According to the Washington, D.C.-based National Association of Home Builders, multifamily housing starts are poised to increase to 133,000 units this year, a nearly 50 percent increase over 2010 numbers. While the activity is still far below traditional apartment construction volume, it nevertheless is further evidence that multifamily builders, provided they can score adequate financing, are ready to take advantage of the supply/demand imbalance and enter the promised land of rising rents and revenue. Indeed, veteran multifamily builder heavyweights are already powering up their development pipelines, clearing out legacy deals and looking for buildable land opportunities. Here are the top five markets where multifamily developers are looking to break some substantial 2011 ground.
It should come as no surprise that one of the hottest rental markets in the country is also ripe for development. Virtually all of 2011’s best development markets suffer from a supply/demand imbalance created by the absence of new apartment construction over the past three years, and Washington, D.C. (and its Northern Virginia and Maryland suburbs) is no different.
In late December 2010, Englewood, Colo.-based Archstone announced the groundbreaking of a 389-unit, transit-oriented apartment community in Gaithersburg, Md. Funded primarily through an $89.9 million FHA insured Section 221(d)4 loan through Boston-based CWCapital, the Gaithersburg project follows the July 2010 groundbreaking of the Archstone NoMa apartments, construction of which is primarly funded through a $152 million FHA insured Section 220 loan, also financed through CWCapital.
“Gaithersburg is forecast to add 78,000 jobs by 2030 and has a commuter rail station connecting residents to 700,000 jobs in D.C.,” says Archstone senior vice president of development for the East region Rob Seldin. “Gaithersburg also had the highest rate of Class A apartment rent growth in all of suburban Maryland for 2010. This confluence of market factors combined with reductions in construction costs will allow us to deliver the community at a significant discount to current value. The timing could not be better for this project."
With a comparative low cost of living considering its West Coast metro peers and a Business 2.0 employment engine that includes Nike, Microsoft, and a refueled aerospace and tech job sector, Jet City looks to be rebounding from the recession doldrums with spiking rents and limited supply. On Dec. 10, Atlanta-based Wood Partners laid its cards on the table when it came to this Northwest market, opening a Seattle development office and hiring Steve Orser as vice president of development of the Pacific Northwest.
“Maintaining and increasing the offices we have has positioned us to jump out in this early cycle and be positioned on the development side to do really well,” says Mike Hefley, director of asset and property management for Wood Partners, which capped 2010 with 2,000 units and $400 million worth of development. “We are open, and we are early in the cycle, and our experience is that is where you make the most money."
“We’re excited about the prospects for apartment development in 2011,” says Encore Multifamily president Brad Miller. “We expect we’ll likely be among the industry’s top developers, and that’s with only six or seven projects breaking ground.” According to Miller, Encore Multifamily will be building across several Texas markets and has been fortunate to get construction loan executions out of the HUD 221(d)(4) program.
“I don’t know if anyone fully understands and appreciates what happens when you don’t just slow down supply, you completely shut it off,” Miller says. “In Dallas, we typically have 6,000 to 7,000 units a year that become functionally obsolete and are therefore out of the rental inventory. So we in some market instances we have a shrinking supply of apartments to satisfy the needs of apartment dwellers.”
Of all the unexpected rent-growth markets in 2010 (i.e. every major market in the country), none was more surprising than Florida, where metros in the south of the Sunshine State continue to best expectations for a market that was once the poster child of multifamily real estate distress. “We are looking at multiple markets to launch development, including Seattle, Los Angeles, Texas, D.C., and surprisingly, Florida,” says Phoenix-based Alliance Residential senior vice president of operations Brad Cribbins. “I think it really depends on what we consider to be stronger yield markets, but we are looking at a number of deals that were note purchases or otherwise broken deals that we can now make sense of.”
Houston-based REIT Camden Property Trust also likes Florida as a development play, and has held on to legacy opportunities in Orlando. “Rents are moving up and construction costs are coming down,” says Camden president Keith Oden. “We are seeing a decline from sticks and bricks construction costs of up to 15 percent of total project cost versus two years ago. That turns a 6 percent yield into a 7 percent, and as we are looking at our budgets for stabilized properties for 2011, we are looking at NOI growth in Orlando in the 6 percent to 7 percent range. So what used to be a 5.5 is now a 7.5, which is very attractive to us.”
The New York- and New Orleans-based Domain Cos. announced in late December their intention to continue the firm’s successful development streak in the Big Easy with South Market District, a mixed-use, transit-oriented development combining 450 first-class apartments with 170,000 square feet of upscale retail, restaurants, and entertainment venues that will commence construction later this year.
“Downtown New Orleans is poised for explosive growth as New Orleans is just beginning to unlock its economic potential,” says Domain Cos. principal Matthew Schwartz. “If the city is to realize the full benefit of all the exciting new developments taking place today, it is essential that we create the high-quality housing and retail downtown that is necessary to continue to attract and retain a highly-educated and creative workforce.” Completion of the South Market district development is expected by 2013.