How Apartment Developers Are Navigating Market Disruptions
Although disruptions in the market such as supply chain delays, labor shortages, and inflation continue to impact projects for developers, there are still opportunities for change in the multifamily sector.
That’s assuming you can get financing. Panelists at GlobeSt’s Multifamily Spring 2023 Conference, say right now, the biggest challenge are the disruptions in the capital markets.
“When you’re underwriting transactions, the moment that your interest is going over what your yield is, it’s going to make it extremely difficult to underwrite a deal,” said panelist Jeffrey Ardizon, principal of The Estate Companies. “As far as fundamentals, they’re very strong in South Florida. We are experiencing very heavy migration and have a lot to offer. For projects that just got delivered, rents were underwritten at substantially lower numbers, the rent growth we’ve had in the past two years has in some cases offset the increase of operating expenses like insurance and other construction costs. The challenge is on the newer deals that have not gotten off the ground yet. Despite all these headwinds, we’re still seeing very healthy velocities and strong absorption in South Florida, especially in Dade and Broward.”
South Florida has a good problem, panelists say, which is that demand for multifamily continues to stay strong. For developers newer to South Florida, conducting business is a learning curve compared to other markets.
“What’s been interesting is the demographic is very different. We toured a lot of buildings down here, when you compare things up in Maitland – a fitness center, for example – in New England we were maybe spending $75,000 on the fitness equipment, and here, we’re spending $250,000 on equipment,” said panelist Sandi Silk, senior vice president, and development Partner of Jefferson Apartment Group. “The difference is the clientele of the luxury market buildings is really looking at fitness as a lifestyle, as opposed to a social outlet which is what you see in New England.”
For Nestor Mejia, president of construction and development at SHOMA Group, the solution to many challenges is to establish good relationships.
“Establish relationships with everyone. With your banker, general contractors, and your consultants in general,” he said.” Try to be adaptable to different situations.”
According to Ardizon and Mejia, one reason South Florida is flourishing is due to a lack of rent control, which is more common in the rest of the nation. But as they see it, cities need to provide a friendlier environment building for developers, as migration prices out a lot of locals.
“You have to incentivize developers to build product for those income levels; today’s construction cost makes it very difficult to pencil out,” said Ardizon. “The only way we can get that done is if the cities and municipalities work with us. These projects bring large economic benefits to the cities, tax base goes up, there’s a lot of infrastructure that takes place and a lot of economic pros that you see around, especially around larger developments.”
Changes in lifestyle and design have caused developers to think more broadly about amenities and unit spaces in multifamily, said Silk.
“It used to be that you walk through an amenity space in the middle of the day and see one or two people in an amenity space working,” she said. “Today, it’s 10-20 people working and you’ll see people in the fitness rooms at all hours.”
Silk said that while some unit spaces may be getting smaller in some areas, in others, it’s getting bigger to accommodate a studio with a nook or separate desk space.
“You constantly see the impacts from the cultural impacts that are occurring. I really think that In five years you will be able to tell that that building was built before Covid and that one was built after,” said Silk.
The backbone of every project is to have fiber-optic internet and wifi available to everyone on the site, as many activities are now wifi-driven, the panelists said. Having ground-floor retail operators is also an important amenity that attracts residents.
“Think consciously about where the retail is going,” Silk said. “Start working with a retail operator early to start building a story around who you want.”
Rethinking space and making the effort to transform a site are also important factors as more people rely on food delivery and rideshare companies. A challenge a lot of multifamily buildings are facing is that there isn’t a designated spot for food deliveries, which makes lobbies smell.
“You have to have a system for that,” Silk said.
When building a property, getting the right resources and supplies are still a challenge. Panelists say now, it can take days to get a callback or several months for supplies like elevators and concrete.
For Mejia, being hands-on during development and building relationships with professionals such as consultants, vendors, architects, and consultants can help with expectations during supply delays so there aren’t surprises.
“We get our boots dirty. We go to our projects on a weekly basis,” he said. “We work as a team.”
March 2023. GlobeSt.