5. Build it or Buy it—Not Both.
One strategy floated by developers—including industry REIT Englewood, Colo.-based UDR—has been to make apartment acquisitions and let properties cash-flow with the intention of ultimately using the underlying land as a redevelopment opportunity and eventual exit strategy. While creative, the tactic isn’t resonating with many builders due to its inability to guarantee a resolution of the issues preventing development now.
“It’s just a little bit riskier because the market is a dynamic environment that is constantly changing,” says Palladium’s Huth. “I’m not real comfortable in taking down an existing asset that I’ve got to pay X amount for with the knowledge that I’m going to have to scrape it at some point and put something else up to get a return. Regardless of the exit strategy, I think the property economics have to work in the first place on the initial acquisition.” Hudacek says Sares-Regis has been looking at the buy it/re-build it strategy throughout the first half of 2010 but agrees that market conditions don’t warrant the complex nature of buying an asset simply for the underlying land. “Right now in the Bay Area, Class B and C products that are three or four years old are still going to trade at $125,000 to $150,000 per unit, and land value from new development is nowhere near that. It’s not a straight one-for-one calculation, either, because typically that three- or four-year-old product is built at a lower density. So maybe you’re buying an older project at 32 units to the acre versus a new project at 45 units to the acre. If you buy that old project at $150,000 a door or more, we think it’s still 10 to 15 years off before you make the cap ex decision to raze it and build something new.”
6. Prepare for the Races.
How the multifamily land market shakes out will likely be a trailing indicator of the broader recovery in the apartment market and might take a few first movers to set a bar comfortable enough for the masses to follow. In a market known for its cyclicality, the firm consensus is that normalcy—if not yet on the immediate horizon—is just a vantage point away. “People are still a little skeptical of being the first ones out there to make land acquisitions and want to see neighbors go out there and jump in first,” Huth says. “But once we start to see more development activities pick up and lending requirements loosen where we can get deals financed, then it’s going to be a run to the market as quick as you can to try and get the greatest sites.”
Expect Wood Partners to be one of the first out of the gate. Dearborn says the firm has enough capital to pursue projects in Boston, Washington, D.C., South Florida, and of course California, where the company restarted construction on City Walk in late June. In all, the firm plans on starting 2,000 units in 2010 with 3,500 additional units on tap for next year. “A lot of the equity that was raised for distressed real estate acquisition that did not materialize is gravitating towards new development,” Dearborn says. “The costs make sense, the demographics make sense, and it gets the yield these folks are looking for in their investment funds.”
