Developer Bob Hall got his start buying an old building in a deteriorating downtown to house his import business. He didn’t know about due diligence, deferred maintenance or building codes and after having to refinance then sell his house to fund the required repairs swore he’d never buy another building… until he looked at his tax return. He was making more money renting out the extra space than the import business was pulling in… and he was hooked.
In an Axiometrics piece out today “Multifamily Completions Will Continue to Rise” they had a chart showing apartment building completions versus starts lagged 1 year:
Why lagged 1 year? Because “the Census Bureau’s average length of time from start to completion for projects with 20 or more units was Continue reading Suburban Apartment Building Development Returns Bringing New Competition
Earlier this week I posted on statistics that generated this chart from CoStar showing that 56% of office buildings that are converted or demolished make way for apartments and/or mixed use. These type of projects do come with their own set of risks and rewards however. Fortunately that same day Globe St. posted an interview with Jim Grauley, COO and president of Columbia Residential on the down and dirty details of repositioning buildings for residential. Columbia does a lot of LIHTC (Low Income Housing Tax Credit) projects but they started up Columbia Ventures LLC to focus specifically on repositioning existing buildings for market rate housing. In a two part interview (part 1 and part 2) he laid out the requirements, risks and opportunities.
One project they currently have underway is the Imperial Hotel in downtown Atlanta. It required a complicated financing transaction for a complete historic and LEED Gold renovation that will create 90 state of the art efficiency apartments. “Columbia also is taking on an adaptive reuse of another historically significant building in Downtown Atlanta converted to market rate apartments” said Grauley.
Their objective is to create “a sustainable urban lifestyle [that] is achievable when transit, occupation, services and entertainment are all in close proximity to home, making car ownership an option rather than a necessity.”
Here are my bullet points from the how-to knowledge he shared:
- Target a building that has unique/non-replaceable characteristics.
- That is located in a strong, hard to replicate, location.
- The acquisition cost of the building structure must be significantly lower than replacement costs.
- Market rents are a big driver of what can be done. higher rents drive acquisition, land, and construction costs higher, so in many cases reuse can be more feasible than new construction.
- Often reuse projects will have a larger portion of capitalization via equity sources, given the renovation risks or uncertainties and lender tendency to be more conservative with the unknowns in underwriting (= lower LTV or LTC).
- The biggest risk is dealing with the unexpected in design, construction, and operations from older buildings. You must plan for this to happen with contingencies and very substantial up front due diligence on the building.
- The building must have a layout that will allow the creation of desirable living spaces, with good light, volume, character, and connectivity (Ties in with the 22k floor plate ideal that was mentioned in my first post).
- Creativity and knowing the market are key challenges in building out the kind of living spaces that will find market acceptance.
- In older cities or districts, there are often more incentives for preservation and reuse and redevelopment.
- In historic buildings, projects can utilize historic renovation credits and incentives to allow for feasibility.
- It’s optimal when there are incentives and subsidies for renovation—such as state/federal historic tax credits, new markets tax credits.
- ROI can be very good, but the often necessary subsidies for renovation or preservation can limit the re-sale timing and in some cases return..
In many top US markets the supply of office space has not just been stagnant, it’s actually been shrinking and apartment building investors have been the beneficiaries.
In a CoStar piece out today entitled Didn’t That Used to Be an Office Building? they list a couple big advantages of converting office space to apartments: Office working residents are close to work, and there’s great access to public transportation. How many people who spend hours a day sitting on the freeway would like the option to park the car all week?
If you combine the residential and mixed use portions of the chart below, 56% of the office conversions/demolitions are going to apartments:
We all know that jobs are a critical driver of the apartment building investment cycle and so we dutifully follow along with the talking heads when the unemployment number is estimated, released and then its potent debated. But Mike Scott over at Dupre+Scott points out in a piece posted Friday that apartment building investors should be following employment, not unemployment. Specifically he recommends measuring how many jobs it takes to create demand for one apartment unit. Currently in King County (where Seattle is the county seat and where Dupre+Scott is located) it takes about 8 jobs to do that:
The formula is simple: Net new jobs / apartment units absorbed. And if you’re an multifamily investor in the tri-county area (King, Pierce and Snohomish in WA State) that Dupre+Scott provides apartment investment research for, they’d be happy to supply you this information http://www.duprescott.com.
Looking at the chart we can see that while currently it takes about eight jobs to fill one unit it wasn’t always so and in fact the twenty year average is closer to nine. Mike explains Continue reading More important than unemployment for apartment building investors?
Back in February we posted an Axiometrics chart plotting the revenue growth vs. job growth in leading apartment investment markets in the US. They were out last week with an updated chart but not just in the way we might think since the numbers are Axiometrics’ 2013 forecasts for revenue and job growth updated through May this year. To me the real ‘update’ is that they reversed the axises on the chart and I think it makes more sense laid out this way:
Before I get sidetracked onto a long discussion on the importance of understanding just Continue reading Job growth vs. revenue growth chart of top apartment building investment markets in the US- updated.
Friday twofer on Seattle. First is Dupre+Scott’s entertaining and enlightening video on apartment building construction and property sales:
Mike has two nice charts showing apartment development numbers back to 1988 and sales volume back to 1981. Note that on the sales volume chart 2013 numbers are Continue reading The ‘Twin Peaks’ of Seattle Apartment Building Investment Plus MPF Research says rent growth holding strong there.
According to the ASU W.P. Carey School of Business’ Phoenix Housing Market Explained presentation, PHX will have to add housing equal to the current size of the Denver metro area over the next two or three decades to hold all the people who will move there. This presentation was done in March of this year but the demographics are powerful and still operating. Watch minutes 5 to 25 for the market demographics, after that they dive into the specifics of the single family sector recovery.
Transit corridors and public lands will shape where development takes place says Mark Stapp, Director of the Real Estate Development program at ASU’s W.P. Carey School of Business. ‘Densification’ will happen around the transit hubs which means these will be good locations for apartment building investment but Continue reading Phoenix population to add 2.6 million by 2040, housing supply not keeping up. Good for apartment building investment.
Requires (free) registration: M&M Research
Here’s a peek at their Phoenix Charts:
The NAHB has a piece out called Producer Prices in March – Building Materials Prices Approaching Housing Boom Highs talking about how far gypsum (main ingredient in drywall +18%), softwood lumber (2x4s, 2x6s, etc. +30%) and chipboard (oriented strand board and waferboard which have replaced plywood, joists and beams in many applications +68%) prices have risen in the last year, the chart tells the story:
Bill McBride over at Calculated Risk has a piece showing the longer term price history for Random Length Lumber (2x4s only, both cash and futures) and a link to a pretty depressing Vancouver Sun article on pine beetle devastation in BC (Spoiler alert: the Continue reading Apartment Building Replacement Costs Rising: lumber back to housing boom highs, growing labor shortages.