It’s been a busy year for David Ravin, to say the least.
In April, Ravin purchased the development and construction division of Charlotte, N.C.–based Crosland LLC, where he had worked for 13 years, most recently as head of its multifamily division. In June, he recapitalized the entity through a 50/50 joint venture with Northwood Investors. Two months later, the company purchased Crosland’s property management division, consisting of 3,000 units.
The new firm, Northwood Ravin, has about 1,500 units under development, including six developments in the Raleigh-Durham area alone. The company has seen its headcount grow from 25 to 120—many of them former Crosland talent—and it continues to climb.
Crosland, a diversified company with a focus on retail and residential, had fallen on some hard times, as many of its lenders moved to foreclose. Its diversity had been a strength in the past, but when all asset classes sunk and the credit crisis hit, the company found itself under increasing pressure from financiers.
But Ravin is starting with a clean slate. He’s taken a sizable pipeline and management portfolio, not to mention much intellectual capital, from Crosland. And having lived through Crosland’s meltdown, he’s also taking a few lessons learned, including the following.
Don’t Drink the Kool-Aid
One of the mistakes Crosland made was buying into an overheated multifamily market. Like many developers, the firm was driven by its competitive nature to take on some marginal deals, and it began to lose its discipline. Even if a deal didn’t fit all the company’s investment criteria, it figured that a rising tide would lift all boats.
“The sites that we had talked ourselves into were the ones that really dragged us down, more so than they would’ve propped us up in good times,” Ravin says. “When things get really heated, and you feel like you need to grab up seven sites because it’s getting so competitive, the truth is, when things go south, that’s an immediate recipe for sinking you.”
Design Outside the Box
Many of the areas that Northwood Ravin is active in—including Raleigh-Durham; Charlotte; Richmond, Va.; Nashville, Tenn.; and Tampa and Orlando, Fla.—are starting to grow overheated again in terms of new-development proposals. What’s more, those proposals all look alike. Everyone’s basically building the same product—urban infill, deck-wrapped deals that target the same renters in the same submarket a few blocks away.
“The thing I think the industry is missing is that we should be developing different product—it’s a certain recipe for disaster to go after just one population and oversupply it,” Ravin says. “There’s a whole spectrum of the way people want to live, and you’ve got to look at where the demand curves are heading.”
While the company focuses on high-barrier urban Southern markets, Northwood Ravin is also developing some suburban projects—and they aren’t garden walk-ups. Instead of building units that are stacked over one another, the company is focusing on attached and detached townhouses with private garages and yards, in good school districts, to take advantage of the wave of former homeowners entering the rental pool. Pet stations, pools, and child-friendly areas have become important elements.
Underwrite Cash Flow, Not Exit Caps
When Ravin joined Crosland, the company’s average hold period was 10 years. But as the multifamily market grew hotter, and the company achieved better returns through dispositions, it became a net seller.
Many developers close some really great sales and get lulled into reinvesting the proceeds into increasingly iffy deals, to try to do it again. Once a company’s plan becomes so confined that the stars have to align a certain way for it to make any profit, it’s made a mistake.
“Northwood Ravin is building to hold, and anyone who says otherwise right now might be potentially making a mistake,” Ravin says. “The market may be very heated right now, but that doesn’t mean you’ll be able to exit at a 4 cap in four years. You want to be underwriting cash flow, rather than underwriting exit price.”
Diversify Your Financing From Deal to Deal
This was something Crosland always did—and it saved the company from a much worse fate.
Like Crosland, Northwood Ravin doesn’t have a set financing scheme for every deal. Some new developments are financed with institutional partners, and some are financed through joint ventures with other developers and landowners. The bottom line is, financing shouldn’t always have to be internal or external, or tied to a specific institution or investor.
“We never had a set box at Crosland—some projects had institutional partners, and they didn’t hiccup nearly as much as the small private guys,” Ravin says. “We did whatever made sense to move the project along, and that really helped us when the world went south.”
Stop Building When the Rookies Come
Ravin opened Crosland’s Raleigh-Durham office 12 years ago, when everyone wondered what the company saw in the markets. Today, bolstered by the tech-heavy Research Triangle area, it’s among the nation’s hottest markets for apartment investment.
Since multifamily has become the darling asset class of investors, many commercial real estate developers have decided to try their hand at apartment development for the first time, hoping to catch some of that lightning in a bottle. And many equity investors, too, are targeting the asset class for the first time.
“They’re the worst people to compete against; they can really drive a marketplace down by making pricing mistakes that affect everybody,” Ravin says. “But that’s the good thing about multifamily—you can see the construction coming from a long way away. And if we feel like a market is getting oversupplied, then we’ll sit back and wait to take advantage of the other end of the bubble.”
