Wrap Up Report: NMHC 2014 Apartment Strategies Conference
New apartment development deals generally continue to offer more attractive yields for multifamily firms, but a number of changing cost factors are beginning to take a bite out of returns. For many apartment executives at the 2014 NMHC Apartment Strategies conference, this shift is giving them reason to not only recalibrate expectations for projects underway but also cast a more critical eye at potential new deals.
had tremendous tail winds in ’10, ’11 and ’12,” said Greg Mutz,
chairman and CEO of AMLI Residential Properties during a morning panel
discussion. “But the trifecta is going to hit us the other way-rising
cap rates, costs going through the roof and the rents are going to
Several executives said that they were doing more planning ahead for contingent cost increases-often anywhere between 3 percent and 6 percent-and trending rents and expenses forward to try to get a better visibility. But even so, many still found themselves facing what Mill Creek Residential Chief Investment Officer Bill MacDonald called “D-Day decisions” to either continue to move forward with a deal even despite a likely erosion on return or pull the plug entirely.
“It’s easier when you’ve got something half built [to make these decisions],” said Mutz. “But it’s these deals for ’16 and ’17-it’s a little iffier than it was a few years ago.”
Ben Pisklak, CIO for Gables Residential, agreed. “The first round of deals [this cycle] did great. But the next round of deals? We are adding contingencies, but we are terrified that we’re not going to get those right. So, we’re sticking to a lot of product that we know we do well ... and staying out of other products that are outside our strike zone.”
Apartment executives said they continue to look for development opportunities in major metro areas such as Atlanta, Boston, Dallas, Denver, Houston, Los Angeles, Seattle and South Florida. However, the long entitlement process in some of the high barrier-to-entry markets like San Francisco and significant new supply in places like Austin are further leading apartment executives to slow their roll on new development deals.
Given the challenges and the uncertainty, some apartment executives are looking for yield in different places. Adam Fruitbine, managing director of Alliance Residential Company, said his company has been making strategic changes to its development approach in the markets in which its already operating. "We've rotated to different areas of the market and try to stay ahead of the curve," he said. "Maybe that means looking at more suburban markets where the yields are a little better-getting there before it's found out, so to speak."
Despite the uncertainty surrounding some downtown development deals, particularly when compared with the often lower land costs and quicker development cycles in some more suburban submarkets, industry executives said they would still pull the trigger on urban development deals. "In the high-barrier markets, where it takes more time to develop, to be in those markets, you have to be in them all the time," said Gables' Pislak. "You're still looking and working the projects."
AMLI's Mutz added, "You've got to take your shot when you've got it."