For the past half century, Hines has made its name in just about every real estate sector—other than apartments—in the United States.
Gerald D. Hines started the company in 1957 with a vision of employing some of the world’s greatest architects to create high-rise office buildings. Over the years, his Houston-based company has fulfilled that vision and more.
As it built its commercial portfolio, and apartments in places such as Beijing, Brazil, and Barcelona, there was one domestic product type from which Hines was noticeably absent—multifamily. The firm had an occasional presence, but it was all behind the scenes, as an equity partner in apartment deals like the ongoing CityCenter project in Washington, D.C., being built by Denver-based Archstone.
Yet, after the commercial development markets dried up, the apartment industry’s rising demand and lack of supply were too enticing for president and CEO Jeff Hines to pass up. So in 2010, he decided to throw his hat into the multifamily ring.
But first, Hines needed a leader with hands-on experience. Enter Alan Patton, a 13-year veteran developer and former president of The Morgan Group, a multifamily builder based in Houston. Under his leadership, Morgan built 11,000 units, focusing on Texas, California, Florida, Colorado, Kansas, and North Carolina.
The marriage made a lot of sense. “The office market was slower than it has been,” Patton says. “And we had these really terrific, smart, long-tenured real estate professionals in all of the major markets inside the United States.”
So why not put them to use on apartments?
Hines isn’t alone. Multifamily has flourished over the past couple of years while other real estate segments, such as retail and, mostly notably, single-family, have floundered. That’s drawn developers, eager to keep their platforms cranking, out of the woodwork and into apartments.
Some, like Hines and others in the commercial and retail space, have tangible projects moving. With others, it’s mainly talk. But when “outside” developers even joke about moving into the sector, established multifamily builders grow wary.
With its massive office platform, Hines brings a critical mass of development know-how to the table that makes it formidable right out of the gate. It’s sticking to the 15 to 20 core markets that the company calls its home office sector, basically the coasts, Texas, Phoenix, Colorado, and select Midwestern markets, like Minneapolis and Chicago, where its people are familiar with the terrain.
“What they were used to looking at was core-type office locations,” Patton says. “A great office site is great infill multifamily.”
As Patton is well aware, core also attracts equity. Earlier this year, Hines closed a $110 million fund with a large, undisclosed institution that will handle six or seven deals. Its Hines Global REIT is doing three more deals, while the balance of its pipeline is, right now, slated to come from one-off joint ventures with pension funds or programmatic partnerships.
To help put the projects together (and build and manage them), Patton is teaming up the Hines veterans with a “handful” of multifamily experts in all of its target markets. “We have people on the ground in those cities already. When we’re looking for a 2.5-acre rectangular site in a city, they know where to go,” says Patton. “They know living and traffic patterns and places to stay out of—it’s not like we’re coming in from 30,000 feet.”
Things seem to be working so far. In July, Hines broke ground on its first two developments—a 322-unit deal in Houston and a 215-unit project in Atlanta. In September, it plans to start another 185 units in Minneapolis.
Hines has regional offices in Houston, San Francisco, Chicago, and Washington, D.C., and its current pipeline consists of deals in Boston; Houston; Minneapolis; Chicago; the Washington, D.C., corridor; Atlanta; South Florida; St. Petersburg, Fla.; Denver; and Orange County, Calif.
“We’ve got this incredible organizational footprint with good real estate people that know their markets and know how to get sites zoned,” Hines says.
Eventually, Hines wants to do about 5,000 starts a year, which would vault it into the top 10 nationally. Patton says the company’s hold time could vary, but it plans on a three- to five-year horizon, doing its own asset management while utilizing outside property managers.
Locked and Loaded
In Washington, D.C., the apartment market improved and apartment starts picked up earlier than in almost every other part of the country. That lured some retail developers into apartments. Big names like Boston-based office developer Boston Properties, New York–based Brookfield Office Properties, and New York–based office owner Vornado Realty Trust have jumped into the game.
Washington, D.C.–based Combined Properties is converting two existing retail buildings in the D.C. area into multifamily buildings. More could follow.
“A couple of the sites we have are more attractive [for multifamily] because the areas have grown up around them,” says Marianne Lowenthal, executive vice president of development at Combined Properties.
Rockville, Md.–based Federal Realty Investment Trust, a REIT specializing in the ownership, management, development, and redevelopment of retail assets, has partnered with multifamily developers over the years and owns about 1,000 units. But when the time came to redevelop Mid-Pike Plaza, a 24-acre shopping center less than a quarter mile from a subway stop in White Flint, Md., it decided to handle the project itself.
In Santana Row, in San Jose, Calif., Federal has more than 300 units of its own real estate coming on line. Right now, residential represents only about 4 percent or 5 percent of its rental income, but Andrew Blocher, senior vice president and CFO at Federal, could see this number doubling as new projects come on line. The company builds apartments only where it’s already planning or has retail.
“It depends on the unique risks in opportunities that come along with specific residential development,” Blocher says. “We understand if it’s a great infill location. As a result, we’re more willing to take on the residential exposure.”
Residential exposure is what got single-family builders in trouble. Because of that still-struggling market, there has been a lot of talk about single-family builders entering the apartment market. On the national level, the only real entrant appears to be publicly held Lennar Corp., which is reportedly starting Lennar Multifamily with industry vets Todd Farrell and Randy Ell. The company refused multiple requests to be interviewed for this story.
“The home builders are used to looking at land,” Patton says. “They’re used to building residential product. For them to do multifamily rental deals would not surprise me.”
Some activity is occurring on the private side, as well. Dallas-based Hillwood Properties, a part of Perot Cos., expanded its multifamily division and plans to build 5,000 apartments over the next decade, according to the Dallas Business Journal. Irvine, Calif.–based home builder MBK Homes has plans for two properties and is looking for more (see “MBK Joins the Fray,” below). Then there are companies like San Ramon, Calif.–based SummerHill Homes, which merged with its sister company multifamily builder and San Francisco–based Urban Housing Group after Urban’s pipeline grew larger than what it had historically handled.
“There are a number of deals in the pipeline, so it made sense to merge the two businesses,” says Chris Neighbor, senior vice president of SummerHill. “It’s a single-family company getting into apartments by way of merging with its sister company.”
Other people with single-family experience in California, such as the San Diego–based Buie Stoddard Group, have teamed up with equity and are buying lots, entitling them, and selling them to multifamily developers.
“Entrepreneurially, a handful of guys did entitlement adjustments to take a less-dense property to a denser property,” says Timothy P. Sullivan, a principal at La Jolla, Calif.–based John Burns Real Estate Consulting.
Friend or Foe?
Traditional multifamily developers seem to have mixed feelings about newcomers from other sectors entering the space. Some view the new competition as a threat. “The multifamily guy will tell you it’s already a crowded space,” says one multifamily developer who didn’t want to be quoted for this story. “If we’re competing over the same site, we’re running prices up.”
Patton acknowledges that some competitors may not be excited to see a company like Hines, with a long track record of success, enter apartment development. “There is enough demand for all of us,” he says.
Ron Ladell, a senior vice president at Arlington, Va.–based REIT AvalonBay Communities, isn’t as concerned. He says many firms eager to get in the business aren’t necessarily looking at the sites that he is. But he admits more competition can push up costs.
“They’re paying more for land than they need to because they’re so aggressively trying to get into that asset class,” Ladell says. “They also hire the architect, the engineer, the planner, and whatever professional they think they need. I think that will raise the cost.”
The simple return of single-family building could push up those costs as well. Of course, Patton himself wonders how long some of these new competitors will stay when single-family does come back. “It’s going to be interesting to see what home builders will do long term,” he says. “They could do it. I don’t know how important it will be to their business once single-family comes back [however].”
But even when the office market returns, Patton says Hines is in multifamily to stay. “It’s important to us to keep this going,” he says. “It’s not our goal to be the largest national multifamily builder. We just want to be the smartest.”