Multifamily Opportunities Lie in Niche Product, Amenity-Rich Neighborhoods
Following years of frenzied development across the country, the multifamily industry is entering a slowdown period where developers have fewer starts and even fewer completions. As of the end of October, multifamily starts are down 1.8 percent year-to-date compared to this time last year, according to the U.S. Census Bureau and the Department of Housing and Urban Development. Year-to-date completions are down 3.1 percent in that same time frame.
“We’re entering a more normalized market going forward, as opposed to an aggressive development market of the past few years,” says Steven Shores, president and co-founder of Pollack Shores, an Atlanta-based multifamily developer. “I don’t view it as a negative. In a lot of respects, we were trying to catch up with demand in the years immediately following the recession where there was no new development.”
Core submarkets within major metros saw the bulk of new multifamily construction in the years following the downturn as developers were answering renter demand to live within close proximity of employment centers, dining, shopping and entertainment. Construction in those submarkets is now slowing as those sites have become more difficult to come by, in addition to the existing governors of construction such as the industry’s labor shortage and rising costs for materials and land.
Mill Creek Residential Trust LLC, a national multifamily developer and manager with more than 16,800 apartment units in its portfolio as of June 30, 2016, is an active developer in the Southeast, especially in the metro Atlanta area. Even though the firm is bullish on Atlanta, the company’s planned developments in the metro area in 2017 will be about half of 2016’s total, according to Chad Dubeau, senior managing director of Atlanta and North Florida for Mill Creek Residential.
Developers like Mill Creek are also dealing with lenders and other capital sources that have restricted their loan production for new multifamily communities. Banks and other lenders are requiring more equity for deals and are doing less multifamily loans overall in an effort to stay diverse.
To work around the issue, some developers are taking on joint venture partnerships with life insurance companies and other entities to fund development.
“Life insurance companies have become very attractive financing sources, some of them are long-term holders and they’re being more aggressive than the banks,” says Rachel Russell, vice president of development for the Carolinas at Milhaus, a multifamily development firm based in Indianapolis. “We can feel the development cycle for multifamily winding down, but the interesting thing is that there’s still so much demand to be captured. If you can find a deal that works and you have a lender that will work with you, there’s still a lot of success to be had.”
Despite the headwinds, developers are adapting to the changing market conditions and finding opportunities to build their projects. Whether developers are building inside the metro or outside, the common through line for a majority of new developments is that the projects have an urban design.
“Urban opportunities aren’t just about location relative to center city, it’s more about urban design and proximity to employment and recreation,” says Russell. “Residents will always respond to urban and walkable design, which doesn’t always mean that those projects are geographically urban. Renters desire to be close to their jobs and lifestyle offerings like restaurants, bars and parks.”
Urban Design in the Suburbs
In response to higher barriers of entry in the core submarkets of major metros, multifamily developers are looking outside of those districts to build their new assets. A number of these developments may be situated outside of the literal city center, but they are close enough for renters to take advantage of those districts while enjoying access to other demand drivers, such as employment centers and lifestyle amenities like retail and entertainment destinations.
Pollack Shores is involved in two of the more high-profile projects in the Atlanta area that happen to be outside of Atlanta city limits. The firm’s management division, Matrix Residential, manages the Haven at Avalon, an upscale apartment community located in the 86-acre Avalon mixed-use development in Alpharetta, Ga. Renters have access to a Whole Foods Market, Regal movie theater and a number of retailers and restaurants.
“A suburban node like Avalon feels pretty urban because of its walkability and lifestyle focus. Suburban can feel like core neighborhoods if it has the retail amenities, jobs and transit,” says Shores. “Renters will pay up to have the added amenities in a mixed-use development versus a standalone apartment community.”
Pollack Shores’ other significant project is the Home at Battery Atlanta, the multifamily component of the $1 billion Battery Atlanta mixed-use village surrounding SunTrust Park, the new ballpark for the Atlanta Braves in Cobb County. Renters will have access to a variety of entertainment and retail choices, the most noteworthy being the more than 80 home games per year for the Braves.
“The Home at Battery Atlanta features three communities that will each cater to a slightly different tenant mix. They will all have on-site amenities in addition to all the components of Battery Atlanta,” says Shores. “We’re building a lot of apartments in conjunction with a new ballpark, a ton of retail and entertainment and the Comcast office tower. If you live there, you can walk to restaurants and entertainment or you can hop on a bike and be at the Silver Comet Trail.”
Mill Creek Residential is also underway on suburban projects not too far outside city limits. The company is developing Modera by Mill Creek-Sandy Springs, a 340-unit community underway near the new City Springs town center and municipal complex in Sandy Springs, a nearby suburb of Atlanta. The property is situated within walking distance of I-285, the perimeter highway encircling Atlanta. Not traditionally seen as a walkable corridor, the city of Sandy Springs and private developers are actively building out the downtown Sandy Springs district with a park, single-family residences, civic buildings and other apartment developments.
“We are introducing an urban setting with an activated streetscape, and aim to make that area walkable, much like the urban core products in Midtown Atlanta or Old Fourth Ward,” says Oz Friedmann, development associate with Mill Creek Residential.
Modera by Mill Creek-Sandy Springs will also feature 25,000 square feet of ground-floor retail space. Having retail and restaurants available on-site is a desired amenity for tenants.
“Retail ends up supporting multifamily because there’s more people around those stores and restaurants,” says Russell. “The residents’ time is more limited due to traffic so the closer you can have essential, everyday retail for your renters the better. Renters will pay a premium to not have to drive far to get the things they need.”
Opportunities for new multifamily projects are still available in core submarkets around the Southeast, but there are fewer to speak of nowadays. In addition to the multiple high-rises underway in metros like Atlanta, Miami and Washington, D.C., that are built out vertically, one of the ways developers are building in core neighborhoods is through smaller, boutique apartment developments that can still fetch top-of-market rental rates.
“Smaller apartment communities within the urban core don’t get as much press because they’re not as big, but those are much needed to improve the urban fabric,” says Russell.
Mill Creek Residential has started construction on Phase II of Modera by Mill Creek-Morningside, which will add 21 apartment residences to the company’s existing 300-unit community in Atlanta’s Morningside neighborhood. Phase II will face Piedmont Avenue and will also include 4,700 square feet of ground-floor retail space, which will add to the development’s 32,500 square feet of existing retail space anchored by a 26,755-square-foot Sprouts Farmers Market.
Phase II will feature loft-style residences, each of which will have 12-foot ceilings and a private patio or rooftop terrace featuring outdoor lighting, woven wood trellises and planters. The two phases of Modera by Mill Creek-Morningside will be connected via a pedestrian bridge.
“The first phase of Modera Morningside helped address the lack of supply in the submarket while also spurring the transformation of the Piedmont Avenue/Cheshire Bridge node. With Phase II, we aimed to make it unique not just to the Morningside neighborhood, but to all of metro Atlanta,” says Friedmann. “We’re very selective about where we develop. We’re still focused on the urban core, with key demand and demographic drivers, but those sites are definitely more difficult to come by.”
— John Nelson