Despite Challenges, Developers Get Their Groove Back
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Nearly 400 industry professionals convened at the Hyatt Regency hotel here yesterday to listen to insight given by leaders of the apartment market during the full-day event. Sharon Dworkin Bell, senior staff vice president of the National Association of Home Builders moderated the discussion, which included Humphreys & Partners Architects CEO Mark Humphreys; David Thompson, development director for Wood Partners; Todd Wigfield, Greystar’s managing director of development; Joe Wilber, SVP of investments-East for Gables Residential; and Pinnacle Housing partner Michael Wohl.
In terms of trends, Humphreys indicated that there’s a "Manhattanization" going on across the country. That is, US markets that previously didn’t have a downtown are now heading in that direction. Downtown, he said, “is where people want to be. We’re seeing a high number of urban projects in tertiary markets.”
Design, he noted, “is much more complicated than a few years ago because of rising construction costs. It’s really all about efficiency.”
Wohl added that tailored amenity packages for developments, particularly urban infill projects, are very important for developers to be competitive right now.
While the panelists noted that the lion’s share of development in past year or so has been urban-type design, there are some drawbacks. Wilber pointed out that parking is important in urban projects, “but recently we’ve been ‘overparking.’ One is because the municipalities required it.” But it turned out that tenants didn’t need as much parking as he planned. “We could have used that space for other purposes.”
Also critical, he added, it technology and Internet connectivity. “If you don’t get a strong signal, people won’t live there.”
This urbanization of the US is causing large sites for development to get snapped up quickly. Yet rising construction prices, particularly for lumber, means that in certain markets, wood-frame construction costs as much as steel and concrete. Lumber costs are up 30% from February to now, commented Humphreys. “In most parts of the country, you can’t keep your framers on the job,” he related. “They’ll walk away if they can get more money elsewhere. Meanwhile, concrete costs are up at least 4% year over year.” As a result, there’s more interest in high-rise, type-1 construction.
“Construction costs are the most important factor now in development,” said Humphreys. “You’ll have a hard time trying to value engineer 10% of costs out of the building. You have to do it from the beginning of project, the design phase.”
Thompson noted that while concrete and steel prices have been pretty flat year over year, lumber has been up significantly the past few months and petroleum-based projects are also about 3% more expensive than a year ago. “Labor costs and availability of labor is also a factor,” he said. “We’re seeing overall costs going up across the board.”
Land costs are also up significantly. In fact, said Wilber, “they’re back to their pre-recession highs.” Particularly in Miami, developers looking to construct rental product are facing stiff competition for land from condominium builders. “We’re back to where we were eight years ago. That’s both good and bad, because while it keeps supply in check, it also underserves the market.”
Wohl concurred that land prices are making new projects prohibitive. “They’re back at 2005 levels,” he said. “Some prices are so high that I can’t underwrite them. I think we’re reaching a tipping point now where it’s hard to make projects work.”
Still, the developers wholeheartedly indicated that they’re looking to bring more product to the market, although they’re more selective on the location and type of project they undertake.
As are capital sources. On the market-rate side, availability of capital “really comes down the the sponsor,” said Wohl, who finds it difficult to obtain capital sometimes because Pinnacle is a portfolio builder. Institutions may be out in the market looking to place money into projects, but while they may have a five- to seven-year hold, Pinnacle builds and holds assets for the long term. “As such, we tend to work more with private capital sources.”
Wigfield shared that the one change he’s noticed in this cycle is that institutions want more control in projects in which they invest. “As construction prices rise in most markets, I wonder whether smaller groups will be able to get money,” he questioned. “I think the institutions are looking to work with larger developers that might have bigger balance sheets. Capital is still very selective on the projects they work on and the groups with which they’re dealing.”
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