Builders Told Their Focus Must Shift to Inner Cities : * Homes: Master-planned communities with huge spaces such as Irvine must be de-emphasized in reaction to the thrift collapse, experts say.

SAN FRANCISCO —  After spending two decades persuading Californians that the future lies in huge master-planned communities in outlying areas where open spaces abound, developers must begin focusing on the state’s inner cities, according to financing specialists attending the Pacific Coast Builders Conference here this week.

That change, which would have tremendous impact in Orange County, is being forced on the industry by lenders and investors looking for smaller, less risky projects in reaction to the thrift industry’s collapse, the specialists said.

With federal regulators pressuring banks to reduce their real estate lending, much of the money available these days is more suited to “in-fill” development--small, high-density residential and mixed-use projects deep inside existing job centers--than to the behemoth 5,000- and 10,000-acre projects that have largely been responsible for the growth of South Orange County, North San Diego County, the Inland Empire and the Antelope Valley.

As a result, builders with vision must be able to compete for hard-to-get financing with plans for projects that can lure both highly paid professionals and lower-paid service workers back into cities, said Newport Beach mortgage banker Thomas Hammond, chairman of the Hammond Co.

The shift does not spell the end of master-planned communities, developers said, because consumers have been conditioned for too long to believe that it is in the Irvines and Rancho Bernardos of the Southland that happiness and fulfillment lies. But the new approach does hold out hope of a new vitality for such older communities as Santa Ana and Garden Grove.

“Lenders love in-fill,” said Richard Hill Adams, president of U.S. Mortgage Co. in Newport Beach.

In the brave new world of tight credit, he said, most lenders are now requiring large equity investments by builders--up to 40%--and smaller projects typically require less capital investment by both developer and lender; when well designed and marketed, the smaller projects have also proven to be easier to market than large suburban developments.

In Orange County, several in-fill projects are succeeding:

* The Townsquare project is a mix of 89 condominiums and town homes built over stores that Mola Development Corp. opened last summer a few blocks from the water in Huntington Beach.

* The 28th Street Marina consists of 35 luxury condos with bay views--some of which will probably be priced at more than $1 million--and 21,000 square feet of retail and office space that Newcomb Development Co. is opening on the Balboa Peninsula in Newport Beach at the end of the year.

* Projects featuring retail shops, entertainment centers and office and condominium towers are also planned for Irvine and Orange.

In addition to financing that is easier to line up than for a sprawling suburban new town, in-fill development can be attractive because it typically uses existing transportation, water and sanitary systems and requires far less investment for infrastructure.

Because the homes and apartments of in-fill projects are close to jobs and shopping areas, they are attractive to buyers tired of lengthy commutes. Because of generally lower prices, they appeal to many younger and older people who cannot afford high housing prices.

Home buyers are also spared the isolation from family members and longtime friends that they often feel when they move to such outlying areas as Victorville and Temecula.

“We’ve been focusing on regulators and the credit crunch (as the bogymen in the home building market) for too long,” Hammond said.

While scarcity of construction and land acquisition loans are a major problem for builders, “there are some fundamental changes occurring that we need to pay attention to,” he said.

Chief among them, Hammond said: The average buyer can no longer afford the large single-family home that builders have been offering as the American dream for years.