Commercial Investment Real Estate November/December 2018 | Page 28

Multifamily Sales Volume
60
50
40
30
20
10
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: Real Capital Analytics
Rising construction costs are “squeezing the juice out
of the yield” on development, says William A. Shopoff,
CCIM, president and CEO of Shopoff Realty Investments,
an apartment developer and investor in Irvine, Calif. Con-
struction costs have moved at a multiple of inflation over the
last two years, while rent growth in many markets has been
slowing. “We are seeing developers show a higher degree of
caution and approaching their underwriting for future deals
with a little less optimism,” Shopoff says.
Rising interest rates and higher construction costs are
putting more pressure on land prices and making it more
difficult to make the numbers work on new projects. “Con-
struction costs have risen significantly in Denver, and it has
really caused the market to adjust to the new rents that have
to be obtained,” Egitto says. For example, it is not unusual
to see urban rents in the $2.50 to $3 per-square-foot range,
and some unique locations approach $4 psf, while suburban
projects generally can work at a lower $2 psf rent, he says.
In some cases, developers have built projects in Denver
with an expectation that they can collect the higher rents,
and they have continued to see projects lease up quickly even
with these higher rates, Egitto says. Part of the success is
due to the significantly different amenities compared to the
older product, even though existing price comps might not
have supported that price point, he says.
Investors Vie for Value-Add Deals
Investors still have a huge appetite for value-add acquisi-
tions, even as buying opportunities have become increas-
ingly difficult to find. “We think the value-add market is
extremely competitive,” Shopoff says. Although the firm
works on value-add projects nationally, it’s been more than
a year since the company has taken on any new projects
of this type. “Markets cycle, and there will be opportu-
nities again, and we are always looking. But right now
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November | December 2018
the yields we can achieve on value-add you can find in a
better arena,” he says. Instead, Shopoff has redeployed its
capital to focus on development projects, as well as pre-
development projects where it buys and entitles land for
multifamily and then sells to other developers.
With value-add deals getting picked over in the gate-
way markets and largest secondary markets, investors are
looking at smaller secondary and even tertiary markets.
“We have a tremendous amount of interest from investors
nationally and internationally for value-add deals in the
Louisville market,” says Tyler Chesser, CCIM, vice presi-
dent of commercial real estate investments at Gant Hill &
Associates in Louisville. “We have gotten to a point where
those deals are fewer and farther between than they were
a few years ago, but opportunities do still exist,” he adds.
Competition has motivated some investors to embark on
value-add 2.0 projects, essentially taking a property that
already has undergone some improvements and going back
in for a second round of more in-depth renovation. “We
have gotten to a point where most investors who are cap-
turing opportunities are very savvy,” Chesser says. Some
of these veteran value-add investors can readily identify
repositioning opportunities that others don’t recognize.
They are comfortable paying very aggressive prices because
they see the potential to add more amenities or reduce the
expense load on the operating side, he says.
For example, Chesser recently represented the buyer in
the purchase of the 83-unit Lofts of Broadway in Louisville
for $6.8 million. The Downtown Louisville warehouse was
converted to loft-style apartments in 2005. In this case, the
buyer sees an opportunity to further upgrade units with
additions such as granite countertops and add new on-site
amenities. “We believe that this is going to be an incredibly
successful project because of the demand for this type of
product,” Chesser says.
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