The big hunt-and-find game in CRE is securing financing, especially for new construction projects. Some private equity lenders look to make short-term capital accessibility an attractive business. That doesn't eliminate challenges.
Multifamily starts in particular are down 40% to 50% compared to 2022. High financing costs and flat or falling rents can undermine construction viability.
RealPage recently looked at four types of family construction projects that senior vice president and Chief Economist Jay Parsons wrote "are some of the deal types we still see breaking ground" by either enabling premium pricing, an approach to controlling costs, getting subsidies, or working on a longer-term payoff.
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First comes what Parsons calls "the story." This is situation-enabled narrative-driven straightforward marketing. It may be a unique location or design, a compelling provenance, or other aspect of image and emotional appeal that convinces potential buyers to rationalize a price high enough to let the developer make a decent margin even with inflated costs of land and construction.
Second, the "low-cost basis." The point is a project that has some inherent significant cost reductions on the development end. The developer might have worked to increase supply chain efficiency and reduce costs, making materials purchases in advance or splitting a large order for volume discount over multiple projects. They might do more of the work themselves, including trades labor, with internal staff where there are sunk costs. Or perhaps the developer has kept some land in a back pocket for eventual use or a development partner is a long-time landowner and acquired it at what would now be considered a bargain price.
One warning is to recognize that such advantages often come at what can be an invisible cost. The developer or partner may have made investments over time. Not to discourage using land, materials, or labor that is less expensive than paying current prices, but to be smart in business, take those investments into account. Always have an internal reckoning of what "inexpensive" actually costs.
Subsidies are the third approach Parsons mentions. "Subsidized affordable or workforce housing projects are (relatively speaking) the steady eddies of multifamily development – less upside, but reduced risk on the downside. Tapping into federal programs like LIHTC or local/state programs like PFC (Texas) and Live Local (Florida) can be slow and cumbersome." There are also tax subsidies out of the Inflation Reduction Act that can help cut costs. But "red tape is real," Parsons warns, and also there's the need for care in applying for tax credits or deductions.
Last in the tale of four is a long-term play for developers that are also long-term operators and less dependent on short-term returns. That requires the ability to sustain the costs over the time frame that enables a payback.
In all these cases, Parsons says that success is much easier than it sounds. "Every developer is trying to raise capital on the thesis that there will be a lot less supply in 2025-27 (when today's new starts would complete), but for a lot of investors, they're more interested in waiting out potential lease-up distress amongst the current wave of projects than investing in the next wave of ground-up development," he wrote.
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