Class A MF Development at this point in the cycle
For the LPs, investors, and GPs doing ground-up deals, how do you guys feel about entering into Class A multi-family ground-up deals at the point in the cycle? Specifically, in growing secondary markets in the southeast. Let's say sites are secured at a competitive basis/entitled/etc. and ready to go today.
What risks do you guys see? Feel free to list ones that may seem obvious and fundamental.
Construction pricing is terrible, but there are many southeastern markets that are strong (I'd stay away from Charleston though) and both the job and population growth to support continued development.
There is more equity to deploy than ever with some rumblings about this year possibly being a 3-quarter year given uncertainty surrounding the election.
So when people say this, I kind of get thrown off. "Terrible pricing" meaning the HC will come out high and its hard to pencil out a good deal?
Lets say all else equal, construction costs will be controlled very well (yes perfect universe), what about from a market standpoint? My concern is a downturn in the cycle and tenants defaulting to less pricey buildings out of neccesity.
Yes. Meaning it costs as much to build a garden deal today as it did to build a full wrap deal only a few years ago. Meanwhile the fucking subcontractor just bought a brand new pickup to tow his brand new boat when it isn't parked next to his brand new above ground pool.
I'm sure that happens somewhere, but a lot of times, from my understanding, what happens is that the lower end product gets crushed. New product can always lease up - at what price point is the question. If you have to up concessions or drop rents to the point where you can't pay the interest, then that's obviously a problem, but not hitting your rents, and thus your returns, and having to adjust your strategy is better than losing the farm.
Young people need places to live. In the southeast at least, they are less likely to have roommates and, if given the choice between smaller A product in a good location and larger B or C product further out at the same price point, they're picking newer and nicer.
People don't care what price per square foot their rent is, only what they pay every month. A 650 SF place at $2.20 rent is $1,430 per month. For a young couple to only pay $715 a month in rent per person is a steal here.
People don't care what price per square foot their rent is, only what they pay every month. A 650 SF place at $2.20 rent is $1,430 per month. For a young couple to only pay $715 a month in rent per person is a steal here. [/quote]
They might not care about their P/PSF is, but they definitely consider how small the place is I would assume. Ideally, no one wants to live in a shoebox.
You'd be surprised. Say you and your girlfriend can spend at most $1,500 per month.
Your theoretical options are:
600 SF 1 BR in a brand new high rise ($2.50/SF) in the middle of everything where you can walk to restaurants, work, the grocery store, etc.
750 SF 1 BR in a year or two old wrap project ($2.00/SF) in a decent area, but you're going to have to drive to work and activities.
1,050 SF 2BR in an older garden deal out in the 'burbs ($1.43/SF). More space, but older product, a much longer commute to work and fun, unprotected parking, etc.
Most Millennials I know are picking between 1 and 2 and completely ignoring 3.
I agree with you on that. Especially with your examples. Seems to be the trend of today
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