Over the past quarter-century, Trammell Crow Residential has been a multifamily development bellwether, producing an average 6,700 units of apartments annually. Despite stress in the capital markets, Trammell Crow was able to pull 8,400 starts out of its development pipeline in 2008, even after starting 10,200 units in 2007. Then, the streak came to a screeching halt. Last year, the company broke ground on zero units. Nada. Nothing. Zippo.
“It was the first calendar year in our company’s history that we did not commence construction on any new apartment communities,” says Charlie Brindell, president and CEO of Dallas-based Trammell Crow. “We had about 1,300 units in the pipeline that we hoped to start but were unable to start principally due to a lack of construction and development financing. In the private markets, debt and equity simply have not been available at meaningful levels.”
Last year, quite frankly, was the worst year of multifamily housing production in history, or at least since the U. S. Census began tracking apartment development, according to National Association of Home Builders (NAHB) vice president and senior economist Bernard Markstein, who tracks single-family and multifamily permits, starts, and completions for the NAHB. “Multifamily starts in 2009 were much lower than we were anticipating and much of that was just failure to get financing,” Markstein says. “We knew that weak demand would pull things down, but multifamily projects almost ground to a halt in 2009. And for 2010, we are talking worse than 2009 with only 87,000 units expected to start.” Skeptical that the number of starts will dip that low? Consider that Alliance Residential, which was among the top 15 multifamily builders in the country with 2,269 units developed in 2008, will not be breaking ground on any new projects in 2010, preferring to instead grow via asset acquisition. Or Camden Property Trust, which announced in February that it would recognize an $85.6 million charge for the fourth quarter of 2009 and would cease capitalizing interest and expenses on eight of the company’s 13 land parcels being held for development, with the remaining five parcels not breaking ground until after a mid-year market reassessment.
Alliance and Camden aren’t alone by a long shot: Across the country and throughout the industry, companies have shuttered entire development divisions, reassigned development staff into property management roles, or have otherwise put all thought and inclination of new multifamily construction starts on permanent hold.
The reason for the collapse in development is quite clear: There’s simply no money in the game. Recession-shocked capital providers have not had debt or equity monies that meet the manageable expectations of most developers; there’s been less money than ever coming into completed developments via ancillary revenue and effective rents; and there’s been seemingly no financial profit in the investment of ground-up construction when existing product can be had via acquisition at significant discounts to replacement costs.
“We’re not doing any new development this year,” sums up Bob Faith, CEO of Charleston, S.C.-based Greystar Real Estate Partners, also among 2008’s most prolific multifamily builders with 1,968 units delivered. “We want to look at where the freight trains of opportunity are, and the opportunity right now is buying well-located assets below replacement cost with troubled capital structures at trough rents.”