In 2005, Wood Partners was the top builder on Multifamily Executive’s annual Top 50 Builders ranking. In 2008 and 2009, it came in fifth on the list. But in a surprise move that shows just how far the construction market has fallen, the Atlanta-based company has decided to change its focus from development and construction to asset management, acquisitions, and property management.
Wood will move the bulk of its remaining development personnel over to asset management and acquisitions. Next year, it will launch a property management division that will manage most of its approximately 15,000 units, excluding units in certain market segments such as seniors and student housing and certain geographical markets. It has already informed its current third-party managers that it will be taking over management of its assets.
The move to acquisitions and asset and property management is, essentially, a concession that the development market won’t be coming back to its past strength in the near future and that it will be difficult for Wood to sell the projects it has recently built. With the elimination of its traditional method of generating revenue (through the construction and sales of apartment and condo buildings), Wood is having to regroup to bring value to its majority owners—Los Angeles-based CB Richard Ellis.
“I don’t think there’s any merchant developer left standing that isn’t thinking through this stuff like we are,” says CEO Jerry Durkin. “To think there will be development capital and that we will get back to starting units at the levels we did over the last five years is foolish in my opinion. We just have to evolve and survive.”
Jay Jacobson, a partner in the firm, will spearhead the move to acquisitions, while development partners Patrick Trask and Charles Barrus will be heavily involved in the transition. Mike Hefley, former COO at Gables Residential, will head up the company’s property management efforts. The transition will be gradual.
“We’ve got jobs in lease-up, and we’ve got third-party relationships that have to be taken into consideration,” Durkin says. “We have equity investors that need to be consulted. You don’t just start a property management company and pull the trigger and say we’re done. We have to transition into it over a period of time.”
The decision isn’t a surprise to Ron Witten, president of Witten Advisors, a multifamily consulting firm based in Dallas, given where the development business is right now. “It’s certainly a significant decision,” he says. "Given the likelihood that no new development will be completed in the next three to four years, people are looking for revenue opportunities.”
Drivers of Change
Not only are merchant builders having trouble finding capital for new development, they can’t get prices they originally anticipated for their stabilized projects. At Wood, that means holding deals it would have otherwise sold. If it’s going to keep those projects long-term, the company would prefer to take a more active role in managing them.
“We’re not getting into the management business in order to be profitable as a management company platform,” Durkin says. “We’re doing it to better manage and to deliver more value within those assets to ourselves and our partners.”
Wood’s partner, CB Richard Ellis, bought a majority stake in the business in 2008. Durkin anticipates the transition to asset management will make the company more attractive to potential buyers. “CB owns an interest in our company, and I think everyone knows that, at some point, that they’re going to liquidate that interest,” Durkin says. “Whether we go public and whether we go private and remain private with a new partner, we’re going to need to look at different things than we were when we did that deal in the first place.”
Before that happens, Durkin needs to walk a tightrope—the company needs to clear its balance sheet of existing issues, while adding units for its new asset and property management teams. He acknowledges this won’t be easy. “We’d like to get that stuff off of our balance sheet so that we have balance sheet that’s financeable going forward,” he says. “We’re getting ready to have a lot of those discussions, as I think the entire industry is. We’re just in the beginning stages of working through a lot of these assets. We’ll have a lot of conversations [with equity partners] that will be gentlemanly but won’t be easy.”
As the company manages its current stock, it would like to look at cultivating equity partners and adding units. There are opportunities. It recently bought Alta City Walk, a partially completed deal across the street from a federal office building in Oakland, Calif., for $5 million. The project had been abandoned after the former developer sunk $83 million in the deal. “We had more equity interested in that deal than we’ve had interested in anything we’ve talked about for a year,” Durkin says. “In a deal where there’s distress, the equity literally came out of the woodwork. We’re looking for those kinds of deals.”
The company does have some development on a limited basis with equity commitments to fund new construction projects in Oakland, Calif.; Boston, Mass.; Atlanta, Ga.; and Denver, Col., but the pipeline is much smaller than in the past. Even if construction comes back, Durkin doesn’t know how quickly the company can switch back into development mode. Basically, this transition to asset management will be difficult to undo. “We expect to have migrated some people permanently to the acquisitions platform, and we expect to make enough, if not more money, in acquisitions than we made in development in the long haul,” he says. “If we built a successful acquisition platform, we will have to ensure that’s it’s an ongoing sustainable effort. Everyone has bought into that, and guys will have to make career choices at that point.”