At the Multifamily Executive Leadership Summit in Vail, Colo., this past March, Gerry Ogier, chairman, partner, and co-founder of Contravest, an Altamonte Springs, Fla.–based builder, shared a story that’s all too familiar for many of the small and regional developers across the country. He has four projects in his pipeline, but he’s only certain that one will get off the ground, because equity is very difficult to come by.
Ogier isn’t alone. Despite a weekly flood of press releases about new multifamily projects around the country and persistent talk about overdevelopment, many developers wonder how many projects are being started. “How people put together all the pipelines we’re seeing announced is a quandary to me,” says Jerry Brand, senior managing director for Charleston, S.C.–based Greystar.
Though the Top 50 firms, like Greystar, can still find equity, as Brand did on his 134-unit Elan Town Center deal in Redmond, Wash., where he partnered with Resmark Apartment Living, a division of Los Angeles–based Resmark Cos., it’s not easy for them, either. The programmatic joint ventures that basically provided developers with a blank check for development during the wild days of the early 2000s have long since disappeared. Even with some smaller partnerships emerging, it remains extremely difficult to tie down development equity.
“The majority of people are struggling,” says Porter Jones, a vice president at Chicago-based Jones Lang LaSalle, who focuses on finding equity for development clients. “There are a ton of projects that are supposedly planned or proposed. But very few of them are actually getting the funding required to be built.”
The private development engines of the 2000s were fueled by programmatic equity. Dallas-based JPI, a stalwart on the Top 50 in the early and mid-2000s, had a long-term relationship with GE Capital. The Hanover Co., based in Houston, built a partnership with MetLife before the insurer sold its share to Denver-based REIT UDR in 2010. When the economy went bust, the formation of those types of partnerships came to a halt.
“A lot of the folks developers were using as capital partners five years ago are no longer in the game,” Jones says. “People are very selective. It’s very difficult to get the equity groups’ attention, because they’re looking at so many deals.”
Jones says past relationships can clinch a deal. So if you satisfy your equity partner the first time, you’re in good shape. “They’re being very selective as to what projects they end up funding, and it’s very relationship-based,” he says. “If [the prospective partner has] done deals with the developer in the past that have worked out, they’re more prone to do another deal with that developer.”
As the pool of programmatic equity providers has declined, a lot of the bigger names in providing apartment equity, like GE Capital, have departed. “In the old days, you had 10 people lining up saying, ‘I want in. I’ll do anything to get in,’?” Brand says. “Now, it’s a much more selective market.”
That only heightened the competition to get to players like Prudential, Northwestern Mutual, and Eagle Realty, which are still in the market today. “It’s a whole new host of funds, private equity, and high–net-worth family offices that are out funding new development,” Jones says. “The cast of characters has transformed with the times.”
And now, many Top 50 Builders are approaching these same equity sources, further squeezing out smaller players. “These are groups with national franchises, and they’re out competing for the same capital at a project level,” Brand says.
A Glimmer of Life
Just because programmatic equity has gone away doesn’t mean some smaller developers haven’t put together corporate-level equity structures. They just aren’t as big as the ones in the heyday.
Ed Easley, who ran JPI West from 1996 to 2003, got his most recent firm, Carlsbad, Calif.–based Urban West, on the map by announcing that El Paso, Texas–based Hunt Cos., a top 30 builder with a heavy focus in military housing, agreed to invest at the entity level in a new venture. With that backing, Easley can focus on development and acquisition deals in Arizona, California, and Washington. “They’ll provide co-investment equity,” Easley says. “On each [deal], we’d bring a limited-equity partner. Hunt and Urban West would be sponsor equity.”
A bigger hint that programmatic equity may one day come back emerged in a March deal in which Seattle-based Harbor Urban, a merged entity of Harbor Properties and Los Angeles–based Urban Partners, secured New York–based AREA Property Partners. AREA will provide equity to develop about 1,500 units of sustainable urban-infill projects, including high-rise residential and neighborhood workforce housing.
In fact, the venture with AREA actually gave Harbor Properties the dry powder to merge with Urban Partners. “[The venture] is a programmatic investment relationship,” says Jim Atkins, managing director of Harbor Urban. “They’re not our only capital partner. We have other relationships within general partnership and with limited-partner investors.”
Whether bigger programmatic ventures will emerge this year and into next is still in doubt. Jones says that when these deals do happen, they’re on a small scale. “We’ve seen little programmatic deals, where [they’re] dedicated to three or four developments,” he says.
The question is, will he see more of these?