With stiffening competition in the acquisitions market and development still limited by debt limitations and burdensome entitlement process, what's an entrepreneurial firm to do if it wants to generate healthy returns?
It's simple, if you listened to the panelists on the "Variety Show: Use Product Type and Location to Diversify Your Pipeline" at the 2011 Multifamily Executive Conference. To add units, and get good returns, you need to be open to anything.
Look at San Antonio-based Lynd Cos. It has relied on three distinct methods of juicing returns. It builds, buys assets, and corrals notes. But it has simple rules for each. When it develops, the company likes to stick with high-rise product, like its EnV tower in Chicago. When it buys, it prefers to find garden deals, given how pricy high-rises are. Lynd expects an Internal Rate of Return (IRR) of around 20 percent on new construction and in the mid- to high-teens on acquisitions.
"Were less hot on garden," says A. David Lynd, president and COO of the company. "We think we can buy them cheaper than we can build."
And when it buys notes, it's open to going about anywhere, like Michigan. "The notes are less geographic and more opportunistic," Lynd says.
Lynd has multiple capital sources lined up for each of these three activities. "When we see an opportunity we know which capital partner has an appetite for that strategy," he says.
Mixing it up isn’t just buying notes and assets and developing. For companies that rely on development, being able to build different product types, often in the same project, is essential in urban projects.
R. Scott Ziegler founding principal of Houston-based Ziegler Cooper Architects said developers must find the sweetspot of what a market will bear as far a as unit sizes and rents. Then that developer has to design something to hit the mark. In one project, he showed how a developer put one a 21-story building on the same site as a four-story structure. The high-rise had a density of 160 units per acre, while the small structure had 60 units an acre. Then the developer added retail to the mix. This sort of variety could become the wave of the future as developers add density in the urban core.
"We're coming to a point in the top 20 American markets where you have to think creatively," Ziegler said.
Richard Lamprecht, executive vice president of West Investments with Denver-based Archstone says when developers mix product types, whether a building is concrete or wood built, they can accelerate lease-up. "You need to be comfortable with all types of product if you develop," he said.
Lamprech gave an example of an Archstone project that had two-story paired townhomes and three-story standard flats on the same site as a way you can mix product types. The townhomes had three bedrooms in a market that was devoid of that configuration. "You have to look at you market and find what's not out there," he said.
In fact, Lynd and some audience members saw great potential in building three bedrooms, especially since most developers are producing smaller studios and one bedrooms right now in their effort to lure the Gen Y renter. "With homeownership struggling, there will be demand for two- and three-bedroom apartments," Lynd said (indicating that families are having to leave their detached homes for apartments).
In fact, Lamprecht thought projects with a mix of units and housing types could ultimately lure the whole family. "The broader you make the floor plan mix, the better chance you have of mom and dad, the kids, and grandma in the same spot," he said.
Architects and developers can increase flexibility even more by designing apartments that could one day be converted to condos when that market returns. While the panelists admitted that was an opportunity, ultimately renters and buyers want different things. "What people want when they rent may be different than what people want when they buy," Lamprecht said.