In Some Markets, It's Now Cheaper to Build Than Buy

Like many multifamily firms, the Altman Cos. has had a difficult time finding bargains on the acquisition front.

Earlier this year, the Boca Raton, Fla.-based developer bid about $13 million for a Class C asset in a Class B location. The eventual winning bid was $17 million, about 25 percent higher than Altman’s price point. “When you have 20 or 30 people bidding, somebody’s going to be the bigger fool,” says Joel Altman, the company’s chairman and CEO. “And having been in business 42 years, sometimes I think we know too much.”

A combination of too few deals and too many opportunity funds has led to a bidding process that leaves many players shaking their heads at the size of the winning bid. In many cases, especially in higher-barrier coastal markets, assets are trading at far above replacement cost.

In short, it’s become cheaper to build than buy in many markets, and as a result, many developers who sat out the recession are now turning back to new construction.  For instance, developer Alliance Residential didn’t start on any new projects in 2009, choosing instead to focus on acquisitions. But the company now sees development opportunities in some unlikely places. “Values are up, but land is still pretty depressed. We can build cheaper than we can buy in certain markets—some that you wouldn’t intuitively think are quite ready for new development, like South Florida,” says Jay Hiemenz, CFO of the Phoenix-based developer.

In late August, the company acquired a fully entitled and permitted property in Tampa on which it plans to build Broadstone at Citrus Park Village, a 296-unit Class A garden community. Construction is slated to begin in October, and the community is expected to come online in mid-2012. “That’s one plus of buying in this market,” Hiemenz says. “There’s a lot of deals that are permit-ready, so we don’t have to take it through a long entitlement.”

Similarly, Altman is getting ready to start another new development not far away from Broadstone at Citrus Park. The company expects to break ground on Grand Cypress, a $27 million, 258-unit community in North Tampa in October. The development is slated to come online in March 2012. “We think there’s going to be tremendous demand over the next seven years,” says Tim Peterson, CFO of Altman Cos. “We’re coming through post-WWII lows in starts.”

Cap rates on Class A assets in Tampa have compressed considerably since 2009, with many deals trading in the low-6 percent range this year, according to market-research firm Marcus & Millichap. And the tale is similar 3,000 miles west. In mid-August, Wood Partners made its first acquisition in the San Diego market when it purchased a site on which it plans to build a 379-unit luxury community.

“In the high-barrier coastal markets, we are seeing low-5 percent and sub-5 percent cap rate acquisition transactions. In addition, the values of many of these transactions are in excess of replacement costs,” says Joseph Keough, COO/CFO of Atlanta-based Wood Partners. “The un-trended spreads for our new development deals are 250 basis points plus, versus recent comparable acquisitions. We believe all of these factors bode well for new development and our capital partners agree.”

Wood’s deal is located within a master-planned community in which original developer Sunroad Enterprises planned to build an apartment complex, a plan that was stalled by the recession. Wood will use the original plans and permits. Construction on the $90 million project is slated to begin in September.

Being able to slash pre-development dollars by buying land that’s already permitted certainly helps. But so does the declining cost of labor and materials, which continue to remain low even as acquisition prices climb.

Brand Properties developed the Overlook, a 410-unit Class A property in suburban Atlanta, which came online in the second quarter of 2009. Lease-up has gone so well that the company has been able to bump up rents this year. The Atlanta-based company took a run at acquiring some Class A assets in Atlanta over the past year but was routinely outbid as the assets would end up trading in the high $90,000-per-unit range. So the company is now looking to build another property across the street from the Overlook and has submitted an application for 221(d)(4) financing.

“We’ve been able to underwrite it because construction costs have come down so much," says Derek Kahn, CFO of Brand Properties. “And obviously we have very good insight into what the submarket is commanding.”