Last year, Mill Creek Residential Trust bought Port Royale in Fort Lauderdale, Fla., with a plan to tear down roughly a third of its 737 apartments to make room for more than 500 new high-rise units.

It’s part of Mill Creek’s strategy to only build when the numbers for a prospective project make sense—even if that means skipping the bidding war for a prime site. Instead, Mill Creek is often creating its own places to develop, at a price that makes sense. By finding a way to squeeze more apartments into Port Royale, Mill Creek found a site at a much lower price than comparable vacant sites in South Florida.

“We are going to find our own sites—our own opportunities—that are not being brokered,” says William MacDonald, chief investment officer for Mill Creek.

To find good opportunities, developers like Mill Creek are staying disciplined and looking further afield to find potential projects. That’s because both apartment and condo developers are quickly bidding up prices for development sites in prime locations.

“Land prices have gone up tremendously over the last few years, particularly land in urban infill locations,” says John Sebree, director of Marcus & Millichap's National Multi Housing Group.

Developable sites in the strongest apartment markets are now trading for prices that can be twice the price they traded for during the last housing boom. Some buyers may simply be hoping that the strong apartment market becomes even stronger with a fuller economic recovery.

With prices so high, developers like Mill Creek are being very careful before they commit to an opportunity. “We are being a little choosier about the specific sites,” says Mill Creek’s MacDonald.

Since the housing crash, Mill Creek has created a scorecard to rate each development opportunity that includes more than 50 items, from geographic diffusion to the firm’s analysis of the real estate cycle.

Most important, Mill Creek will consider an opportunity to develop if it is likely to provide an investment yield that is at least 150 basis points higher than capitalization rates for stabilized apartment properties in the current market (once development costs including land and labor are paid).

“It’s getting tougher now to find the yield that we need,” says MacDonald.

Strategic Search
Mill Creek’s Fort Lauderdale property is just one example of the lengths to which it will go to find or create a site worth developing. Mill Creek has also spent three years working with the owner of a 100-year old building in Jersey City, N.J., to get the entitlements necessary to redevelop the site into apartments. The developer plans to complete the purchase of the site early this year.

Developers across the country are facing steep prices for developable land.

“We are competing against groups that have a different mode of operating: They get a site under control and then figure out the details,” says Adelaide Grady, director of the Boston office of Wood Partners.

Grady is carefully hunting for sites were the price of land makes sense. “There are deals in the urban core that we have passed on because they are mis-valued,” she says.

Wood Partners expects to commit to three or four new development sites in 2014 where the cost of land and construction are justified by the likely rents at the properties. In the Boston metro area, these sites tend to be in strong inner-ring suburbs and a few urban sites that are still priced attractively. For example, Wood Partners is now building 392 apartments in East Cambridge, Mass., within walking distance of Kendall Square–though the land was considerably less expensive to comparable sites closer to the Square.

Wood Partners isn’t alone in looking beyond the prime urban core for opportunities.

“The increased cost of land price will push more development into the suburban apartment markets,” says Marcus & Millichap’s Sebree.

Experts also hope that land prices may be peaking. A broader economic recovery may provide investors with a broader array of choices, taking some of the focus off multifamily, even as job growth creates more demand for apartments.

“Pricing is so outrageous, we may be hitting the peak of this cycle,” says Mill Creeks’ MacDonald.