It’s tough enough trying to keep an existing, stabilized apartment full right now. Just try getting people into an empty new development as renters look to stay put or trade down in light of an uncertain job market while potential buyers start to pounce on falling home prices.
"Our new product has been under more pressure [than existing properties]," says Leo Horey, executive vice president of operations for AvalonBay Communities, an Alexandria, Va.-based REIT.
Gary Sapp agrees. “Developers of perimeter suburban projects are facing challenges where markets were overbuilt, unemployment is rising and apartment developers are facing unforeseen competition from single-family homes now offered for rent by desperate investors and builders (or their lenders),” says Sapp, who is president of the Southwest Division of Hunt Development Group, a private real estate development company based in El Paso, Texas. “The stories I’m hearing there are bloody. Rent achieved is 60 percent to 70 percent of proforma, concessions are rife, and competitors across the street are playing a game of ‘How low can you go?’ in offering lowered rent, shorter lease terms, and free rent concessions.”
That makes it hard to entice renters who are concerned with value to move into a new luxury unit—whether downtown or out in the suburbs. That’s the chore facing Todd McCulloch, a director in the Dallas office of Wood Partners, a multifamily builder based in Atlanta. Wood’s strategy is generally to stabilize new construction and sell. But with no buyers, it has to hold and lease longer than it expected.
“In the immediate future, we’re much more focused on being a good operator rather than having some type of pipe dream that were going to sell at an attractive cap rate in the near term,” McCulloch says. “Our asset management staffs’ portfolio has grown substantially. Those of us that are developers, for all intents and purposes, are asset managers as well.”
And because of that, McCulloch has a major challenge. He’s trying to stabilize six different projects in the Dallas—three are infill and three are suburban—and it’s not easy. “In every submarket in Dallas, there’s been across-the-board effective rent declines just because everyone has gotten so aggressive,” McCulloch explains. “For the new guys opening, rents are easily double digits less than their proforma rents.”
Gables Residential is opening new buildings in Atlanta, Austin, Texas, Washington, D.C., and South Florida. The lease-ups are going well in places like Washington, D.C., but in suburban Atlanta, concessions are pushing as much as two-and-a-half months. “We had to give more concessions than we originally anticipated,” says Cristina Sullivan, senior vice president of property operations for Atlanta-based Gables. “The market is tough. We had to be creative with marketing. You just couldn’t let up for one week.”
McCulloch watched his competitors offer all kinds of incentives but says renters are just looking at the bottom line right now. “Until 30 or 45 days ago, they wanted to feel like they were getting a good deal or some inducements like free rent or some kind of exotic rent structure,” he says. “But in last 30 or 45 days we’ve shifted to, ‘This is what the price will be on one-bedrooms, two-bedrooms, and three-bedrooms.’”
But not all is bad across the country. In Albuquerque, N.M., Hunt just completed and stabilized a new 200-unit project. The project has already reached 95 percent occupancy and 100 percent lease-up. “The project was leased at close to underwriting rent levels without the need to offer deep discounts or onerous incentives demanded by residents with lots of other choices,” Hunt says. “The project is an infill property in an area of large office users and at a regional retail hub, so the demand base was in place, the location is premium and the competition is nonexistent."