The Asher condominium project in Alexandria, Va., was originally supposed to be a concrete building. Then the recession hit. Unlike a lot of its brethren, however, the project came back to life when the McLean, Va.-based Jefferson Apartment Group and Alexandria, Va.-based Erkiletian entered the picture, bringing with them lumber.
To become a reality, The Asher's price tag had to come down. Jefferson CEO Jim Butz found a way to save 24 percent, by building a wood-frame building. In markets where the early construction recovery is starting to take bloom (cities like Washington, D.C., and New York), the stories like that of The Asher are more the norm than the exception. For instance, in the same neighborhood, Chicago-based Equity Residential has a project called The Madison, which will also be a wood-frame construction. Originally, Trammel Crow Construction wanted to build that as a concrete-frame building as well.
“You are seeing the concrete buildings go back to wood,” Butz says. “As banks start dipping their toe back into the construction loan market, wood-frame is where they’ll start generally speaking.”
REITs aren’t dependent on banks for construction financing, but all of Equity's projects under construction are wood-frame, according to its third-quarter conference call.
“We do not have any high-rise product in the works today, so again, that will mostly be mid-rise and some garden and wrap product,” said David Neithercut, Equity's president and CEO, during the quarterly conference call. “But we will be doing that mostly ourselves, and my guess is mostly it’ll be sort of a smaller total cost project than what you’ve seen us start back in three or four years ago.”
Even if the banks would back a concrete project, a developer still needs to build something that’s affordable—no easy task in many of the markets around that country that are only starting to recover. So companies are opting for garden communities, where pricing for wood-frame is down 20 percent to 25 percent, while high-rise pricing has only fallen by 15 percent to 20 percent, according to Alexandria, Va.-based AvalonBay Communities’ third-quarter conference call.
“You have to build projects that the market can ultimately afford,” says Toby Bozzuto, president of Greenbelt, Md.-based Bozzuto Development Co. “Our customers today are looking for value.”
But just because the market can’t absorb a high-rise doesn’t mean localities will approve it. Still, ultimately, dollars win out. “While they’d like to keep the integrity of the design these started with, most jurisdictions all have a revenue problem,” Butz says. “But with the challenges they have managing their budgets, most of them are happy to allow modifications to a plan so they are able to increase their tax base and their revenue.”
Not all of Jefferson's deals are stick-built, though. Butz says he has one project in downtown Washington, D.C., and another coming online in the Courthouse section of Arlington, Va., next year. But he realizes these deals are anomalies.
“Generally speaking, the Rosslyn-Ballston area and downtown Washington, D.C., are probably some of the best markets in the country,” he says. “If there’s any concrete construction outside of New York City, that’s probably one of the two or three markets that can handle it.”