There’s a scene in the Sandra Bullock film The Blind Side where one college football coach after another enters her character’s home to try to recruit young and rising football player Michael Oher to their team. Each one has to upsell and outbid the others. And if that living room sell doesn’t go well, then bid farewell to the new defensive lineman.
What does that have to do with land acquisition and development? Quite a bit, as it turns out, says Rob Seldin, senior vice president of Denver-based Archstone, an apartment owner, manager, and builder. Seldin compares land and development execs in the apartment space to big-time college football coaches. Both have to have the ability to come into someone’s house and make a compelling sales case. “It’s a lot like college football,” Seldin says. “A lot of it depends on how you do in the living room.”
For Seldin and other multifamily developers, the goal of those living room meetings isn’t to whisk away a potential all-star but to convince a land seller to partner with them or sell them a piece of dirt.
Up until recently, that sales process didn’t include as many players, but lately, Seldin and his fellow multifamily developers have had a lot more competition in the living room. With the surge in multifamily fundamentals in the past year, a bright outlook for the next few years, and continued struggles in other real estate sectors, a number of apartment developers have reported seeing competition from single-family builders and commercial developers when it comes to acquiring dirt, particularly in hot markets like Washington, D.C. But veteran multifamily land buyers still contend they know how to close the deal, even in this crowded environment.
In many ways, the Washington, D.C., market is unlike other multifamily land markets in the country. With strong job growth and limited supply, it’s easier to make deals pencil out in the nation’s capital than anywhere else. That’s pushed land prices up almost 500 percent to $100,000 per unit in some locations and has led to stiff competition when land for multifamily development becomes available. As other markets recover, multifamily developers in those locales could see the same sort of competition for land emerge.
Already, the land space is a crowded market. Just in D.C., land deals are being bid on by large private companies such as Archstone and Dallas-based Mill Creek Residential Trust (whose team migrated from Atlanta-based merchant builder-turned-asset manager Trammell Crow Residential); regional powerhouses such as Greenbelt, Md.–based owner, manager, and developer The Bozzuto Group; and spin-off firms such as Ashburn, Va.–based Woodfield Investments (whose lenders came from Charlotte, N.C.–based Summit Properties, a multifamily REIT before it merged with Camden Property Trust, a Houston-based REIT, in 2004) and McLean, Va.–based Jefferson Apartment Group (whose team came from Dallas-based JPI).
Despite the players already on the floor, new ones seem to rise up almost daily. For instance, Dean Sigmon, senior vice president and director of the Mid-Atlantic region for Houston-based commercial real estate services company Transwestern, says he’s seen smaller, public single-family home builders and out-of-work companies bid for land on which to build multifamily rentals.
Head up I-95 through the Northeast corridor and you’ll see unfamiliar competitors for land there, as well. Ronald Ladell, a vice president for Arlington, Va.–based REIT AvalonBay Communities, has seen new competitors move into the mix on land he’s bidding for in the New Jersey market. Ladell says that despite having to deal with the aftereffects of the housing bust, large single-family builders such as Horsham, Pa.–based Toll Brothers and Bloomfield Hills, Mich.–based Pulte are starting to compete for land.
“Twelve months ago, there was no Pulte out there looking at land in this market,” Ladell says. “Now, they’re back again, and I have seen these companies pay incredibly high prices.”
The office and industrial space sector is entering the fray as well. “There are various nonresidential developers (industrial, retail, etcetera) who are attracted by the low cap rates and recent loosening of credit and who now believe they can compete in the ground-up multifamily arena,” Ladell says.
For established multifamily developers, the appearance of these new competitors has created several issues. First and foremost, increased competition means higher prices. Earlier this year, Bill Sengelmann, senior vice president of real estate investments at Camden, wanted to secure phase II of a Dulles Station (Va.) development (Camden already owned phase I). A bank owned the dirt, so Sengelmann placed a bid of $30,000 a door, confident of landing a deal. “Someone bought it at $50,000 or $60,000 a door,” Sengelmann says. “That blew me away.”
Unfortunately, high bid prices can sometimes come with a catch. Instead of closing for all of the land at once, as rental builders such as AvalonBay generally do, single-family bidders want to close in phases—over 12, 18, even 24 months. They may be willing to spend as much as 25 percent more than their multifamily competitors, but their certainty of close on the entire parcel is much more dependent on how sales in the earlier phases go. “The land seller has a choice,” says Bill McDonald, executive managing director of the East region for Mill Creek. “They may get more money in total if everything works out as planned, but they’d get it over a longer period of time.”
Still, some people think this competition is falsely inflated, which is pushing up valuations. “The perception is there’s more activity than is being achieved,” Seldin says. “It’s having a negative impact with regard to land value.”
Thankfully, multifamily developers determined to counteract what single-family builders are telling land sellers have options. Ladell, for one, is selling buyers on AvalonBay’s ability to pay for everything up front, even if it is less than for-sale builders can pay. “It’s frustrating because you have sellers who are saying, ‘I have Pulte and Hovnanian [offering premium prices]. Why should I sell to AvalonBay?’?”
Ladell’s strategy is seeing some traction. “I’m able to convince some sellers that we’re a better deal because we’ll close earlier, in one phase, and without any financing contingency. Also, it helps to be able to show [the sellers] all of the construction that we have under way already within the same market,” he says.
Sengelmann, too, emphasizes Camden’s ability to close. “If you’re a land seller, you sell it to the guy with the most money first,” he says. “But you have to also try to sell it to someone with the capacity and money to close on the deal.” Sengelmann goes a step further by noting Camden’s ability to create value by entitling the land, even if the deal doesn’t close.
For Seldin, it all comes back to the personal sales job. He says buyers need to convince sellers they can get the project through entitlements without giving all of the value away to the jurisdiction. “At the end of the day, land is relatively illiquid, especially in a market where approvals are political,” he says. “Your land is only worth what the person who is entitling it is able to achieve. What the owner is betting on when they select someone is that you’re the best person to maximize their potential. If they choose unwisely and someone goes down the road and entitles in a way that devalues the land, the property owner whose land value is destroyed is left holding the bag.”