When Raintree Partners was founded in December 2007, it fashioned itself as more of a development than an acquisitions firm.
But the Laguna Niguel, Calif.-based company’s business model quickly changed when it saw what was happening in the acquisition space as the economic downturn took hold.
“When you could buy assets for such significant discounts to replacement costs, it didn’t make sense to build them,” says Aaron Hancock, Raintree’s director of acquisitions. “But that’s not the case anymore, which is why we’re looking at land acquisitions this year.”
Raintree is not alone. Many multifamily firms are now re-starting their development pipelines as discounts in the acquisition space dry up.
While it makes more economic sense to build or renovate rather than buy in some markets, other supply and demand trends bolster the case. The lack of new supply coming online, combined with the decline in homeownership and the rise of the voluminous Echo Boomer generation, should boost the rental pool significantly over the next five years.
As a result, Raintree is eyeing development opportunities in the Bay Area, Los Angeles, Orange County, and San Diego, but often finds the competition for available land intense. “If there’s large, high-profile land available, it’s getting pretty aggressively bid on by large institutions,” Hancock says. “We’re finding opportunities on 75- to 150-unit development sites in A locations that are below the REIT radar.”
Likewise, Weidner Apartment Homes—which spent more than $350 million acquiring 4,807 units in 2010—is building a four-story community in North Seattle for about $160,000 a door, and has another development under way in nearby Kirkland, Wash. for about $165,000 a door.
“We can’t buy new product in Seattle at that price,” says Kevin Colard, senior acquisitions manager for Kirkland, Wash.-based Weidner Apartment Homes. “Typically, we’re not a developer, but in markets that we can’t buy in, we’re going to start developing.”
The Chink in the Armor
Developers are optimistic—the question is, when will lenders share that same level of enthusiasm?
“In my almost 35 years in the industry, the set of circumstances facing the apartment business has never been better,” says Jonathan Holtzman, chairman and CEO of the Farmington Hills, Mich.-based Village Green Cos. “But the ability to build new apartments right now is remarkably constrained—construction lenders are still ultra-conservative. The pendulum has swung too far the other way.”
The Federal Housing Administration has been a key source of liquidity for construction debt, but it is hobbled by its bloated pipeline. The good news is, the traditional market for construction debt is starting to return. More banks have stepped off the sidelines in the first quarter, and that competition has driven leverage levels up, and prices on construction debt down.
The picture is also improving for the acquisition-rehab market. The government-sponsored enterprises (GSEs) once had a big appetite for significant levels of rehab, but those days are gone. The GSEs are now much more backward-looking—shining a spotlight on the trailing 12 months of rent collections, not underwriting rent growth.
Most of the rehab work being done now is funded through equity or cash flows. Then, once the dust has settled and the higher rents are being paid, the owner will move to put permanent debt on a property. “It used to be that you’d spend the dollars and get the additional debt,” Hancock says. “Now, it’s spend the dollars, get the NOI increase, and then get the additional debt.”
Still, there are other options for rehab deals: The bridge loan market has really heated up in the past six months from both balance-sheet and GSE lenders. “We’re seeing a lot of the old bridge programs come back at the agency lenders,” Colard says. “And in the last 90 days, the banks are really starting to lend again.”