Capital Constraints a 'Forced Pause' on Multifamily Development

NEW YORK CITY–The challenge of accessing capital to finance new projects is imposing a “forced pause” on some multifamily developers and causing others to go back to the drawing board, a panel of developers at GlobeSt.com’s Spring Multifamily conference told us last week.

“We’ve got 2,000 units in our project pipeline ready to go, so it’s not by choice that we find ourselves under capital constraint,” said Shawn Seaman, president of Hoffman & Associates. “We’re in sort of a forced pause right now. We’re trying to differentiate projects so we can get financing moving forward.”

“We’ve gone back to the drawing board on a number of projects to resize them and make the numbers more palatable — not from a return standpoint but just on the overall deal size,” added Daniel Doyle, chief operating officer of The Beach Company.

The withdrawal of traditional lenders from the market has coincided with a steep escalation of construction costs, amplifying the difficulty of getting new projects started in the current environment.

“The real challenge has been the continued escalation of hard costs,” said Keith Rand, vice president of development at Mill Creek Residential. “The cost of construction has gone up by 30% and that’s been really tough. We’re seeing some subsiding of that.”

“We’re finally seeing some hard cost relief, which is desperately needed,” AvalonBay Communities vice president Scott Fishbone said.

To lighten the cost burden, “we try to tap into incentives and grant programs as much as possible,” said Matt Connors, Sinatra’s vice president of development. “It’s essential for us to get the tax abatements and grants with pricing the way it is.”

The housing crisis has moved the needle of public support for more multifamily development, our panelists noted, with state governments in California and New York pushing initiatives that will facilitate more housing development.

The winnowing of local tax bases from empty office buildings also is increasing support for multifamily development. “Attitudes are changing,” Rand said. “The public sector is going to have to embrace multifamily development as a byproduct of what’s going to happen to your tax base when these office buildings go to their resets.”

However, in some regions that have seen a proliferation of multifamily development, opposition to new projects is stiffening. Doyle, who is based in Charleston, SC, said some municipalities in the area want to stop multifamily development completely.

“There’s one community outside of Charleston where not only do they have a moratorium, but they allocate permits. You can’t get a permit and then you can’t build even if you have a permit,” he said. “They’re throwing things out of balance in a dramatic way.”

“It’s going to result in a much lower tax base and a much higher cost of living, particularly for those individuals who are really a necessity to the economy for Charleston, which bases a majority of its economy on tourism,” Doyle said. “When the people who clean the hotels and work in the restaurants can’t afford to live there it’s going to go away.”

“I think we need to figure out how to build more bridges to the NIMBY communities. The public sector needs to lead the way,” Rand suggested. “We need to ensure that the incremental increase in tax dollars coming from multifamily developments goes back into the communities where these projects are being built so we can build a broader consensus.”