Ron Terwilliger’s talk at the Apartment Finance Today Conference (AFTC) in Las Vegas this week was less keynote speech and more informal chat as the former chief executive officer of Trammell Crow Residential strolled down memory lane and shared hard-learned lessons from a 40-plus-year career in real estate.
After walking the audience through his path to Trammell Crow, Terwilliger set his sights on the thing that keeps him busiest today—lobbying for more quality, workforce housing. And if more isn’t done in that arena, he says, affordability could become an even bigger challenge.
“There will be a minimum of 3 million rental homes needed, probably more, because the demographics are so positive for our sector,” he told AFTC attendees.
But Terwilliger doesn’t think policymakers understand the need for quality affordable housing, so he spends a lot of time lobbying Congress, trying to inform representatives of the severe burden many Americans face in trying to make their monthly home payment.
“We ought to provide quality rental housing, whether it’s single-family or multifamily,” he said.
Terwilliger doesn’t know if the current capital environment is stimulating more affordable development, though. Right now, the large institutional equity wants high-rise, transit-oriented product. That takes time to entitle and isn’t cheap to build. Because of this, Terwilliger thinks garden developments with surface parking are the best solution for the workforce-housing riddle, because of their relative inexpensive construction costs and short development horizon.
In retirement, Terwilliger has become known as an advocate, though during his career, he was first and foremost a developer. And he had lots of lessons for the developers in the room.
Here are his six key takeaways:
1. Real estate is a cyclical business, and there will be downturns. Often it’s not known when the slide will start. “You won’t see it coming,” Terwilliger said.
2. Terwilliger advocates putting in a healthy amount of equity, about 25 percent, in each deal. “In a 15-year development, you may go through two or three cycles,” he said. “Be careful how you leverage [each deal].”
3. In this low–interest-rate environment, getting long-term, fixed-rate debt is of paramount importance. Terwilliger said that even if a developer has to take less to bring in mezzanine, it should try to get a five-year loan. If that doesn’t work, he said, get a three-year loan with two one-year extensions. “Watch out with a year maturity, because 25 percent equity may not be enough to pay out of pocket,” he said.
4. Getting the correct amount of leverage is only the beginning, though. Terwilliger said it’s also important to use architects and subcontractors familiar with the product type that you’re building. He said Trammell Crow usually used its own construction company unless it was unfamiliar with the product type involved. He wanted the construction team involved with the design as soon as possible. “One of the biggest mistakes developers can make is to [take on] something they can’t afford,” he said.
5. In the past five years, a lot of merchant builders have gotten stuck holding assets a lot longer than they anticipated. When that’s happened, they’ve quickly discovered the importance of choosing the right asset and property manager. “A lot of developers don’t understand the importance of the asset manager,” Terwilliger noted.
6. No matter how good your relationship is with your equity partner, things can get contentious if the market turns. Those trusted partners could suddenly get marching orders from their corporate offices to divest themselves of real estate. Because of that, the partnership agreement with the equity partners must be tight, even if your relationship is great at the beginning. “It’s all great when you’re making money,” Terwilliger said. "But those profits mightn’t always be there."
