Development: Site Acquisition

By Jeffrey Steele, Contributing Editor

How does a company determine if a site is appropriate for its needs? “It’s a fairly extensive process,” responds Anup Misra, senior vice president for Wood Partners, an Atlanta-based developer with an office in White Plains, N.Y., that acquires, develops, constructs and property manages high-density and mixed-use communities across the U.S.

“Prior to closing we go through a very extensive due diligence process. The site has to meet our core strategic criteria. We are a transit-oriented developer, and most of our assets are in core locations. By core locations, I mean in major metropolitan cities, close to downtown or close to a transportation hub, or with easy access to a transportation hub by bus or car. It should also be a site that makes it easy to commute to job centers. In addition, the site must have a sustainable employment growth aspect. It can’t be a site that’s just viable now. It has to be viable from a jobs standpoint five years from now.”

The approach is a bit different at Alchemy Properties, Inc., a 23-year-old New York City-based, vertically integrated real estate development company that focuses on mid- to high-end condominium properties in the five boroughs.

What drives the site acquisition process is the desire to avoid enduring a long, protracted and complicated approval process, says Gerry Davis, principal. “If the available site is not zoned correctly, that becomes difficult for us,” he says. “It could have great infrastructure, terrific access and egress and great support. But if it doesn’t have the correct zoning, we’re probably not going to do it.”

Of course, the site also has to be appropriate in a number of other respects. One is public transit. In Manhattan, most sites offer excellent access to subways except for those in some areas bordering the rivers, Davis says.

Once out in the boroughs, however, Alchemy Properties tries to select sites within a couple blocks of a subway. In the boroughs, “you do have sites that get into a kind of no-man’s land between the subway stops,” he adds.

As for broad retailing and dining support, finding such amenities is not typically a problem, particularly in Manhattan, Davis says. There is ordinarily a proven rental market in any area in which Alchemy plans to build condominiums.

At Dallas-based Trammell Crow Co., a wholly owned subsidiary of CBRE, which operates all its residential through High Street Residential, among the site attributes most highly sought is convenient access to public transportation, which in most of its cities is rail transit.

“But just as important is finding sites in cities where the city is an amenity in and of itself,” says Josh Dix, senior vice president and national practice leader for residential for Trammell Crow Company. “We don’t want to develop in a vacuum. We want the vibrancy of the city to be an amenity.”

Beating the competition

To acquire these plum sites, developers must beat their competition to the punch. Each developer is likely to have its own strategy for attaining that goal.

At Alchemy Properties, acquisitions are often off-market transactions, “where we’ll work quietly and directly with the seller to put an economically sound deal together for the seller,” Davis says.

“We try to build allegiances with stakeholders, whether they are neighbors or sellers, so hopefully we can get some kind of competitive edge.”

Another scenario attracting Alchemy might be an off-market transaction in which an attorney handles a transaction for an estate, and it isn’t going to the brokers for a possible auction.

Yet another might involve a broker managing a transaction for a seller who doesn’t want it known he is selling, Davis says.

In the markets upon which he focuses, Misra faces intense competition from other major development players. “Because we’re a ground-up developer, the site becomes the major point upon which we price our product.

“If it’s a mid-rise or high-rise development that we’re contemplating, let’s say our requirement is to find a site allowing us to build 150 apartments. There are not many competitors that can afford to build a project on that site, which limits our competition to maybe the other top 5 or 10 developers. We end up competing on our credibility, our track record as a developer, our vision for the site as a Class A luxury developer, and our ability to work with the city or town.”

Trammell Crow Company is “very flexible with our site acquisition criteria, and that allows us to go into sites that perhaps other developers may not,” Dix says. “That can encompass environmental, infrastructure and staging issues. We do find that even when locations are seemingly built out, we can find creative solutions to redevelop existing assets. Maybe it’s an office building that gets repositioned to residential. Or maybe it’s an old fire house that gets incorporated into housing. We operate on a very diverse platform across all asset classes, specializing in office, residential, industrial, health care and retail … [That] allows us to look at sites differently than a purely residential firm might.”

Sweaty palms and other challenges

A great many roadblocks stand in the way of finding great in-fill sites, and the aforementioned need to locate sites that are zoned correctly is just one.

Another is possible environmental contamination of a site. Fortunately, New York City has a process to remediate environmentally challenged sites, Davis says. “We’ve learned what that means, and you can quantify it,” he adds.

“If we are to excavate 10 or 15 feet down, on an entire site, we can quantify what the remediation will cost to the project. We’ll do due diligence, see how bad the conditions are, determine a cost and price that in.”

Far less straightforward are instances involving sites with histories of owners or tenants “doing something they weren’t supposed to do,” Davis says. “That turns up in due diligence and makes my palms sweat.”

Trammell Crow’s Dix says in cities, there is almost without fail some type of environmental remediation that must be done, and these get baked into the land price. That may result in an adjustment to the price Trammell Crow pays.

“Zoning is absolutely critical to what we do in an urban environment,” he adds. “But one of our advantages is the amount of work we’ve done in our respective markets. And that gives us perhaps an advantage over some other developers. An example of that is a project where our competitors were looking at it in a certain way, but we were able to increase the density by more than 20,000 square feet by being more familiar with the zoning code.”

Dix believes some developers don’t give enough weight to the light and air issues in the future development, and how important that is to residents.

“We’re doing this not to put a pretty picture on our brochure, but for the end users who will live there,” he says. “Qualify of life is really what’s important.”

Noting every site he’s seen in the Tri-State area of New York, New Jersey and Connecticut has challenges, Misra reports that in addition to environmental hurdles, he deals with geo-tech challenges related to the soil below the site, which dictates what kind of foundation systems the buildings will require.

Other obstacles include titles that are not clear or clean, the need to include affordable housing, and the constructability of a site. Is it a tight site? Does the contractor have additional costs due to the nature of the site? And what is the construction competition? Is there a huge pipeline of new product being built in that area? “If there is a pipeline of new communities being built, my pricing is under stress, and I have to price my product accordingly,” Misra says.

Davis agrees a site’s constructability is important, but says Alchemy has grown accustomed to very complex Manhattan sites, “where we’re working over neighbors, dealing with the Department of Transportation and the like. If a site starts getting too complicated, and you’re on the roadway to a bridge, you know it is going to be very expensive to get a street-closing permit, for example. Now your pro-forma costs start to increase proportionately.”

Future vision

Reflecting on his 25 years in real estate, Misra says he and his colleagues should remain “positive but cautious” in terms of the market slowing down, the cost of debt and the job market. “In all these areas we have to be risk averse … We have to be very aware of what’s happening in the local market. If we see major employers leaving the counties, we know five years out there could be a problem.”

Three major trends in the Tri-State region will impact site acquisition in the coming years, he believes. The first is the cohort of baby boomers selling their homes and moving into smaller dwellings, close to where they’ve lived all their adult lives, adjacent to commuting hubs and packed with rich resident amenities.

Second, members of Generation Y are looking to move from their parents’ homes, but they still want to live close to their parents. They’ve been priced out of Manhattan, and they’re eyeing not just the suburbs but the downtown hubs of those suburbs, where they can walk to restaurants, train stations and dry cleaners, limiting their automobile ownership to just one or possibly no vehicle at all.

“They prefer smaller apartments, but with larger amenity areas, and that allows us to possibly look at more compact infill sites,” he adds.

The third trend is that in markets like Manhattan, Misra is increasingly competing against condominium developers. “And that’s affecting my pricing, which is pushing me to increasingly look at suburban towns,” he says.

While the challenges of site acquisition can be daunting, Misra says he’s consoled by one realization. “Wood Partners has had more construction starts than anyone else,” he observes. “We’re obviously doing something right.”

In most metros in which Trammell Crow develops—among them greater Chicago, Minneapolis, Houston, Austin, Oakland, Denver and Washington D.C.—prime opportunities remain in walkable urban environments. Says Dix: “We continue to target locations that offer proximity to great urban amenities.”

To comment, e-mail Diana Mosher at [email protected]