Infill Developments are Wave of Future
- Apr 28, 2010
Irvine, Calif.–Greg Sullivan recently joined Whittlesey Doyle as senior land advisor focused primarily on the Orange County market.
Sullivan started his career at CB Richard Ellis in 1986 and in 2002, co-founded Urban Infill Properties, Inc., a boutique real estate company specializing in the identification, acquisition, management and disposition of urban land for residential and commercial developments, adaptive re-use, new construction and investment.
Sullivan also has the working knowledge of the General Plan Amendment and Zone Change processes giving him the expertise to structure these often more complicated transactions.
Sullivan stated that Whittlesey Doyle is a natural step in his career providing him with data, information and support to better service his clients’ needs. His clientele ranges from developers to individual investors, family trusts, institutional lenders, pension funds, and both public and private builders.
He talks to MHN about the opportunities in Orange County and why this is the time to get entitlements approved.
MHN: Where are the opportunities in Orange County, the region in which you specialize?
Sullivan: We see opportunities in cities where there has been some work by local agencies that focused on General Plan Amendments to add residential density and mixed-use. Some significant opportunities have been created by the city in Anaheim, Huntington Beach and Irvine in recent times. However, a lot of the projects in these cities are over-entitled at this time so the opportunity lies today in looking at those entitlements and lessening the amount of density and intensity on the sites. For example, we recently put into contract a 12.5-acre site in Huntington Beach. The site was initially being looked at as a high-density project, but in the aftermath of the economic downturn, we are now looking for a less dense project on that site. A wrap or podium project is certainly not practical for this site. So I would say that the opportunity in Orange County is looking at previously entitled projects and reducing their density. Also for some properties, there is a window of opportunity right now to get new projects entitled and most people who have the capital to get something done are looking at delivering projects in 2012 and 2013.
MHN: But what about financing problems?
Sullivan: Yes, the real question to a landowner ends up being whether you attempt to sell your property to a developer today, by having them entitle the site and then what is the likelihood of closing the deal? The finance market is very difficult and things are loosening a bit but money is not easily accessible. So the guys who are able to completely perform the A to Z of a development, are the groups that have a lot of money currently and don’t have to go to outside for financing. Most of the public REITS are good choices for property owners and obviously some well-heeled private developers.
MHN: What part of the process is this time conducive to?
Sullivan: We see this as the perfect time to get entitlements approved; for developers to get their pipelines filled but be selective and look at the good markets.
MHN: What is going on in the OC market in terms of rental demand?
Sullivan: There is a lot of old stock. Seven years ago, when things started to heat up, there was a significant amount of product being delivered in some residential hubs. In these locations, there were plans for a lot of density but they did not come to fruition. Currently, there is lot of competition for tenants, rent concessions are being handed out, and owners are certainly not achieving the underwriting they had hoped for when the projects went off ground. As time goes by the projects will be filled up and rents will come up.
In most cycles, what happens when tenants are kings, apartment owners make a lot of concessions, but once the economy returns and things are stable, free rent is the first thing to go. Therefore, instead seeing a two to three percent increase in rent growth, you will see a seven to eight percent rental growth due to the elimination of free rent. Subsequent to the elimination of free rent, rent rates will rise as occupancies come back. Of course, this will bode very well for those developers who have product out.
MHN: What is your assessment for demand in the multifamily industry?
Sullivan: Crystal balls are fun to have but they can sometimes be murky. However, my belief in Orange County and Southern Calif. as a place to live is optimistic. It’s wonderful place to live, work and shop and people are always going to have a lot of interest in living here. Over the next 10 years, we will see continued population growth. I am a firm believer in what the ULI proposes: that infill developments will reduce urban sprawl and smog and people don’t want to drive 2.5 hours to work. Cities need to continue to embrace infill developments. The next two to three years underwriting will remain difficult and it will be hard to determine rent growth. Thereafter, we believe that occupancies will stabilize bringing rent growth back to the development equation. Those that plan well will have the opportunity to secure land at lower values and bring excellent new projects to the market.