Without a doubt, 2005 was the year to be a condo developer. Just look at the Novare Group's year-end performance. The Atlanta-based condo developer set a company record with 1,486 starts, breaking ground on four significant properties. “In 2005, we were in ramp-up mode, working on a lot more projects than we were in 2004,” says Jim Borders, Novare's president.

Similar success stories echoed across the country as condominium sales soared due to low interest rates, rising single-family home costs, and increasing investor interest. In response to these market conditions, an increasing number of builders strategically shifted their focus from the rental to the for-sale business, including big players such as New York–based Tarragon Corp. and Marietta, Ga.–based Wood Partners. Other companies entered the condo market for the first time, such as Capstone Development Corp., a student-housing builder that broke ground on nearly 500 student for-sale condos.

Condo developers, however, weren't immune to building obstacles in 2005. The biggest roadblock: soaring costs for land and building materials. “It was much more difficult to get a shovel in the ground than it was in 2004,” says Borders, whose company was able to start only four of its intended eight projects. To combat these elevated costs, Novare is opting to build higher-end product targeted to affluent young couples and empty-nesters. One such example: Gallery in Atlanta's Buckhead section will offer units that are double the size of the company's typical entry-level offerings. “There is less sensitivity to price, both in aggregate prices as well as price-per-foot, than you find in the entry-level [market],” says Borders.

For apartment developers, building new product proved even more financially challenging. “For someone like us, who is focused on rental apartments, securing land deals was very challenging,” says Tim Naughton, president of AvalonBay Communities, an Alexandria, Va.–based apartment REIT. “Oftentimes, the condo [land] buyers could pay twice, sometimes even more, than what we could justify based on underlying rental economics of a site.”

But despite such challenges, AvalonBay and other apartment firms managed to maintain robust development pipelines in 2005. Companies developed land they had acquired in previous years and secured land deals that don't typically appeal to condo players, such as land leases, larger land deals, and public-private partnerships. “We found ourselves looking at different kinds of deals [than in the past],” says Naughton. This strategy helped AvalonBay start $900 million worth of new rental product last year.

Looking ahead, developers expect apartment starts to gain stronger momentum this year as interest rates rise and the condo market softens. JPI, an Irving, Texas–based multifamily player, plans to build more rental than condo product in 2006. “We are now seeing the market turn more toward rental, and the projections for '06 and '07 are even better to a great extent because the strength of the condo market took much of the [rental] product out of the market,” says Jim Butz, president of JPI East, a division of JPI.

Rachel Z. Azoff is associate editor for Multifamily Executive, a sister publication to Builder.

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2005 BUILDER 100 Top Multifamily Rental Builders List (23-36) ( Download PDF )

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Learn more about markets featured in this article: Atlanta, GA.