgate Resorts timeshare billionaire whose efforts to build the largest home in the U.S. were the subject of the documentary “The Queen of Versailles.”

When last we heard from him, he prophesied that the election of Barack Obama would lead to economic ruin. He sent an email to his employees saying that the election of Obama will “threaten your job” and mean “less benefits and certainly less opportunity for everyone.”

It turns out his crystal ball was clouded. In a company-wide email to employees announcing that he was raising minimum wage to $10 an hour, he noted: “We’re experiencing the best year in our history.” It is not clear what he was paying them or how many of his employees will be impacted, but a company spokesman said it numbers in the thousands.

As I’ve argued before, Siegel is building much much more than a McMansion: a 90,000 square foot home is super mansion territory and is unlikely to show up anywhere near a typical suburban subdivision. (Perhaps this is illustrated best by the years it has taken Siegel to build his gargantuan home.) Thus, I don’t think he qualifies.

Who might qualify as “McMansion man”? What might such a superhero look like? Or, given the negative attention often paid to McMansions, perhaps a super villain. If you have read a lot of the press coverage of McMansion in the last 15 years or so, perhaps one of the executives at Toll Brothers deserves the title. (But, they are now into urban building.) Maybe the McMansion protestors in Los Angeles could name such a figure.

McMansion Appreciation discussion thread

This is rare: check out reasons some people appreciate McMansions and newer (90s to today) big homes.

I actually like 2 story foyers and tall ceilings. Not sure what everyone else thinks…

Second floor laundry room
a real master bathroom with seperate tub, shower and toilet room…

Duct work in the proper places and not added on later.

Tall basement ceilings

And some snark sneaks in here and there:

I like that they make you appreciate how nicely folks built in the US in the 1930s.

There is clearly a market for such homes but it is difficult to find people who openly state the reasons why they like the features of McMansions that many critics dislike. Who probably the most of this information (that would be interesting to analyze)? Builders like Toll Brothers who have successfully sold big houses for years.

Overview of the move of Toll Brothers into urban development in the last ten years

Commonly known as builders of McMansions, Toll Brothers has branched out into urban development in the last decade. Here is a description of their efforts in New York City, as told by the head of Toll Brothers City Living:

We did some projects early on in Williamsburg, which I didn’t think would have been ahead of the curve. But for a lot of people who came to our sales office from places like Manhattan felt the neighborhood hadn’t arrived yet.

Based on that experience, we’re really focusing on neighborhoods that are established. When your main focus is condo, the way ours is, it needs to be that way, because you get one chance to sell a project. If everything isn’t perfectly right, then you’re going to suffer for it…

We’re certainly busy, but we’ve been more selective, so we’re on Gramercy, we’re on Park at 89th, we’ve got a tower on Park Avenue South going up, we just did the Touraine at 65th and Lex. Further down the line, we’ve got something on First and 52nd and in Hudson Square, on King Street. The project we’re doing in Brooklyn is in Brooklyn Bridge Park, which is basically in Brooklyn Heights, which was basically the first suburb…

We were fortunate coming out of the real estate recession and having a lot of cash and not needing to borrow, when most lenders were very reluctant to do condo loans. Toll has about a billion in cash and a billion-dollar credit line nationwide. We bought the Touraine site with just cash; we bought the Gramercy site with just cash; we bought a site in Dumbo with just cash. This was in ’09 and ’10. Most of the condo guys were not yet back, and we were competing with the rental guys, and we can always pay more than them.

Three quick thoughts:

1. It is hard to tell whether the image of Toll Brothers is changing. This article is similar to a number of other ones in recent months (example here) discussing the company’s efforts in New York City. At the same time, Toll Brothers is consistently linked to the construction of large suburban houses. In the long run, I wonder if there are critics who will never be able to look past the company’s connections to McMansions and see whatever else they are doing.

2. Few of the articles that discuss the efforts of Toll Brothers in New York City give any numbers about how much of the company’s business is in cities versus suburban development. From the projects described above, I would guess the urban efforts are still just a small part of the total operations.

3. The last paragraph hints at the dynamics of the housing market in recent years. Toll Brothers had the resources to capitalize on the housing market bubble. They aren’t alone but while these flush buyers make more money at the upper-end of the market, the lower end languishes.

CNN says “McMansions are making a comeback” but the data is limited

CNN reports that McMansions just may be on the way back:

During the past three years, the average size of new homes has grown significantly, according to a Census Bureau report released Monday. In 2012, the median home in the U.S. hit an all-time record of 2,306 square feet, up 8% from 2009.

During the recession, Americans downsized and the average new home shrunk in size by 6% over two years to 2,135 square feet. At the time, many industry experts said the days of the McMansion were over.

The shrinkage was supposed to indicate that a new era had begun, with young buyers seeking to live closer to urban cores and settling for smaller places and baby boomers downsizing after their kids had flown the nest.

But it wasn’t that consumers wanted less space, many just couldn’t afford more, said Jeffry Roos, a regional president for home builder Lennar. And now that the economy is improving, they’re demanding bigger homes again, he said.

This is what I suspected might happen: once the housing market picked up again, some Americans would go back to buying bigger houses. But, this article has a few problems as it relies on (1) the median home size and (2) talking to several large builders.

Regarding home size: the figures cited more often is the average home size. The average size for new houses went from roughly 900 square feet in 1950 to nearly 2,500 in the mid-2000s. The median home size might be more accurate as the extra big homes can’t skew the data as much but the average is used more often. Also, the median hasn’t changed all that much in the last few years – this is only a difference of 150 square feet, a 12×12 room. Why can’t we see figure about the number of big homes that have or have not been built rather than relying on these overall figures that are a snapshot of a varied housing industry?

Relying on just a few large builders also does not reveal the big picture. The builders cited, particularly Toll Brothers, are big players but the housing market has a lot of different builders and developers. Overall, how are lots of different builders feeling about big houses? Are they actually building these bigger houses? What do real estate experts say? The news for Toll Brothers has looked good recently but there is more to the big house market than just Toll Brothers.

This seems like an article that would benefit from better data and also may not really be able to be written until some more time has passed and the trend is more clear. In the meantime, simply invoking the term McMansion and discussing a possible trend is apparently enough…

UPDATE 6/5/13: As the CNN story is repeated across the web, there is some confusion. For example, look at how this retelling mixes the idea of an average or median:

A new Census Bureau report says the average size of a new home has grown eight percent in the last three years, up to a record 2,300 sq. ft. in 2012…

According to the National Association of Homebuilders, buyers prefer a median home size of just over 2,200 feet, in line with the Census average.

Two different figures for the “middle” size mean two different things…

Housing recovery more than just the McMansions of Toll Brothers?

One analyst suggests the housing recovery in recent months is more than just an uptick in McMansions and big homes:

The housing market appears to have recovered from the depth of its decline. Toll Brothers (TOL) reported a whopping 46% jump in its latest earnings report and Home Depot’s (HD) earnings soared 18%. Today the National Association of Realtors reported that April existing home sales surged to their highest level in more than three years…

Michael Santoli, senior columnist for Yahoo! Finance, says the housing recovery seems to have a new leg based on a scarcity of supply coupled with low interest rates and growing demand.

“This can feed on itself for a while,” says Santoli, “not just with regard to Toll Brothers, which makes higher end McMansion-type houses, but across the industry.”

Santoli says not to expect a steep rise in prices from here despite a “bottleneck of demand.” And don’t expect all housing-related stocks to surge.

It would be helpful to see more exact housing figures at different levels of the market. Big homes seem to be doing okay as evidenced by the strength of Toll Brothers. But, the lower ends of the market don’t seem to be recovering as much as underwater mortgages lead to limited supply and hold the housing market back. When the housing market is truly recovering, shouldn’t a broad swath of Americans benefit? Or, are we seeing a fundamental shift in American housing where middle and lower-class residents have continuing difficulty in purchasing homes?