Builder betting on 'urban-surburban': KB Home puts condos in strategic sites.

The future financial health of KB Home may well be helped by something unusual for the nation's largest suburban house builder: apartment-style condos.

An early version is in development in Warner Center, and it is to hit the market in the next few weeks.

The Ascent project, with units as small as 640 square feet, includes private cabanas and communal hot tubs. It bears little resemblance to the suburban subdivisions that generated big profits for the Los Angeles home builder over the past decade.

But with the housing slump slowing sales in suburban markets nationwide, a good piece of KB's future growth for at least the next several years may well ride on the market's reception of Ascent and similar prototype developments in Orange County.

"You now have a sea change. The industry is in a horrendous correction," said analyst Gregory Gieber of A.G. Edwards & Sons Inc. "In some of these markets I think it's a very viable idea. It makes a lot of sense."

The housing slump has taken a big bite out of the company's earnings. Net income was just $27.5 million in the first quarter, which ended Feb. 28. That was down 84 percent from the same period a year earlier. Revenue was down 19 percent to $1.77 billion.

The sales center for the Woodland Hills development is set to open in July with the 191 condominiums ready for occupancy in spring 2008. Prices will range from $300,000 to $600,000. Also hitting the market this summer, with construction scheduled to be completed next year, are the Carlyle at Colton Plaza in Irvine and Anavia in Anaheim.

The developments mark the first significant push into local markets under the company's KB Urban venture since it completed a 63-unit condominium development at the massive Playa Vista project near Marina del Rey several years ago.

They also mark the first new projects for the venture since the company pulled out of the Convention Center hotel project at L.A. Live--a project championed by former Chief Executive Bruce Karatz who resigned in November amid an inquiry into stock options backdating.

However, the L.A. Live project would have involved the construction of luxury high-rise condominiums, and in December, under the helm of new Chief Executive Jeffrey Mezger, KB pulled out of the project across from Staples Center.

In contrast, the Woodland Hills, Irvine and Anaheim developments are in what Mezger calls "suburban urban" settings with "lots of jobs and a high demand for housing and not a lot of product.

"The strategic move for the company remains the same, in that we want to expand our business in the urban products closer to jobs," said Mezger. "We decided to start in California and make sure we are comfortable with the execution and then we will export it to other cities. Every major city we operate in has these opportunities."

Lengthening commutes

The KB Urban projects target empty nesters and young families or working professionals.

Ascent's location at Warner Center puts it at the doorstep of a large office and retail complex, while the 156-unit Carlyle is located near Orange County's John Wayne Airport and Anavia is located near Angel Stadium in a pedestrian friendly neighborhood of Anaheim.

In pursuing the developments, KB is targeting home buyers who in the past may have purchased suburban developments in Palmdale and other suburbs. But at a time when traffic congestion continues to worsen, they may be willing to give up green lawns and backyard barbecues for shorter commutes.

(The low-rise projects also can be completed with construction techniques much closer to single-family developments than those used in high-rise condos.)

"Their choice is to other drive one and 1/2 hours to work or look at an alternative project," Mezger said.

Indeed, while home sales are down across Los Angeles County, they are particularly slow in far flung suburbs such as Palmdale, where May sales fell nearly two thirds on average in four ZIP codes amid stagnant prices, according to data provided to the Business Journal by HomeData Corp.

Currently, KB has two subdivisions in that area, The Vineyards and Calico Terrace at Palmdale, which are each slated to have 200 units and so far have sold about one third of the units, according to the company.

Bill Toth, owner of Windermere Real Estate in Burbank, said that projects like the Warner Center development make sense these days in Southern California, where residents are increasingly tiring of long commutes.

"People want to be closer to work," said Toth, whose company operates in Burbank, Glendale and Toluca Lake. Toth has also sold KB homes in Burbank and Santa Clarita.

"A lot of the studio and the professional business-people like those types of places. They don't have families yet--or maybe one child--and they will live there a few years and then maybe move to another neighborhood," he said.

BY DANIEL MILLER

Staff Reporter