Commercial Investment Real Estate November/December 2018

Investors Still Favor Apartments New supply has not put a damper on investment sales transactions. Multifamily sales volume reached $69.8 billion in the first half of the year, up 11.5 percent year- over-year compared to the $62.6 billion in properties that traded during the same period of 2017, according to Real Capital Analytics. Many capital investors still in the market are interested in multifamily buildings, especially those who plan to hold assets for the long term. Yet investors are keeping close tabs on supply growth, decelerating rents, and interest rates in what most agree is a mature stage of a prolonged growth cycle. Many investors are being selective in what and where they are buying, and some metros are still seeing a big gap between buyer and seller expectations, which is slowing transactions. “Caution is being exercised by most to ensure past mis- takes of a previous cycle are not repeated,” Chesser says. In Louisville, investors are concerned about oversupply and slowing rent growth, and the current lease up and stabiliza- tion of new communities are being monitored closely. How- ever, the reports of outpaced performance to expectations continue to fuel demand in the Louisville market, especially among national and international buyers looking to achieve higher yields than they can find in some gateway markets and larger secondaries. “We have found that our market has really struck a chord with investors. We have yield and a diverse market with employment across many different industries, population growth, and many strong indicators that folks like,” Chesser says. Other markets have seen a notable shift. Buyer senti- ment has changed radically in New Jersey’s Gold Coast market over the past six months, along with higher inter- est rates, while seller expectations have not changed. That CREATIVE DEVELOPERS BATTLE RISING COSTS Developers facing the dual pressure of rising construction costs and slowing rent growth are finding creative ways to make the numbers pencil out on new projects. Higher construction costs are putting more pressure on land prices. Developers also are exploring other alternatives to maintain yields, such as increasing density or value- engineering projects. Some developers are offsetting higher construction costs by offering micro-units that allow the developer to deliver units at a more affordable rate, while still capturing a higher rent per square foot. In Denver, for example, a former hotel adjacent to Mile High Stadium was converted into the Turntable Studios, a micro-apartment project with 179 units that range from 330 to about 800 sf. “I also think the investor market finds those micro-units attractive. The one or two that have sold here have generated very high per door prices,” says Rick Egitto, CCIM, principal of capital markets in Avison Young’s Denver office. “Renters like it, and investors like it as well,” he says. A few innovation leaders are leveraging new design, engineering, and building systems and processes to reduce construction costs. “There are people who think they have a better mousetrap,” says William A. Shopoff, CCIM, president and CEO of Shopoff Realty Investments, an apartment developer and investor in Irvine, Calif. “We’re not quite there yet, but we do think that we’re going to see some technological changes in construction that are going to drive value,” he says. Some developers are using various levels of prefab with modular or factory-built units that are assembled on site. CCIM.COM Denver-based iUnit currently is designing factory-created, prefab units that are assembled on site. The company built the 40-unit Elliot Flats in the Lower Highlands area of Denver and has a second project underway. Both projects also adhere to sustainable building practices with an aim to achieve net-zero energy efficiency. Menlo Park, Calif.-based design and construction firm Katerra works to squeeze efficiencies across each step of the building process — from its design, technically engineered materials, supply chain, and construction. Its strategies range from more cost-effective product sourcing to off-site manufacturing that provides greater precision, higher productivity, and more quality control. In a rising cost environment, these cost-effective building solutions could help developers and investors preserve yields and address the bigger issue of creating more affordable housing as well. If developers can build apartments cheaper, that alone is a big advantage. If they can build apartments both cheaper and faster, that’s a huge advantage in a competitive marketplace. “You not only save interest expense, but you start generating revenue faster — and more importantly you know what market you’re delivering into,” Shopoff says. Since most urban projects take 24 months to complete, builders end up delivering projects in a different market than they started in terms of competition, rents, and economic drivers. For developers that can build an apartment building in six to 12 months versus 24 months, and at a cost savings of 5 to 10 percent, that’s a huge competitive advantage, Shopoff says. No developer wants to be on the wrong side of the curve. November | December 2018 27

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