Real Estate News

Natomas could see new building boom once levee restrictions are lifted

North Natomas today looks like a giant jigsaw puzzle with pieces missing.

The boomtown built on a floodplain was one of the region’s main centers of urban growth in last decade’s housing boom. It added more than 50,000 residents to the city of Sacramento – about a tenth of the city’s current population – along with millions of square feet of retail and office space.

But since 2008, when federal flood-protection authorities imposed a de facto building ban on the Natomas basin, no homes, stores or offices have risen from the fields along Interstate 5. Even houses that burned down haven’t been replaced. The only structure built in the past six years was a fire station with living quarters perched atop a 30-foot-tall garage, above the projected level of a catastrophic flood.

Natomas has essentially been frozen in place for the past six years, but the thaw could be coming soon.

Last month, after years of delay, Congress approved a bill to finish $1 billion in levee improvements that federal regulators say are needed to make Natomas safe. The building moratorium could be lifted a year or so after President Barack Obama signs the Water Resources Reform and Development Act, which he is expected to do in the next few days.

“It’s going to be great for our economy to have Natomas back in action and back on the grid,” said Angelique Ashby, the Sacramento City Council member who represents North Natomas and serves as chairwoman of the Sacramento Area Flood Control Agency. “A lot of people want to live here.”

Home builders say they’re eager to start filling in Natomas’ blank spots, and that the forced stoppage might actually have helped boost home prices.

During the housing crash of 2006 to 2011, those prices plunged by 50 percent or more as lenders foreclosed on hundreds of Natomas homes. In the past two years, however, prices in North Natomas have surged back with surprising force, partly because of the restricted supply caused by the building ban.

Typical single-family homes that sold for $470,000 at the market’s peak in 2005, then plunged below $200,000 by 2011, are now worth about $320,000, according to online real estate tracker Zillow. That’s 60 percent above the low point but still a third less than the peak.

“We’ve got a hundred grand to go before our house is worth what we paid for it,” said Gretchen Lancero, a homeowner who has lived through North Natomas’ highs and lows. Her home has increased in value by about $100,000 in the past two years, according to Zillow.

Lancero said she’d be sorry to see the vacant lots across from her house developed because new homes would block her view of the Sierra Nevada, but construction could bring further price gains as buyers perceive the neighborhood as more desirable.

“It’s good,” she said. “It means our value is going to go up.”

A major reason for the ongoing price appreciation and the eagerness of builders to resume construction is that North Natomas remains a desirable place to live for many homebuyers. It’s minutes from jobs in downtown Sacramento. Its residents are well-paid, well-educated and racially diverse compared to the city as a whole. And most homes are priced from $200,000 to $450,000 – by far the most popular range for buyers these days, according to the Sacramento Association of Realtors.

No homes have been built in North Natomas in so long that demand, first from investors and now from traditional buyers, has shoved prices up. That, and the potential availability of hundreds of ready-to-build lots, a scarcity in the Sacramento area right now, has builders eyeing the area.

“We’ll be going to Natomas, the sooner the better,” said Chris Cady, central California president for KB Home, a national builder that owns about 500 residential lots in North Natomas. “We’re definitely going to build there. We love the Natomas submarket.”

Good timing

Other builders who own large chunks of lots are also likely to take advantage of improving market conditions if the moratorium lifts, industry leaders said.

“The timing works out pretty well because the market is recovering,” said David Ragland, chairman of the North State Building Industry Association.

For about a dozen homeowners, the lifting of the de facto ban would mean they could rebuild homes severely damaged by fire or other causes. Current federal rules dictate that homes that sustained more than 50 percent damage can’t be rebuilt unless they are elevated above potential flood levels. Owners of those homes have had to keep paying mortgages while renting elsewhere. The president’s signing of the bill could bring relief.

Jennifer Taylor, whose family’s North Natomas home burned down in August 2012, said she and her family eventually had to abandon their old house and buy a new home in Rio Linda because their insurance company gave them only a year to rebuild or replace their home.

“Hopefully some of the people it happened to most recently can wait it out and rebuild,” Taylor said. She said she was outraged that federal authorities allowed houses to be built in North Natomas in the first place but prohibited families from rebuilding there once the moratorium was imposed.

Before the ban took effect, North Natomas was the city of Sacramento’s fastest-growing area, a place where people lined up for the chance to buy a home. Construction began in 1999 after a previous flood moratorium was lifted. Homes and businesses covered the 7,000-acre area much sooner than expected as tens of thousands of residents poured in.

Then, in 2006, the U.S. Army Corps of Engineers determined that the levees protecting the entire Natomas basin, which also includes South Natomas and southern Sutter County, were prone to seepage, putting 100,000 residents and $7 billion in property at risk. This finding prompted the Federal Emergency Management Agency to rezone the area to a higher-risk rating in 2008. The “AE” rating requires new structures to be elevated above floodwaters that could reach 25 feet in the event of an unchecked levee breach along the Sacramento River. The prohibitive cost and complications of such construction have amounted to a de facto ban.

The Sacramento Area Flood Control Agency embarked on some of the most important work to expedite it. SAFCA upgraded 18 miles of the 42 miles of levees surrounding the Natomas basin with $400 million in state flood-control funds and local property taxes.

The U.S. Army Corps of Engineers is responsible for the rest. But its 24-mile portion of the project has stalled for years as Congress waged ideological battles over spending. Late last month federal lawmakers passed the so-called “WRRDA” bill, a major infrastructure package that advances navigation and water projects across the nation, including the Natomas levee upgrades.

The prospect of continued funding for the Army Corps’ $600 million portion of the project means the city of Sacramento can now ask FEMA to rezone Natomas from its current flood-hazard rating to one that would allow for traditional construction.

Hoops to hospital?

FEMA rezoning, including a public-comment period, typically takes from 12 to 18 months, though city officials said they are hoping for a speedier turnaround.

Once FEMA acts, “we could issue building permits for new development” almost immediately, said Jim McDonald, senior planner with the city’s Community Development department.

The first priority would be allowing homeowners whose houses were badly damaged to rebuild, McDonald said. Next in line for building permits would be areas where homes and apartments have been approved and where sidewalks and sewer lines are already in place. There are about 3,500 lots for single-family homes that are entitled and have planning permits, meaning they could see construction soon after the restrictions are lifted, he said.

That should help the city’s balance sheet. The resumption of home construction in North Natomas likely would mean higher building-permit and property-tax revenue for the city.

At the height of the building boom in 2004-2005, the city collected nearly $9.7 million in revenue from building permits – about twice what it does now.

Most of the huge drop was caused by the recession and housing collapse, said city Finance Director Leyne Milstein. But taking Natomas offline likely made it worse, she said.

“Would we have continued to decline without the moratorium? Probably not as precipitously,” Milstein said.

Sales taxes could pick up, too, but may be slower to recover.

City planners say there is about 431,000 square feet of retail space and 1.6 million square feet of non-retail commercial space that only need final approvals to be built. But the business sector of the market will likely lag housing, experts said.

Gregory Thatch, a lawyer who represents a number of Natomas developers, said he expects some retail and office projects to get underway, but hasn’t heard of any major tenants planning to locate in North Natomas.

“When you don’t know when you can build, you can’t solicit,” he said. “I know of no one who is lined up to go in.”

One major area of North Natomas whose future is still uncertain is Sleep Train Arena, where the Sacramento Kings are expected to play for the next two seasons before decamping to a new downtown arena. After that, some city officials are hoping to turn the 184-acre arena property into a medical complex.

Ashby said she’s hoping to attract Kaiser Permanente to the site. Kaiser will have to either seismically retrofit its existing Morse Avenue medical center in Sacramento or build a new hospital, she said.

“We’ve thrown our hat in the ring,” Ashby said. “Should they decide to vacate the Morse Avenue site and find a new location, we’re hoping it’s Natomas.”

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