Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/143044
Tat's not to say that all markets are seeing new multifamily product. Investors, developers, and lenders are carefully evaluating opportunities and potential challenges in their quest to build the right property in the right location for today's renter. Dissecting Demand About 1,700 miles north of West Texas, Calgary, Alberta, is also seeing multifamily development demand driven by a thriving energy sector. "I would be able to secure ofers from my buyers on almost any serviced and properly zoned land right now," says D'Arcy Browning, CCIM, of Re/Max Real Estate in Calgary. Investors in his market are looking at multifamily development opportunities in all locations, comparing per-square-foot land costs and absorption rates among sector niches such as luxury and afordable housing. Indeed, replacement cost is a key factor for investors considering multifamily construction. "We have only recently become interested in new development due to the narrowing gap between the cost of existing product and new construction," says Michael Anderson, CCIM, owner of RealSource, a Utah-based investment frm specializing in multifamily opportunities in growing markets. In some markets, demand is up and the existing multifamily properties are simply obsolete. "We need to replace our inventory," says Todd D. Clarke, CCIM, chief operating ofcer of NM Apartment Advisors in Albuquerque, N.M. "Te average apartment was built in 1965, is red brick, pitched roof, master metered, and built furnished — none of which is what the baby boomers and Generation Y are looking for." Developers are expected to deliver 560 units in Albuquerque this year — up from 158 in 2012, according to Marcus & Millichap. Generation Y, in particular, is expected to be key to multifamily leasing and development. A signifcant portion of this 87.3 million-strong population segment will form new households as they leave their parents' homes during the next two years, Marcus & Millichap notes. So, what are these renters looking for? Updated amenities and "more-efcient living spaces that cater to their technology needs," says T. Sean Lance, CCIM, managing director of NAI Tampa Bay in Seminole, Fla., who has multiple development sites listed or under contract in North Carolina, Georgia, and Florida. "Te developers have taken note and I think the evolution of the product that is being delivered today is better than for-sale condominium projects delivered even 10 years ago." Urban and Beyond But where's a developer to put all of these new units? In some secondary and tertiary markets, the choice is as clear as Petula Clark's voice: downtown. "Developers, equity, and debt are all clamoring for infll," Lance says of South Florida, which has more than 80 rental apartment projects planned or under construction. Te appeal of urban locations goes beyond proximity to employment, he explains, citing amenities such as restaurants as well as walkability factors. And based on rents and absorption levels, the market likes these projects as well. CCIM.com AN INVESTOR'S PERSPECTIVE Michael Anderson, CCIM, and Nate Hanks, CCIM, are co-owners of RealSource, a Utah-based investment firm specializing in multifamily opportunities in growing markets. Anderson shares his company's approach to development. CIRE: What's driving multifamily development? Anderson: Existing demand and availability of inexpensive debt and equity are the two primary drivers. In the last few years, most high-growth [multifamily] markets have experienced soaring job growth, new family formation, and in-migration fueling unmet demand. CIRE: How do you determine whether a market is prone to overbuilding? Anderson: We examine the correlation or gap between the demand line and supply line. Future rental demand is primarily driven by service employees, which are the direct, ancillary of base employment within the area. Base employment serves as a leading economic indicator of future demand by at least 12 months as the service economy catches up to new base employment. The leading indicator for supply is the entitlement process, which can lead actual construction by as much as two years. With these two factors, it's fairly easy to predict a gap in demand or if oversupply conditions are likely to exist within the next 24 months. But it's difficult to stop the development process even when headed toward oversupply due to commitments made during the entitlement process. CIRE: What's your company's role in multifamily development projects? Anderson: We seek a relationship with multifamily developers where we provide the initial investment capital to acquire the land and complete the entitlement process, including plans and permits. We also provide the capital gap between the construction financing and the anticipated costs to complete the project. We expect our development partner to bring the project to a stabilized occupancy level of more than 80 percent, at which time we will arrange for permanent financing and acquire the development partner's interest. We pay considerable attention to community tapestry considerations and shifts in social economics to understand what type of property to build and market. July | August | 2013 37