The Great Recession has already claimed some of the industry’s largest owners and developers—Fairfield Residential, Bethany Group, Lembi, Babcock and Brown, Opus Corp. The list goes on and on and will likely swell some more before the next upturn.
But some developers are surviving, and even thriving, in today’s market by re-engineering their business plans and turning their focus to recession-resistant sectors such as receivership business, student housing, and historic renovations. The overriding trend is to diversify.
Receivership Business
For instance, the Laramar Group was mainly a value-add developer in the past, but as acquisition-rehabilitation business dried up, the company began mapping out new profit centers.
One initiative was setting up a new receivership division in early 2009 to capture the coming wave of distress. That division, which had no units under management in mid-2009, now manages more than 4,100 units at 51 properties across seven states.
“This was not something that Laramar had done in the past, but now it’s a profit center for us,” says Dave Woodward, CEO of the Greenwood Village, Colo.-based firm. “And who knows what that could grow into.”
Student Housing
Or consider Buckingham Cos. The Indianapolis-based developer and manager began in 1984 when company president Brad Chambers, then a 20-year-old college student, bought a single-family rental. Chambers would go on to acquire one community a year after that, and the company began new construction development around 1990.
Today, the firm employs 450 people, owns about 5,500 units, and fee manages another 13,000. Buckingham hasn’t had to lay anyone off during the recession. In fact, the company’s corporate staff has grown by 20 in the last two years. One of those hires was Brent Little, who previously led the student-housing platform of Place Properties, helping to transform that company into a national presence. Little hopes to do the same with Buckingham.
Buckingham broke ground on its first two university developments in 2008, one adjacent to the University of Notre Dame campus, and another near the University of Kentucky in Lexington. Those two deals will be completed by mid-year, and Little is already hard at work on expanding the company’s higher education focus. Buckingham hopes to start three more developments this year, one of which is a student housing deal across from the Indiana University-Purdue University Indianapolis campus.
For the past six recessions, enrollments have continued to increase in major colleges and universities, and the current recession is no different. “Obviously there’s no appetite for condos right now, the appetite for large high-density urban deals has pretty much dried up as well, and conventional deals are tougher to get financed,” Little says. “And so student housing is one of the safe havens essentially in the multifamily industry right now.”
Little was with JPI in the late 1980s and early 1990s, and sees parallels between then and now. Some of the industry’s largest developers such as Trammell Crow and Lincoln Properties stopped developing during that downturn, but JPI invested heavily, and by 1995, the firm was the largest multifamily builder in the country. “That’s the opportunity out there today. This is the bottom of the market,” Little says. “So build into the down market and sell in the up market five years from now.”
Back to the Drawing Board
In recessionary times, anything goes. And sometimes, you have to move away from an old business plan, even if it was your company’s guiding document for decades.
For example, the Wallick Cos., a Columbus-based owner, manager, and developer, retooled itself just before the recession took hold, paring down a business unit that was the foundation of the company for more than 40 years. Wallick began life in 1966 as a construction firm, and the company’s management and development efforts grew out of that focus. But over the years, the construction division began weighing the company down through its massive overhead expense.
“The emphasis of the business has gradually changed over the years,” says Howard Wallick, one of the company’s three owners. “For over 40 years it was a construction business, but we see ourselves primarily as a management business now.”
To that end, the company merged with Cincinnati-based Stern-Hendy at the beginning of 2009, which grew its management portfolio by 40 percent, to about 12,000 units. All of those new fees coming in the door have allowed the company to pursue some development work. For the first time in the company’s history, it will use historic tax credits this year on a rehab of the Berwick Hotel, built in 1894 in Cambridge, Ohio.
“A recession is a good time to grow, which we’ve been doing over the last 18 months,” Wallick says. “The Stern-Hendy deal has given us a steady cash flow through the recession and positioned us to be able to really go after those tax credits.”
On the flip side, Cohen-Esrey has transformed itself from a services-oriented business to a full-scale development operation over the past 15 years. The company has concentrated on a variety of asset types: value-added market-rate deals, historic renovations using historic tax credits, and affordable housing development using low-income housing tax credits.
“The only way to make a development operation work is to have a pipeline that’s so full with such diverse projects that it doesn’t matter what’s happening in the marketplace, you’ve got something always popping for you,” says Lee Harris, president of Overland Park, Kan.-based Cohen-Esrey. “That’s what we’ve been able to do, but it’s taken us at least four years to ramp it up.”
