Multifamily Developers Take a Practical View of Risk

LOS ANGELES—Interest rates represent just one of the many factors impacting the development of multifamily housing, as highlighted by Daniel Doyle, Chief Operating Officer of the Beach Co., during a recent development session at the GlobeSt. Multifamily Fall Conference. He shared, “Our plan for this year was to kick start four projects, but as of mid-November, we’ll only be closing on one of them. You can imagine the disruption this creates for our workflow and all associated operations. The current state of the capital markets has frozen many of our plans and severely limited our capabilities.”

James Holloway, principal at Home Communities, expressed his hope to close on three, maybe two, more projects next year if they are fortunate. He said, “Interest rates have essentially put everything on hold, making things financially unviable at the moment.”

Holloway explained that the rental income in certain areas, such as the South, falls short of supporting the increased costs associated with new developments.

Adam Perry, partner and SVP of Development and Construction at Cityview, emphasized that lenders currently hold significant leverage, resulting in a slow-paced environment for the industry.

Michael Broder, CEO and co-founder at RCKRBX, added that in this challenging environment, it’s imperative to assess your risk tolerance and identify opportunities aligned with the market’s unique needs. He said, “Understanding what people are looking for and how it can fulfill a specific market need is where opportunities can be found in today’s market.”

When moderator Scott Sullivan, principal of Relativity Architects, asked about strategies to minimize risk on these projects, Doyle pointed out that risk varies from person to person. He asked, “Is it the risk to the physical asset, to the people residing in the building, or to the owner/investor? Since our developments are coastal, we must take extreme measures to mitigate all these risks and incorporate factors and criteria that eliminate them. Ultimately, our goal is to reduce insurance costs by including them in the upfront capital.”

Holloway added that he’s witnessed property insurance costs increase by as much as 30% compared to a few years ago. He recognized the necessity of living through the cycle and doing their best to mitigate risks, with the hope of better times ahead.

Perry noted that the industry is inherently tied to risk. He said, “The most prudent step right now, in terms of managing risk, is to proactively engage with your lenders. If you don’t, they might start repossessing your properties. It’s inevitable, so the earlier you establish a relationship with your lender and relationship manager, the better.”

Broder pointed out the challenge of using historical data to make decisions about future projects. He stressed the importance of assessing the performance of an asset and stress-testing it to understand its potential in alignment with the evolving demands of the market from the project’s inception.