Multifamily Builders Snapping Up Land to Offset Costs
To counteract the rising land costs prevalent in most active housing markets these days, multifamily builders and developers have begun acquiring larger tracts than they need and selling off the excess land to other builders.
As a solution to escalating construction costs, some builders, developers and equity partners addressing NAHB’s Pillars of the Industry multifamily conference in Scottsdale, Ariz. last week also suggested buying building materials in the commodities markets.
Other cost-deflecting suggestions offered at the April 3-5 conference included phasing projects, anticipating price spikes and finding alternative sources for materials.
Constance Moore, president and CEO of California-based BRE Properties, Inc., which builds and manages apartments in California, Arizona, Colorado, Washington and Texas, said her company has begun “acquiring much larger sites” and then selling off pieces of them to reduce the cost of land for their apartment projects.
“Land is a huge component of the total cost of our projects,” Moore said, noting that her company tries to hold land to a less than 20% share of total project costs. She cited several projects in California where BRE used the sale of excess land to reduce the land costs for its apartment projects.
At Emerald Pointe in Anaheim, Moore said BRE developed only four of the site's 13 acres and sold the rest. “The sales price on the back half of the site brought our land value down to zero and allowed us to build a pipeline for our future needs,” Moore said.
Similarly, she said that to reduce land costs for an apartment complex in Santa Clara, Calif., the company is building on about three acres of an eight-acre site. The remaining land has been sold to a townhouse builder who is building and selling 1,800-square-foot townhomes in the $700,000-$800,000 range. Moore said BRE often develops the land before selling it to other builders.
“BRE has the capacity and time to do the entitlements,” Moore said. “We have more patient money than the ‘for sale’ guys who want to get in and get out quickly.”
Controlling Costs Through Phased Development
Another way to cut construction costs, phasing projects gives the builder/developer the flexibility to change the design as needed, according to Paul Doocy, chief investment officer for Real Estate Capital Partners, a New York investment firm.
As an example, Doocy cited a townhouse development in the Rocky Mountains that benefited from phasing when the local market softened several years ago. “We had a lot of flexibility. We could get rid of the vaulted ceilings upstairs and add more bedrooms” to meet buyer demand, he said. “We didn’t build all the homes at once and we didn’t lock in prices.”
Doocy said he wished he had had that flexibility with a 115 unit, mid-rise, twin tower he began in Denver in 2001-2002, just “about the time Denver tanked in terms of employment.”
Forward Hedging Can Offset Materials Costs
Thomas Leppert, chairman & CEO, Turner Construction, a nationwide builder headquartered in New York, said builders need to anticipate price spikes, find alternative sources for materials and manage their expectations effectively in order to better control land and materials costs.
“We have utilized the strength of our buying power to frame agreements. We have been able to lock in prices with the option to reduce prices if prices go down,” Leppert said.
Forward hedging, buying the equivalent value of a particular material needed for a project or projects in the commodities market, is one way to control costs, or at least survive price spikes, Leppert added.
“Forward hedging is not restricted to large organizations,” he said. Leppert used forward hedging when building his own home in a Florida resort area. “I went into the commodity market and bought the equivalent value of a forward contract on lumber for my home to make sure I didn’t get hurt on lumber,” he said.
Time and Expertise Matter
“Managing construction costs is a lot about managing our time,” said Blake Thompson, manager, AIG Global Investment Group, which has more than $300 million equity invested in residential real estate, of which 85% is in condominium conversions.
In addition, Thompson stressed that builders should work with contractors who have the expertise to deal with a project’s complexity. “The key is to have experience in specific product types,” he said, while noting that contractors who have expertise in conventional wood frame and are transitioning to high-end multifamily projects “have a tremendous learning curve.”
Leppert said working with less costly subcontractors in this situation could be a “recipe for disaster.”
“It’s important to look at the price of the subcontractor, but also to sit down with them and understand what their workflow will be in the next couple of years.”