"The apartment industry continues to see serious signs of stress," says outgoing Equity Residential Properties chief executive officer Douglas Crocker. He adds another 295,000 units are expected to come on line this year. "That's 50,000 more than I had hoped for," he adds during his company's second-quarter conference call.

So who would be building new multifamily rental projects? Anyone who can do the new math, Crocker explains.

Construction financing can be had for rates ranging from 3.5% to 4.5%, Crocker reports. Even if the project hits an occupancy rate in the neighborhood of 85%, it can go to the for-sale market at a capitalization rate in the 6.9% to 7.8% range. When that still gives the developer a yield on their equity in the 13% to 17% range, it's easy to see why they are willing to build.

"I think we'll continue to see excessive levels of multifamily starts," Crocker concludes.

Officials at AMLI Residential Properties Trust didn't dispute Crocker's view during their conference call Wednesday. "It still is in many cases, if not most cases, a profitable endeavor," says president Allan J. Sweet, whose REIT is in the early stages of developing Museum Gardens in Lake County. "It's possible to develop these deals, with the probability of getting them sold."

Crocker's own REIT remains committed to spending $957 million to build more than 5,500 new units throughout the US. Locally, the development program includes the $67.1-million, 403-unit Highlands of Lombard in that west suburb.

Instant Insights /

Cheap Money, Weak Markets Equal Building Boom

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