Capital Chases Southeast Multifamily Sector, Says InterFace Panel
ATLANTA — This year marked a golden age in terms of operating or selling multifamily properties, according to Alan Dean, region president of Terwilliger Pappas, a development firm with four offices in the Southeast. But given the rising costs associated with land acquisition, materials and labor, the challenge has been putting together new deals.
“Anyone that got deals done shortly after COVID hit, those deals are going to be very valuable because they’re going to be opening up with less competition on lease-up,” said Dean.
Dean’s comments came during a panel entitled “What’s the Outlook for Development in 2022?” at the 12th annual InterFace Multifamily Southeast conference. The event, which took place Thursday, Dec. 2 at the Westin Buckhead hotel in Atlanta, drew more than 300 industry professionals.
Joining Dean on the panel were Jay Curran, president of Charlotte, N.C.-based Crescent Communities; Woody Rupp, chief investment officer of Atlanta-based Brand Properties; Harvey Wadsworth, managing director of Atlanta-based Portman Residential; and Justin Weintraub, principal and chief development officer of Birmingham, Ala.-based Daniel Corp. Robert Stickel, executive vice chair with Cushman & Wakefield in Atlanta, moderated the panel.
High prices for dirt, long entitlement processes and increased competition in the marketplace have taken a toll on developers’ ability to acquire project sites. “The ‘easy’ sites that are shovel-ready and entitled, those are gone,” said Weintraub. “If it was easy, it would have been done by now.”
The ease in acquiring sites does vary by market, however, said Wadsworth. In his view, Austin and Nashville in the Southeast are experiencing the most aggressive terms for land buyers.
Development cost increases are requiring that everyone — including general contractors, lenders and equity partners — be more flexible in their approach, said Rupp. But as costs have increased, so have rents. In the third quarter, national multifamily rents increased 6.2 percent from the prior quarter and 8.4 percent from the same period a year ago, according to a report from CBRE.
Despite inflation and other challenges associated with today’s environment, the panelists were optimistic regarding development and investment activity, particularly in the Southeast region because it continues to draw new residents.
Panelists also fixated on the low capitalization rates for apartment transactions. Since the start of 2021, the average national cap rate for the multifamily sector has decreased 49 basis points, according to CBRE. The property type experienced record investment in the third quarter and continues to be favored among investors.
“There’s more capital chasing our space for good reasons,” said Weintraub. “Multifamily is a sustainable income stream and it wasn’t hurt by COVID like other asset classes were. There’s really good reason that worldwide capital wants to be in multifamily within the Southeast.”
While the net effect of increased investment in the space is yet to be determined, developers aren’t shy about the future. “Those of us that are seasoned and experienced will adapt, adjust and find ways to make money,” said Weintraub.
“We are in a very fortunate time right now that we are in an extremely capital-intensive slope of the business,” said Curran. “We are now putting out larger and larger chunks of capital. Our business plan 10 years ago had investments that were averaging $135,000 per door. Those are unachievable numbers in today’s environment. In our business plan for next year, the average basis per door for luxury high-rise product is about $310,000.”
While it’s impossible to anticipate disruptions like the COVID-19 pandemic, it is important to work far in advance to secure capital for projects of this scale, said Curran. “We’re trying to do everything we can to button up our risk structure and make sure we capitalize deals in a considerable manner so that we can survive and thrive.”
— Kristin Hiller