At last week's RealShare Washington, D.C., event, speakers on a multifamily opportunities panel tackled a lot more than what was going on the nation’s capital. That’s no surprise, with national apartment heavyweights such as Denver-based Archstone and Arlington, Va.-based AvalonBay Communities participating in the event, held by ALM's Real Estate Media Group.
For these companies, times are good. Rob Seldin, senior vice president of Denver-based Archstone said his company’s same-store NOI was higher in 2010 than it was in 2007. “When people think about 2007 as the peak in the real estate market, it’s not true,” he says. That peak is now, Seldin says, who adds that things will get even better. “We think, from a development standpoint, it’s a pretty good time right now to be getting into the ground,” Seldin explained.
But larger, national trends in the industry were also on agenda. The panel looked at what the world would be like with continuing turmoil and a lack of clarity surrounding the future of Fannie Mae and Freddie Mac. Their conclusion: Spreads would widen, and there would be less flexibility on acquisition and rehabs.
On the construction side, however, the news is better. “The lenders are coming back,” said Bob Kettler, chairman and founder at locally based Kettler, which has six construction deals underway right now. But they’re coming back with conditions, he adds. They still want recourse. And they still want builders to bring in equity and come with A-plus locations, sponsors, equity sources, and construction plans. “If you’re getting bank financing, you need a perfect report card,” Kettler adds.
Seldin sees more construction on the horizon, but he says Archstone has general avoided the banks, choosing instead to finance construction through HUD’s FHA 221(d)(3), which offers a four-year construction-to-permanent loan. “I think HUD is the best game in town providing that you can wait [to get your deal done],” Seldin says.
A D.C. Focus
Of course, a large part of Archstone’s attitude is shaped by the high-barrier markets that it operates in. One of which is the Washington, D.C., metro area. Though the market crashed in 2008, it came back pretty quickly in 2009 in the nation's capital. “The effective rents are going up significantly, whether it’s in an outer suburb or close-in,” says Scott Melnick, managing director at Jones Lang LaSalle.
Kettler says the taste in units varies depending on areas. In more urban areas, renters see to want smaller units, while in the suburbs, they prefer bigger apartments. In general, he’s seeing more interest in multiple bedroom units. “It’s because of the dynamic in the suburbs of larger households needing housing,” he says.
Kettler is also seeing a premium where he has mixed-unit properties, even if they aren’t in the city. In fact, at Reston Town Center, which is a solid 30 minutes out of the city, he’s getting rents that are competitive with the hot, close-in, Rosslyn-Ballston corridor.
AvalonBay is under-allocated in the D.C. area and would like to own more product in their backyard, according to Patrick Gniadek, vice president of investments at the company. But the success and stability of the market has brought in a lot of new players seeking apartment deals. Melnick says these new buyers are often paying a premium to come in and buy one-off deals.
“Everyone wants to be here, so there’s a lot of competition,” Gniadek adds. “We won’t buy a deal at any price.”
That kind of competition is leading people like Archstone to develop their own product instead of buying existing stock. “People are looking at deals and, when they investigate the pricing, they’re saying, ‘We’re going to go into development,’” Melnick says.
Eventually, that construction boom could cause issues, but Melnick doesn’t expect that to be the case for a while in the D.C. area. “We’ll have some submarkets three or four years from now where you’ll look on every corner and see if there’s competition,” he says.
Right now, the only market people expressed real concerns about was the Tyson’s Corner area, which Kettler says has 17,000 units in the pipeline. “The first one [delivered] will do well, but then you’ll see a lot of supply,” he says.