At the NAHB's Pillars of the Industry multifamily conference held in April in Scottsdale, Ariz., Constance Moore, president of BRE Properties, unveiled a new strategy that explains why builders in search of land can now look toward their colleagues in the multifamily sector for help.
The apartment developer is buying larger parcels than it needs and selling off the excess to its for-sale brethren. Moore says the partnerships work well because her company has “patient money,” a term Bradley Griggs, executive vice president and chief investment officer of the San Francisco-based group, says describes the difference in investment philosophies between home builders and apartment developers.
“We're long-term owners,” he explains. “We invest in properties we're going to own for a long time, so we invest above our weighted cost of capital. The for-sale guys see themselves as more like manufacturing companies who get in and get out, so they are looking to use their capital over and over again to generate profits. And because of that, they can pay a higher per-acre cost than we can.”
As the 7th largest publicly traded apartment REIT, BRE's niche is to acquire and develop properties with 100 or more units. Griggs leads a team of development, construction, and acquisition specialists, which has built 18 new apartment communities and acquired 19 existing properties since 2000. Together, they contain nearly 9,000 units valued at about $1.3 billion. And the company has a $920 million development pipeline consisting of 13 projects, many in urban infill locations in Southern California, the Bay Area, and Seattle, totaling more than 3,600 units.
At Bellcarra in Bellevue, Wash., BRE purchased a 4.1-acre parcel from a Canadian developer 18 months ago and sold a small, 1.6-acre piece to Hanover Properties of Dallas. The REIT is building 297 units with some retail on the 2.5-acre section it retained, while Hanover plans to put up a “fairly high-end” 20-story high rise. The deal worked out so well that the company is now actively looking for similar opportunities.
BRE paid $21 million for the site but recouped $11.1 million of that from Hanover, cutting its land costs by more than half. “We took down our land basis substantially,” says Griggs, whose career includes stints with Fieldstone and Ryland Homes in Southern California. “We sold off 39 percent of the land for 53 percent of the cost.”
The company did even better in Santa Clara, Calif., where it recently purchased an existing 7.5-acre office property it plans to tear down. In its place, the big apartment developer plans to build 270 units on about 3.5 acres and is in the process of selling the remaining ground to an unidentified builder who plans 60 small-lot, for-sale detached houses in the $750,000 range. Because the sale has not been completed, Griggs would not reveal exact costs. But he says the transaction involves 53 percent of the land for 62 percent of the cost.
Similarly, at Stadium Park in Anaheim, Calif., where BRE acquired 13 acres, it is “in the process” of selling 4.2- and 3.2-acre sites, which will contain about 250 condominiums each. The company will keep the rest for 320 apartments and a 1-acre park.
In all three transactions, BRE is either securing all the necessary government sanctions and “doing the master improvements” or working in tandem with buyers to get through the entitlement process. “Typically, we map out the property and get the approvals,” says Griggs. “Most builders don't want to buy raw land. But in Seattle, we are working together to get the entitlements.”