Top Builders Disappear

If you looked at multi-family construction rankings in 2007, 2008, or 2009, you would have noticed a trend: Sitting pretty in the top spot was Trammell Crow Residential. But take a look at this year’s list, and you’re probably scratching your head wondering if we missed something. Where’s Trammell Crow? Or Wood Partners, for that matter? Where have the dominant private builders of the 2000s gone?

They’re still around, but in ’09, they didn’t put shovels into the dirt. Instead, they shifted their focus to asset management, leasing and operations, and loan maturity management.

CHANGING TIMES

Decimated financing markets crippled these private builders in two ways: First, the lack of any real conventional sources of money for new projects limited their ability to finance construction deals. And even when they did earn the trust of a bank, developers weren’t able to unload the properties they had already built—in many cases, they had lost so much value that they wouldn’t qualify for a loan from industry financing stalwarts Freddie Mac and Fannie Mae.

Faced with this impasse, many builders approached their banks asking for loan extensions, or went to their equity partners in search of a capital infusion to keep stabilized developments above water. If this strategy was successful, the companies began focusing on asset management. In fact, last year, both Dallas-based Trammell Crow and Atlanta-based Wood announced that they were focusing more on that part of their business.

But even management and operations proved challenging as vacancy rates soared, making it difficult to lease and underwrite new construction. “In softer markets, multifamily managers are competing for residents against unoccupied townhome and single-family homes,” says Mitchell Rosenstein, vice president of finance for Miami-based Carlisle Development Group, No. 48 on Builder’s sister publication Multifamily Executive’s top 50 multifamily builders list with 296 units.

STILL STANDING

So who was left to build last year? Not too many companies, as it turns out. The No. 1 builder in 2009 was Fayetteville, Ark.–based Lindsey Management, which built 2,180 units, primarily for the market-rate and student sectors. Last year, that number would have put it at No. 13. And two years ago, it would have landed at No. 18.

That’s how dramatically things have changed and starts have fallen. In the last two years, Trammell Crow sat at the top of the lists with 8,194 and 10,936 units, respectively.

Pure market-rate deals were few and far between last year. Winter Park, Fla.–based Epoch Properties, which started 360 units (landing it at No. 40 on the list), started all of its units in one deal called Coventry Park at Southpoint in Jacksonville, Fla. To get that deal in the conventional financing markets, Epoch, which puts about 35 percent equity into most of its deals, needed to have sterling credit. “Conventional financing is still available if you don’t have maturity issues,” says Kyle Riva, president of Epoch.

Instead, 2009 was the year of the niche builder. Outside of Lindsey, this year’s top five featured Seattle-based Pinnacle, an AMS Co., which primarily built military housing; Irvine, Calif.–based Western National Group, which primarily built market-rate housing; Arlington, Va.–based Clark Builders Group, which also built military housing (along with affordable and market-rate); and Marlton, N.J.–based The Michaels Organization, which built military, student, and affordable housing.

Despite dealing with the demise of the tax credit and scrambling to get money made available through the American Recovery and Reinvestment Act (ARRA) to fill the gap, other affordable developers found some success last year as well. “It wasn’t a bad year for us,” Rosenstein of Carlisle says.

LOOKING AHEAD

These days most developers will rely on the FHA’s 221(d)(4) program to secure financing for new multifamily development. But under that program, certain restrictions can limit the markets in which you can build. And, unfortunately, with the disappearance of other sources of financing, there’s a backlog for FHA loans. Some hope that, as the agency works through its bottleneck, shovels will hit the dirt with greater intensity this year.

For instance, Indianapolis-based Flaherty & Collins Properties placed 50th on the list with 254 starts. But the company was working on one 213-unit project, The Boulevard at Anson, located in Zionsville, Ind., through most of 2009.

“It’s taken us a real long time to get the loan done,” says David Flaherty, CEO of the company. “We would have liked to have started it last year, but HUD is so backed up that I think a lot more of those deals will come out this year in 2010 than in 2009.”

Add that to another affordable deal in the pipeline, and Flaherty expects 2010 to be better than 2009. Rosenstein is in a similar situation. “We’re scheduled to close eight new developments within the next six months,” he says. “Financing is lined up and underwriting is complete.”

Still, 2010 won’t be a banner year like 2006 or 2007. Instead, it will simply be an improvement over 2009. Trammell Crow is one of the companies planning to begin some projects this year.

“We’re looking at a more active 2010,” says Flaherty, who projects starting 627 units this year. “In 2011, we have some big ones in the pipeline. At that point, HUD will not be the only [financing] option. We will have real bank financing options in later 2010 and 2011.”