Leonard Wood of Wood Partners, a Marietta, Ga.-based developer that has started some 12,000 units in the Washington area, the Southeast and Texas over the last five years, said the market is as tough as he's ever seen it.
Doug Crocker, vice chairman of Equity Residential Properties, a Chicago-based real estate investment trust and, with more than 225,000 units, one of the nation's largest landlords, said the business is being hammered by the same low mortgage rates that has propelled the for-sale housing market. “Interest rates are killing us and saving us at the same time,” he told the audience.
And Chris Wheeler, chairman of the Gables Residential Trust here, said it's time for investors to come to the realization that the properties they are backing are no longer worth what they think.
Capital Is Still Chasing Projects
By all rights, Wheeler said, the capital spigot should have been turned off by now. But he wasn't surprised that it hasn't been. “Capital is always late,” he said. “But eventually lenders are going to figure out that most apartments are worth 10%-12% less. It has always happened before, and it will happen again.”
No one seemed to lament the fact that capital is still chasing projects, however, least of all Wheeler.
“There is a time in the realty business to sell and put the money in your pocket, and this is it,” he said. “Capital is still cyclical, and cap rates are going to rise to a more normal level.”
Wood said the availability of money to build is “as good as it's ever been — as long as the property is seen as a 'good' project.”
Even in Atlanta, where many complexes have been beset with unusually high vacancies, capital is readily available, he said. “But the question is, do you really want to build?”
Wood Partners builds with the intention of selling as soon as a property leases up. And it is on the operations side where the company is being hurt.
“Our economic yields are not very good,” he said, noting that the company is being forced to offer an average of two months free rent to attract tenants. “And that means some properties are not very saleable.”
Lots Are Hard to Find
Wood also said he's having trouble buying the small parcels he likes. “Home builders are outbidding us; we can't compete.”
To get what the tracts he wants, the apartment builder is being forced to purchase a larger parcel, develop it, sell off some lots to home builders and keep a small piece for himself. “Land is as difficult as it has ever been,” he told the conference. “The apartment market is pretty soft but land prices are not going down.”
Crocker of Equity Residential said the apartment sector is paying the price for riding the coattails of higher house prices.
“In the '90s, we drafted in the price rises in the single-family sector,” he told the meeting. “And we seduced ourselves into thinking it was a new paradigm. But we forgot one thing: We are absolutely tied to what it can cost tenants to buy a house. And nowadays, with 100% financing, it doesn't cost them a dime.”
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