And then there’s the distress holder who can’t hang on for two or three more years. “Some people just want to get out, and some people are hanging onto the future to make money again,” Hudacek continues. “Either way, there’s an inflexion point approaching in the curve where selling makes sense. The folks who are in a little bit more stress are the ones who are going to sell first as the numbers start to rise.”
However, difficulties determining value in the land markets isn’t spooking off all multifamily development. Equity-backed builders such as Dallas-based Palladium USA are tracking land opportunities to take down deals before the market gets overheated, with the expectation that debt financing will be slow to work its way back into the market. Normalization of cap rates in the disposition market coupled with a little bit of unit absorption is likely the first sign of a construction recovery.
“I think we’re seeing a lifting of cap rates, and then with the amount of inventory being gobbled up out there, we will start developing again,” says Tom Huth, Palladium’s president. “We’re big believers that if you can’t use good equity to take down your dirt, then you’re in a position where that dirt could end up taking you down. That’s what we’ve seen over this last down cycle: Those who financed land on their balance sheet for an extended period of time have found themselves in a challenging position.”
4. Gauge Infill and Pre-Entitles Complexity.
Like most multifamily developers, Chicago-based M&R Development (the development arm of Chicago-based RMK Management) is finding that seller distress and unrealistic price expectations coupled with rent fundamental depreciation is preventing development and land deals in all but the toniest of non-urban markets. (See “Bye, Bye Burbies” on page 42.) “No one is willing to take that leap of faith in the suburbs,” says M&R president Tony Rossi Jr. “The only suburban deals we’ve been looking at really are in areas that would be college oriented or a pedestrian market with a great downtown and a [commuter] train station.”
Land opportunities in infill situations that come zoned and entitled can traditionally be a plus for developers, but land plans drawn up on yesterday’s rent fundamentals and pre-recession growth expectations are proving challenging for builders who are able to take deals down via acquisition. Not that planning boards have a reputation for going easy on the developer set, but recession-fueled reticence to changes in zoning and density is making it difficult to get creative with site plans. “It’s not necessarily a fight; it’s really a time and money issue,” Hudacek says. “If the city is going to be accommodating, I might be able to get a deal retooled within six months. If the city is going to be difficult, it might take me 18 months or two years, and I still might not ever get there. So if it’s a marginal location and it’s a tough city, it’s a pretty easy deal to pass on.”
