2. Don’t Bank your land.
Bye Bye Burbies
Multifamily developers abandon the outer rings in favor of coastal and urban markets more apt to recover and meet the quality of life expectations of the 21st century renter.
As Drew Hudacek scans Northern California submarkets for straight up apartment acquisitions and land suitable for multifamily development, he’s driven by real estate convention: location, location, location. Like all veteran developers, Hudacek is focused on place as much as placemaking, and although there still may be no place like home, increasingly that home—and the jobs supporting it—isn’t in the American suburbs. It’s in walkable urban or transit-oriented submarkets.
“When it comes to recovery, job growth is No. 1 and demographics are No. 2,” says the senior vice president for acquisitions for Irvine, Calif.-based Sares-Regis Group’s Northern California region. “The Gen Y story is compelling: Not only are more college-age folks coming out of school in the last five years than in the previous 20, but for the most part, they’ve been entering a pretty bad job market, particularly further away from metro markets.”
As the multifamily development machine recovers, however, some builders don’t anticipate returning to suburban locations for at least another three years—if ever.
“One of the real problems in the suburbs is that the land is either back in the hands of the bank or it’s in the hands of single-family builders still looking to get what typical apartment land values were as of four or five years ago,” says Tony Rossi Jr., president of Chicago-based M&R Development. “With the discounts given to maintain occupancy over the past year or so, you are looking at 98 percent occupied incomes based on $1.20, $1.25 rent per square foot. To justify development, you probably need to be closer to $1.60 or $1.65.”
Even though Rossi sees construction costs flat-lining and municipalities becoming more favorable to development as they search for tax revenue, he still doesn’t think suburban deals pencil out until rents show substantial improvement—an eventuality that looks grim given the Gen Y propensity toward urban-oriented product.
“We’re looking for more unique locations, and for some time those are still going to be in downtown locations,” Rossi says. “There might be an apartment development boom over the next several years, but it won’t be felt in the suburbs.”
Capital availability has thus put speculative land acquisition and development on hold, with only builders brawny enough to engineer a distressed deal or otherwise with the capacity to resume projects on hold as the ones able to clear the starting gate in 2010. Other than a distressed mortgage acquisition Wood Partners was able to snag nine months ago for the City Walk project in Oakland, Calif.—264 Class A apartments across six buildings that bankrupted the original general contractor three years ago—the company is going to be working on legacy pipeline projects that have survived the recession before even thinking about purchasing new land tracts.
“We don’t have any land bank strategy to speak of and don’t ever acquire land to inventory,” Dearborn says. “In the last cycle, we bought three land sites that we ended up keeping because we couldn’t begin development right as the crash hit, but that’s something we’d rather not do. We would rather pay full retail price for fully entitled land, and we see value in paying for the entitlement process.”
Even if Wood Partners was in the market for new multifamily dirt, buyers and brokers currently in that space say deal flow is suffering from a wide bid-ask spread identical to the one that has kept stabilized apartment assets from trading normally. “We’re not seeing any large multifamily developers bank land holdings,” says Mike Chapman, a first vice president of Los Angeles-based CB Richard Ellis’ Tucson, Ariz., office who, in addition to brokering some 15,000 apartment units, has worked on the sale or lease of more than 1,600 acres of multifamily-zoned land. “There are sellers in town who have wound up with multifamily pieces but that wasn’t by choice. It was because they got caught with them before they could build on them in the last cycle.”
3. Know Your Seller.
The hold dynamic on zoned and entitled multifamily land thus parallels the transaction difficulties on the asset side: Only the most distressed of assets are hitting the block as lenders and borrowers work out extended terms, and non-distressed portfolio holders wait for valuations to meet or match the prices they paid for holdings at the height of the market. “Most of the multifamily land holders right now are either banks or developers who purchased land with hard capital or A&D [acquisition and development] loans,” says Hudacek of Sares-Regis. “They’ve been able to weather the storm and carry the loan for a couple of years and have little interest selling into a trough market.”
