From downsizing empty-nesters to car-free young families, a broad range of demographic groups are taking a new shine to urban living, for reasons that include commuting fatigue, interest in downtown amenities, and a desire to reduce their energy costs and carbon footprints overall.

Peter Hoey

With urban home values generally holding stronger than their suburban counterparts, are urban remodeling investments paying off more handsomely as well? “It’s inevitable that you’re going to recover more of your investment [in close-in urban areas],” says John McIlwain, a senior resident fellow at the  Urban Land Institute. “It depends on the kind of remodeling you’re doing,” he cautions, as well as the economic strength of the city you’re in, but the simple combination of limited supply and affluent demand adds up to a new calculus for remodeling investments.

Supply and Demand

One city whose urban neighborhoods are definitely holding better than farther-out areas is Portland, Ore., where careful land-use planning policies and public transit initiatives have helped to create a strong urban core.

“As gas prices grow, the sting of long commutes will continue to impact the value of homes far from jobs,” says Tom Kelly, president of Neil Kelly Remodeling. He cites the gentrifying area around his company’s North Portland showroom as “a great example of the trend toward higher values in the urban core.”

A similar phenomenon has bolstered urban remodeling in Boston. Coldwell Banker Realtor Danny Shipman says that prices in neighborhoods such as Beacon Hill, Back Bay, and South End are either holding their own or gaining modestly. As long as homeowners in these areas stay put for at least five years, there is a good chance that they will be able to get their money back on remodeling — and possibly even turn a profit — especially if they renovate in the key kitchen and bathroom areas, he says.

Empty-nesters “who are cashing-out of the big house in the suburbs” constitute part of this group, says Greg Antonioli of Out of the Woods Construction & Cabinetry, in nearby Arlington, Mass. Many of them have vacation homes, and to satisfy their need for a connection to the city “they don’t mind pumping $300,000 into that 900-square-foot condo. This is where they’ll ride out their ‘golden years,’ and it had better be perfect.”

Antonioli’s company is also doing more work for young families. “It’s now OK for yuppies to raise their kids in the city,” he says. “Fortunately for us, few of the current condos in Boston are well-suited to children.”

Ironically, remodeling can be critical to would-be suburban sellers, even as their home values decline. The issue is oversupply. “Quite a bit of inventory makes it competitive,” Shipman says. Homeowners pretty much have to remodel their kitchens and bathrooms or risk their properties just sitting on the market, should they try to sell.

Reality Checks

Which brings us to over-improvement — remodeling homes more extensively than the market can justify. This problem seems particularly acute in areas that have larger lot sizes and fewer conservation measures in place.

Realistic pricing is the new reality.

Outside Philadelphia, Re­/-Max Realtor Gita Bantwal cites an older “tear-down” that was replaced with a much larger home. “He put in everything imaginable,” she says of the builder, who then watched the home languish on the market after he priced it at $895,000, more than twice the value of most of its neighbors. “He’s still mad,” she says.

In St. Cloud, Fla., an Orlando commuter suburb whose tiny homes were built during the 1920s and ’30s, “10 years ago, you could pick up anything for less than $30,000,” says Allison Stewart of Florida Pines Realty. Investors doubled or tripled the homes’ size, and then flipped them for as much as $200,000.

Then came late 2005, when “it was like somebody literally turned the light off,” Stewart says. “The phones instantly stopped ringing.” People who scooped up those $200,000 flips, thinking they would continue to appreciate, are now looking at values closer to $125,000.