IT'S SAID THAT DEVELOPERS have short memories. That's probably true. But coming out of this downturn, some developers are changing their strategies after suffering through 2008 and 2009. Here are four of the lessons they've learned.
1. Consider the finished-lot model; it makes more sense.
Before the downturn, a lot of apartment builders got overextended with land that needed time in the pipeline for rezoning.
“That [entitlement risk] is where everyone lost a lot of money when the party ended,” says Jim Butz, CEO of McLean, Va.–based Jefferson Apartment Group and former president of JPI East. “If you were rezoning a deal early in 2008, you would have written off all of that money. JPI did, and all of our competitors did it, and that's very painful."
That has changed Butz's strategy this time through the cycle. “We're looking for sites that are zoned, and we're not taking entitlement risk,” Butz says.
2. Don't count on everything breaking right.
“[Living through recessions] increases how you gauge expectations,” says Rick Hausler, a partner in Tysons Corner, Va.– based Insight Property Group. “You won't flip six heads in a row. Maybe there will be two or three tails."
But that doesn't mean you should play it too conservatively, either. “If you don't have some optimism about success, you won't do anything,” Hausler says.
3. Put more skin in the game.
Butz says one of the problems at JPI wasn't financial engineering. Through its partnership with GE Capital, it always put a sufficient amount of equity in its deals. That wasn't the same for other developers. Some people may have put down as little as 10 percent. Upon lease-up, after the market tanked, they were upside down.
Butz saw what happened with other companies and is sticking with 35 percent nonrecourse equity in his deals. Some developers are also putting in more equity than the banks are asking for.
4. Understand that outside forces ultimately control your fate.
The reason a lot of developers are putting in more equity is because their debt sources require it.
“It's going to be incumbent upon debt and equity to stick with the professionals who have a long history of successful multifamily development and keep it from getting frothy,” says Greg Bonifield, a partner with Arlington, Va.–based Woodfield Investments.