It does not seem that we have been out of the Great Recession for all that long. If you blinked, you probably missed the value-add run, at least here in Texas. Equity continues to look for higher yields, which most stabilized or near-stabilized properties just can’t hit. So, the equity players have had to shift very quickly to start considering development projects.
Product Type – So, what product types is equity chasing? All of them! While the to-be-built Multifamily equity market has slowed down while investors wait to see if all of the new units will be absorbed, Retail, Hotel, Office, Assisted Living, and Single Family are all open for business. The challenge, of course, is to find the right location, where the land is priced right. This is at the heart of all deals: affordable land. Most land sellers are aware of the market, so finding someone willing to sell a good location at a good price is almost as challenging as finding a value-add project.
Returns – Development Investment spreads (unleveraged yield-to-cap rate) continue to be in the 150 bps range on Multifamily and 200 bps on all other cash flowing assets. Don’t trend your rents though, or you may get burned. While equity will appreciate the potential upside, given the long rent increase ride we have been on, most are skittish to push rents too hard. If your pro forma shows an IRR in the mid-teens, you are right in the strike zone.
Sponsorship – If you really want the equity to part with their money on development, you better be an “accomplished” versus an “aspiring” developer. For some reason a lot of guys want to be developers but don’t always understand all the details behind development. Sponsors with solid track records both before and after the recession as developers are the ones most likely to get an equity partner.
Location – We blew through value-add and then primary market development, so we are now already in a position where secondary market development opportunities are being considered. Just make sure in the secondary market locations that you are at THE location for that product type. Miss it by one street or zip code and you and may not get any traction. Equity is still being very finicky no matter where the property is located.
Since the recession, MCA has been successful in arranging development financing on Multifamily, Retail, Senior Living, Hotel, and Single Family developments. Frankly, we’ve been surprised at how quickly equity players have returned to the Development Game given their attitudes only twelve to eighteen months ago. The money is out there. You just need to have the right project and sponsor.