Don’t look now, but the disposition market is getting hot. How hot? Try Phoenix hot, where hometown developer and owner/operator Alliance Residential Co. just unloaded its 280-unit garden-style apartment community Broadstone Canyon Crossroads to Greenwood Village, Colo.-based Baron Properties. In a press release announcing the deal, Alliance executives said the sale will allow deployment of capital directly into the company’s development initiatives, which in total are expected to eclipse 5,000 units in new starts this year.
Alliance CFO Jay Hiemenz checked in with Multifamily Executive senior editor Chris Wood this week for an exclusive look at dispositions, the recovery of secondary markets, and the return of the merchant builder model to the multifamily development arena.
MFE: Congratulations on the disposition of Broadstone Canyon Crossroads. What do you think has happened in the market over the past 90 days that made this deal possible?
Hiemenz: It really comes down to the cap rate compression that we’ve seen that started with the focus on core urban product by investors who were creamed on higher-risk activity [in the recession]. They’ve really gone back to core product in the urban metros. As that has become ultra-competitive, the private investors have been bid out of that market: They just can’t access debt at accretive yields even as low as interest rates have gotten. It’s a big change from the dark, dark days where you were just trying to cover your loan balance. Valuations have come a long way, and that’s what is driving the market now. We’re taking advantage of that.
MFE: Does that mean the merchant builder model is back?
Hiemenz: We don’t necessarily go into projects with a merchant build strategy: We always pro forma for a longer-term hold. If it works out that you can maximize value at the time of your C.O. (certificate of occupancy), then great. But we don’t begin with assumptions that on this deal we’ll be a merchant builder, on this deal we’re going to hold it. We’re really assessing the market at the time we finish the value-add proposition, be that a development effort or fundamental improvements via management. Having said that, I do think developers are looking at the shorter end of their pro formas versus a seven year hold and thinking of unlocking value shortly after completion or stabilization.
MFE: There’s market buzz that Alliance’s Enso property in Portland is in disposition and might close for upwards of $400k per door. I don't know if that's a record, but it's extremely impressive pricing. What kind of testament is that to the market for core and core-plus?
Hiemenz: I can’t comment on that specific deal as it is currently in due diligence. But the Northwest markets are consistent with what we are seeing: Portland has really come back as far as underlying fundamentals, and there are not that many downtown assets available. A property like Enso, which is in the high-demand Pearl District submarket and is fully leased up, is going to see a lot of institutional interest because of the upshot of simply riding the market up if anything else. There’s incredible demand for core product in the coastal markets, and Portland is testament to that.
MFE: What's different about the assets that you are designing, building, and selling today compared to the assets back in 2006 and 2007?
Hiemenz: I think changes tend to be incremental, not monumental, but I do think you’re going to see a continued push for green building. Municipalities are starting to embrace it, and the consumer is becoming increasingly savvier regarding it. We’re seeing broader acceptance and demand for green product. There’s definitely a push towards urban product with smaller units as well with mixed studios and ones, versus the ones, twos, and threes of before. We’re a product of capital, and capital sees the demand over time for smaller, energy-efficient, urban apartments.
MFE: How many new units do you expect to bring to market in 2011? In 2012? What's the size of your development pipeline?
Hiemenz: We have a pipeline of about 5,000 to 6,000 units, most of which should be closed this year—some may spill over into the first half of next year. We are looking at a lot more opportunities in markets that we were inactive in and have been a little bit longer in recovery.