The recession has forced many merchant developers to rethink their strategy, as firms found out the hard way that a more diversified business model stands a better chance of survival.
But in adapting on the fly, the improvements these firms made should insulate them from the next recession, proving that whatever doesn’t kill you may ultimately make you stronger.
Consider Wood Partners. After cutting its overhead by about 50 percent, the merchant developer ramped up its acquisition team, hiring industry veterans Curtis Walker, a senior-level executive with stints at Trammel Crow, Post Properties, and Fairfield Residential, as well as Don Foster, a former senior acquisitions officer at Harbor Group International.
Wood also started a property management division, hiring Mike Hefley, former COO of Gables Residential, to lead that program. The company had always farmed out that service in the past, but the newly created division will focus on Wood’s portfolio, with the eventual goal of managing all of the company’s 13,377 units.
“We were development-focused and vulnerable to a capital shock,” says Joseph Keough, CFO of Atlanta-based Wood Partners. “So we’re diversifying our revenue sources.”
Developers have also found themselves hawking their management, development, or underwriting expertise to third parties for the first time. In short, many firms realize that selling intellectual capital could raise real capital.
Throughout its 73-year history, Crosland has mainly been a development shop, with only about 20 percent of its units coming through acquisition. But in the past two years, the company found that its expertise in developing and managing properties throughout the Southeast was attractive to many opportunity funds looking for regional partners on the ground.
Crosland has been increasingly tapped by private investors to do market analyses or complete entitlement processes, or find a deal and stay on as the property manager. In fact, Crosland’s property management arm picked up about 1,000 units through these arrangements.
“A lot of the money was raised without real estate expertise, so people came to us to help underwrite and find assets,” says Steve Mauldin, who stepped down as CFO in July to become president of the Charlotte, N.C.-based Crosland. “Capital sources understand that the game’s won and lost, and value gets created at the property level, and that’s where we plug in.”
Since last year, the company began heavily marketing its management business, Crosland Investment Services, to banks, mezzanine lenders, and other merchant developers, picking up another 1,000 units in the past year, growing that division to 6,500 units. Half of the new units came through its fee work with private investors.
“We started providing a much more full-service organization,” Mauldin says. “Over the last year, we have focused, really for the first time, on Crosland Investment Services.”
When the recession began to take hold, the first move for many merchant developers was to cut overhead in their construction divisions. But some firms with large in-house construction groups have also found ways to leverage their expertise.
Alliance Residential began to market its construction services—which had always been an in-house operation—to others during the downturn as its own pipeline slowed considerably. Aside from general contractor work, Alliance also offered underwriting and analysis, as well as entitlement services.
The company also shifted resources into property management, taking on a whopping 10,000 new units since the beginning of 2009, mainly by serving as a “white knight” for lenders with growing REO assets.
“We’re doing a lot of work for banks and other financial institutions who are trying to figure out how to get out of the real estate they find themselves in,” says Jay Hiemenz, CFO of the Phoenix-based firm. “Some of that requires capital work, so we were able to redeploy a lot of our development resources into property management.”