TO SUM UP THE multifamily construction and development climate in 2009, Chicago-based Fifield Cos. chairman and CEO Steve Fifield turns to The Bard. “It's exactly like that famous quote: ‘We run away today to flight again another day.'” After trying to fast track projects in the first half of 2008, Fifield Cos. turned instead to extensions and negotiated with lenders and institutional partners throughout the remainder of the year to push construction schedules out as far as 2011.
“By summer, it was clear the banks had left the scene,” Fifield explains. “We had a project where we already had the land and were putting up 35 percent equity, but the banks wanted 50 percent. Those same banks aren't even at 50 percent now—they are waiting for the market to shake out.” Fifield isn't alone. Projects coming online in 2009 will likely be few and far between, and will also face a competitive environment as job losses push rental vacancies up and render all but the most one-of-a-kind condo projects virtually unsellable.
“I have clients coming to me saying that even if the land was free their project doesn't pencil out to build,” says Kitty Wallace, senior vice president of Irvine, Calif.-based multifamily brokerage firm Sperry Van Ness. “There are major developers sitting on projects that they are having problems financing unless they have some sort of internal money partner. People are laying off their work forces. Lenders are few and far between, but the deals have to make sense and you have to be a recognized operator.”
Liquidity via Fannie Mae and Freddie Mac provides some alleviation, but for anything beyond a standard garden walk-up, finding additional mezzanine and equity financing is daunting, particularly in the current economic environment. “Once you get past the $50 million number, you start running into challenges,” Wallace says.
The challenges facing ground-up developers have put value-add rehabbers into the driver's seat this year and into the near future. In Florida, where San Antonio-based Lynd Co. has hired Andrew Ginsburg as regional vice president to expand operations there, construction costs still preclude virtually all new rental development.
“We are certainly actively interested in acquiring sites for ground-up development, but it just does not make any sense right now,” Ginsburg says. “If you can take a distressed asset that is already built or just needs to be finished out—that provides the best opportunity for any type of development.”
Point being, look to count yourself among the opportunistic and not the distressed. “Focus on what you've got, finish what you've got, position yourself to postpone anything else in the development pipeline for the next two years, and then adjust your development teams accordingly,” Fifield says. “That way, in 2011 and 2012, you'll be in the early part of an economic recovery. That'll be the time to deliver real estate.”
As New York City-based Clipper Equity puts the finishing touches on BellTel lofts—its ambitious redevelopment of the former Verizon Building in Brooklyn—hopes are high for a phase two sellout of the property's 250 studio, one-, and two-bedroom condos. “Phase one is sold out, and phase two is on the market,” says Clipper executive vice president JJ Bistricer. “Things are moving along: It is a value play with prices from $500,000 up to $3 million. It is [also] a landmark building—it has character,” he says.
Helping the project along has been Clipper's creativity in reaching their target demographic of young, upwardly mobile Big Apple denizens: The company gives brokers iPods that have a video highlighting the project as well as a monogram of the building engraved on the back.
Still, the developer won't jump into another project any time soon. “We have things in the pipeline and rights to develop, but we'll see where the market goes the next couple of months,” Bistricer says. “In this economy, you work with what you have, maximize its potential, and make sure you get every dollar you can out of the property. There are a lot of hidden values on properties, if you take a second look.” Take, for instance, Bell-Tel's most recent residents, the 20-somethings of MTV's “The Real World” reality TV show, who are currently leasing BellTel's 6,000-square-foot penthouse for more than $50,000 per month.