First, the bad news: Developers will find it more difficult to pencil new deals.

Equity will be too expensive, and loan terms will be too tough in 2009, suspending many groundbreaking ceremonies until 2010 or beyond.

Multifamily developers would do best to spend the downturn finding opportunities that will generate upside sooner than their peers when the market returns. “For distressed real estate investors, this is their time,” says Jamie Woodwell, vice president of multi family research at the Mortgage Bankers Association.

Take, for example, ZOM, Inc. In its more than 30-year history, the company has concentrated on developing ground-up Class A apartment projects.

“We don't have a formal acquisition program yet, but we are certainly studying it for 2009, to perhaps selectively purchase high-quality assets in strong urban growth markets at signifi cant discounts,” says Trip Stephens, chief investment officer at the Orlando, Fla.-based firm.

Specifically, Florida's tanking condo market presents opportunity. ZOM's property management arm, ZOM Residential Services, Inc., has expanded its Florida presence significantly in the last year—lenders foreclosing on failed condo deals have hired the company to help stabilize the communities.

Managing these failed or fractured deals gives ZOM an inside look at the market. “We continue to learn more, and it makes us more aware of other properties in the area that might be ripening into a distressed situation that we can capitalize on,” says Stephens.

Some companies have already purchased failed condo developments at deep discounts since mid-2008.

In its nearly 20-year history, the Laramar Group never considered acquiring a failed condo deal until last year. By September, the company had already purchased three such deals in the Tampa and Boca Raton, Fla., markets, sometimes for half of their value.

Laramar's strategy was to acquire the existing mortgage from the senior lender and negotiate with the mezzanine and equity providers, as well as the owner, to complete the foreclosure process. The company says the banks are motivated sellers and will do whatever they can to get nonperforming loans off their balance sheets.

Land ho

Amid tighter loan standards and higher prices for equity, buying land on the cheap becomes a critical component of enhancing your development yields.

In addition to South Florida, prices also are sinking quickly in places like Southern California, Phoenix, and Las Vegas. And developers are reporting great land deals in Georgia and the Carolinas, as local markets like Charlotte and Atlanta struggle with the deepening credit crunch.

Land prices also are beginning to loosen in stronger markets such as Houston, Dallas, and Washington, D.C.

“There are already some great land deals, and they're going to get even better in 2009,” says Robert White, president of market research firm Real Capital Analytics. “The banks are just starting to file foreclosures in signifi- cant ways now. So there are more immediate opportunities and potentially higher returns in buying assets or land out of foreclosure, as opposed to doing anything ground up that's new.”

Developers who can find construction financing in 2009—those with access to private equity or who have long-standing relationships with specific banks—may want to position their deals to come online just as the next upturn begins.

Camden Property Trust is active in Phoenix and Florida, but it is bullish on the markets' long-term prospects. Although Phoenix lost about 43,000 jobs in 2008, many believe this is a short-term anomaly. Marcus & Millichap has tracked the Phoenix market for 25 years and says this was the first year of significant job loss in that time span.

Camden is a long-term holder, averaging about 12 to 14 years per property, so it has the patience to wait out regional downturns. The company is closely watching Phoenix, Tampa, and Orlando, to see how deep the regional recessions will be.

“If those markets do recover soon due to limited new supply, and you have the capital today to invest, 2010-2011 might be a great time to have some new product hitting the market,” says Dennis Steen, Camden's CFO.

ZOM recently broke ground on a 422-unit community in Dallas and expects to break ground in the second quarter on a 189-unit high-rise in Arlington, Va. ZOM also plans to begin construction in the second half of the year on two Florida developments, and will complete a new project in 2009 called Flagler Village, a 218-unit venture in Fort Lauderdale.

“We are very bullish on building during downturns and opening up into recovering economies,” says Stephens. “A lot can happen to the upside during a two-year construction cycle. We're starting projects in 2009 to position for the 2010 and 2011 recovery.”

Back to the drawing board

Many in the multifamily industry are starting to view student housing as a somewhat recession-proof sector, as schools across the nation face capacity issues and the education market has shown itself to be more immune to overall economic downturns.

“That's one property type that we've seen as much acquisition activity, if not more, this year than previously,” says White. “It's gone from being a small niche to a more mainstream type of investment product.”

Developers also see opportunity in acquiring preferred equity stakes or general partner interests in new developments built by now-distressed companies.

Developer Dominium, Inc.'s growth has come largely during downturns, and the current market is no exception. In mid-2008, the company took over as general partner of a 253-unit, four-property portfolio in Missouri and Illinois from Pyramid Cos., which went out of business. All four properties came online in the last 18 months.

Developers might best focus on acquisition-rehabilitation deals in strong markets, since procuring reasonably priced Fannie Mae and Freddie Mac debt for such deals will be easier than scouring the market for construction financing.

Many developers are also beginning to find that historic tax credits are an effective driver of production. The credits are fetching about $1.10 to $1.15 per tax credit dollar, a stark contrast to the malaise of the low-income housing tax credit market.

Workforce housing also will likely emerge as another opportunity. Many in the industry believe that the new Democratic administration will find ways to spur more workforce housing development, perhaps by making tax credit financing available to a wider range of projects.

ZOM, which hasn't done an affordable housing deal in 15 years, is eyeing workforce housing opportunities too, another act of becoming a chameleon in tough times.