Working for Summit Contractors in Jacksonville, Fla., Matt Robinson gets a pretty good feel for what's being built in multifamily. Summit, the largest builder on the Multifamily 50 list, is a third-party general contractor that builds all types of multifamily housing across the country. So, when this senior vice president talks about hot product types, you listen.

What Robinson says surprises absolutely no one who has been following multifamily starts during the past few years. "The market-rate product [for rent] is going away," he says.

Builders are no longer putting up 140- to 220-unit market-rate projects, says Robinson. Instead, they build market-rate on a smaller scale, if they build it at all. "Even those [smaller market-rate projects] are rare because of interest rates," Robinson says. "We've seen a real shift from market-rate to the for-sale product."

Stuart Meyers
Stuart Meyers

Condos aren't the only product type developers turn to as market-rate slumps. Some developers entered the student niche and explored military housing possibilities. Others even built affordable housing. When developers talk about why market-rate is slumping, interest rates usually come to the forefront. "I think interest rates are the one major driving point," says Stuart Meyers, chairman of Cornerstone Group in Coral Gables, Fla, the No. 8 builder on the Multifamily 50. "People would prefer to own if they can. They want the tax advantages and equity build-up. It's the American dream."

Ron Terwilliger, CEO of Trammell Crow Residential in Atlanta, estimates that 5 million renters became homeowners (buying condos and single-family homes) during the past eight years, pushing up condo prices. In many areas of the country, condo prices hit record highs during the past 12 months. That meant for-sale developers could afford to pay more for land than their for-rent counterparts, who were struggling with high vacancy rates. "Land is so hard to find right now," Meyers says. "It's very difficult to make the risk-reward relationship work for rental housing."

New Directions The shaky performance of the market-rate product, combined with the hot condo market, forced Cornerstone, like many other builders, to reevaluate its strategies. For instance, three years ago, the company went outside of its niche as a workforce housing developer and built three high-end rental projects. But economic conditions forced it to sell two to condo converters. Now, the company is building two more luxury-type products–160 units in Ft. Lauderdale and 326 units in Sunny Isles, Fla. "We are refocusing ourselves," Meyers says. The difference is these new products are for-sale so that the company can capitalize on low interest rates.

Ron Terwilliger
Ron Terwilliger

Trammell Crow, the 11th-ranked builder on the Multifamily 50, also built properties with the original intent of opening them as rentals, then shifted them to for-sale. The company sold apartment developments to converters in both Northern Virginia and Atlantic City, N.J. And in Houston it is converting rental townhouses to for-sale product. "We have sold some projects to condo converters because they paid more than we could make as rentals," Terwilliger says.

Even if you aren't building a luxury product, shifting it to for-sale may make sense. Cornerstone decided to build townhouses for the entry-level buyer. "Rather than build a high-end product, we are sticking to smaller units at lower prices," Meyers says. "In one project, someone could be on Miami Beach for $300,000 to $400,000. That's a bargain. I like the economics of the lower-priced product because it opens up the buyer pool."

Builders are adjusting to market conditions. But interest rates create uncertainty. If rates stay low, condos should remain hot. If they begin creeping higher toward the end of the year, the market could cool considerably. "In this environment, it's a concern because eventually things have to turn around," Meyers says. "It's just a question of when."

The Affordable Pipeline It's one thing to build a townhouse for the expanding demographic of entry-level home buyers. It's a totally different one to compete with nonprofits and other developers for tax-credit dollars and then jump through the hoops that financing affordable housing requires. Yet some developers are doing just that as market-rate slumps, according to Robinson.

Bob Greer
Bob Greer

Terwilliger sees the trend, too. He says about 40 percent to 45 percent of new rental apartment starts in the United States during the past year were subsidized, a departure from the market-rate-driven development of the past. Trammell Crow was a leader in this movement, moving into affordable housing four years ago before market-rate went sour. "We see a lot of demand in affordable housing," he says. "Because of tax credits, we have been able to build a lot for the affordable market."

Big developers aren't the only ones to turn to affordable housing. Bob Greer, president of The Michaels Development Co., an affordable housing developer in Marlton, N.J., ranked 38th on the Multifamily 50, sees a lot of small nonprofits getting into the tax-credit cycle, seeking smaller allocations.