In Down Time, What Are MF Developers Doing?

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New York–Multifamily starts have hovered in the 100,000 to 142,000-range for all of this year, which isn’t saying anything positive about the multifamily sector. But the 44.9 percent year-over-year increase in starts for July seems to suggest that more developers are building units this year than last. A modest sign of improvement that is brought on perhaps by activity in the affordable and student housing sectors, as well as by a small number of conventional multifamily development taking place in transit oriented areas. Developers that are not building new projects, aren’t however waiting for full recovery. Instead they are focusing on acquisitions, other sectors of multifamily housing and building overseas.

For example, Pinnacle, one of the top 10 developers in the country, hasn’t built any market-rate multifamily projects from the ground up in the last two years. “It would be fair to say that Pinnacle is not looking at speculative or market-rate projects in the next 12 months; we are not comfortable with putting our capital into those kinds of projects right now,” Stan Harrelson, CEO of Pinnacle, tells MHN. “Most of our efforts are focused on government projects (mostly military housing) as well as student housing projects.” The company is building 1,800 student housing beds in the next 12 months.

Pinnacle’s growth strategy includes management, investment and development but development is not taking place at the rate it used to. While Harrelson says the strategy hasn’t shifted to acquisitions, the company has acquired close to 2,000 units in the past two years. In addition, the company will acquire 700 units by the end of the year. “We are talking to every bank, every lender and every life company and so forth, but we can’t win in an auction environment. Our success comes from buying properties that we know very well,” says Harrelson about Pinnacle’s acquisition strategy. “We are interested in Class A properties and less willing to do the value-add deals in the suburbs. There is a lot of money chasing deals and people are not exhibiting a disciplined approach and are throwing a lot of money at projects that we believe don’t warrant it.”

Harrelson speculates that the projects taking off right now are the transit oriented developments, and those that are trying to seize upon light rail or other transportation developments. Especially in areas like Dallas. “The D.C. area also continues to be strong and unperturbed by economic woes. But the days of the ultra high-rise, amenitized projects are behind us. Garden-style apartment communities in suburban areas are Dinosaurs. Perpetuation of tax credits as well as student housing will spur some developments in the garden sector in suburban areas as well as in the Midwest or some of the smaller towns,” says Harrelson.

Pinnacle plans to continue to build on a strong relationship in military housing and is looking to close projects in South Korea and some other cities. The company is active in seven countries including China, South Korea, Japan, Canada, U.K. Bahamas and Mexico. “International projects are a way for us to diversify,” says Harrelson. “We can do it in an intelligent and disciplined manner. We don’t need to go in and compete with those who make their primary living in those countries. We will do spot projects that will fill a specific need.”

As for market-rate multifamily projects, the company is keeping its options open. “We are not yet willing to get off our skies and tie up our capital in those projects,” he explains. Of course like many companies, we are enduring challenges but are buoyed by next steps. “We think this is a time that defines companies and we can make quantum leaps in terms of scope and range of our influence. We think we are very well poised to take advantage of that,” he says.

Dominium Development and Acquisition, another top developer, has shifted its focus to acquisitions. “Recently, much of our growth has been through acquisitions of existing properties as opposed to development, which in the past we were quite active in,” Armand Brachman, managing partner of Dominium, tells MHN. “Right now, there are a lot of opportunities to acquire properties.”

Prior to 2000, development represented 65 percent of Dominium’s growth, but today it is down to 40 percent. If rehabilitation work is taken out of that equation, new development constitutes only 10 percent of the work they do today. “Development has gone from being a majority of what we do to minority. You are able to leverage equity much better by acquiring properties than building new ones. There are more acquisition opportunities available right now and we can build our portfolio much quicker by acquiring than by building. Typically the development process takes about two to three years,” says Brachman.

Acquisitions will be a significant part of Dominium’s growth in the foreseeable future. In the next 12 months, the company is looking to acquire 2,000 units all across the U.S.—wherever the opportunities are.

Things look very different for affordable housing developer Michaels Development. While demand for conventional multifamily has suffered due to job losses, demand for affordable housing has been greater than ever. Robert J. Greer, president of Michael’s Development, tells MHN that the company has never been busier. “Our activity is growing more and more every year. Our staff is growing and the number of units closing as well as our pipeline has grown significantly. The past 12 months were very good and the coming 12 months are looking very good.”

The company is busy, unlike conventional multifamily developers, building tax credit developments as well as Hope 6 developments. “We have been handed 16 of them—many of them are so large they can’t be financed at once. They have to go through many phases and years,” says Greer.

Michaels has also become very involved in the privatization of military housing. Another major area of the company’s activity is buying portfolios of other developers who have chosen not to stay in the affordable housing game or are having financial difficulties and are seeking someone to buy them out. The company has acquired over 3,000 units in these general partner acquisitions.

A big reason for Michael’s success can be attributed to a move the company made when the economy took a dive. Fannie Mae and Freddie Mac stepped out of the tax credit market and most syndicators who they had worked with for years, suddenly stopped buying credits. But Michaels, which needed to keep going, formed its own syndication division within the company—including both new staffing as well as asset management and new staffing for that. “We did this by taking the 9 percent credits we were awarded and syndicating them to local banks who had CRA obligations and were having difficulty meeting them. Buying our credits satisfied their needs and gave us the equity we needed to make the deal feasible. In the early years we did that with local banks, and as we grew, we reached out to regional banks and now most recently we are now dealing with national banks,” says Greer.

Michaels is now building or is in the process of building 4,450 units in 31 states in the next 12 months, and is doing preservation work on 2,600 units.

Of course, this is not the case with every affordable housing developer. Greer says, “I am constantly speaking at conferences and I belong to many of the trade associations, and I know that many of the affordable housing developers are struggling. The primary difficulty is finding equity.”

In a snapshot, the development landscape looks very diverse and cautious optimism is the best way to describe most of the companies’ attitudes. As Harrelson puts it, “We believe fundamentally in the strength of our industry and that starting with significant job recovery, there will be an unprecedented number of young people entering their prime rental years. Assuming that job recovery will kick into gear in 2012 and 2013, and with very little built this year, there will be a lot of demand and not much supply to fill it.”