Development Doubles Return of a Normal Project

OAKLAND, CA—Oakland is a city of cranes. More than a dozen giant construction cranes dot the cityscape from Jack London Square all the way to Uptown, along the historic Broadway corridor.

In addition, tech firms such as UBER, Pandora and Ask have already joined Blue Bottle Coffee, Cost Plus World Market and Clorox joining the Oakland headquarters group. Indeed, office towers, residential towers, mixed-use projects, medical centers and transit-oriented developments are simultaneously creating a new Oakland, according to a report by John Cumbelich & Associates.

And, West Oakland is no exception. The Union, a 110-unit apartment development, is located in an opportunity zone adjacent to the West Oakland BART station.

On behalf of Holliday Development, Highland Realty Capital recently sourced $18 million of joint venture equity from New York Life Real Estate Investors and $26 million of debt from City National Bank to fund the vertical development of the project, which will also include 3,000 square feet of ground-floor retail. New York Life Investors was a natural fit for this project, as the firm is an investment manager for union pension funds.

The units will be built off-site via Factory_OS, a manufacturing facility located on Mare Island in Vallejo, which is also in an opportunity zone. Factory_OS, or The Factory, began operations this year as a 100% union-employed facility, making it the only viable option for developers who want to build off-site, but have a prevailing wage requirement. The Factory integrates off-site building technologies, software operating systems, lean manufacturing and progressive labor practices to deliver multifamily housing more than 40% faster and at a 20% lower cost.

Building the units off-site will condense the construction timeframe down to approximately 12 months, which is months less than typical timeframes. The shortened construction period reduced the loan interest reserve requirement, along with other time-sensitive capitalized costs, thereby increasing the yield and potential returns on this investment. Most importantly, the risk of the investment is significantly reduced by putting the construction process under one roof, removing external factors such as weather, traffic and other onsite hazards. On a risk-adjusted basis, this development offered double the return of normal apartment projects.

“A lot of folks look at modular construction to reduce costs but in fact, the costs are higher due to the off-site construction methods, and short-term interest rates are at the top of the scale,” Brett Mlinarich, vice president of originations who led the Highland advisory team, tells GlobeSt.com. “The building time was reduced all throughout the process from start to finish. In fact, the construction process was cut in half.”

Highland was hired exclusively to capitalize the project on behalf of Holliday Development. The opportunity received interest from a wide array of institutional investors and lenders. However, the off-site nature of the construction process ruled out the majority of players.

“Despite a challenging capitalization, we commend Holliday for addressing the housing affordability issue head-on with this high-quality opportunity zone project,” says Mlinarich.