City Smarts: M&R Development??s Parc Huron in Chicago exemplifies the company??s approach to urban infill development and land purchasing.

City Smarts: M&R Development's Parc Huron in Chicago exemplifies the company's approach to urban infill development and land purchasing.

Want to know the best time to start ground-up apartment construction? Ryan Dearborn can tell you, but you might not like the answer. “It seems contrarian to say, but last year might have been the best time ever to start development,” says the CEO of Marietta, Ga.-based multifamily development and owner/operator Wood Partners. “There was no competition, no new supply, and labor and material costs were very cheap.” Dearborn’s call on 2009 as the opportune moment to get shovels in the dirt for multifamily development is hardly 20/20 hindsight, either. For some time, apartment developers have anxiously watched construction costs depreciate 20 percent to 30 percent even as expectations regarding a decade-long rental demographic boom have been on the increase. Even now, market rents are beginning to either bottom out or trend upward, marking an inflexion point in industry fundamentals that should have triggered new construction months ago.

There’s just one problem: No one seems to know these days what apartment communities are really worth, and without dependable metrics on cap rates, it becomes difficult to pencil out development pro formas and even tougher to wrestle capital from equity providers who are still holding out hope for markets flooded with distressed acquisition deals at pennies on the dollar. Pair that with banks still trying to do work outs on land deals on the books and it looks like financing for new development—particularly when it comes to land acquisition—is a long shot for even the most seasoned of developers. Multifamily development veterans nonetheless say that a land grab is in the offing, and first movers will be able to key in on the best sites and the best locations by following some fairly straightforward steps.

1. Watch Asset Cap Rates.

“Certainly across 2009 and thus far in 2010, there’s been virtually no development activity in the multifamily sector and part of the reason is that the value of land has been the big elephant in the room that nobody can really put a finger on,” explains Drew Hudacek, senior vice president for acquisitions for Irvine, Calif.-based Sares-Regis Group’s Northern California region. “Historically, development capital is looking for a risk-adjusted return of 150 to 200 basis points over what you would expect on an investment acquisition. When the capital markets blew up, nobody really knew where cap rates were, and everybody’s development pro forma went into a tailspin.”