Thought Leadership From Our CEO, Kevin Brinkman: Current Market Requires Creativity
‘Necessity is the mother of invention’ and when it comes to multi-family development in today’s market, it’s time for developers to get creative. While low vacancy rates, solid employment growth, and the continued obstacle of rising home prices are driving more people to rent, developers are also experiencing an ever-growing challenge of making the numbers work.
According to the Colorado Department of Labor & Employment, the Boulder-Denver MSA’s unemployment rate is 2.5% and the employment growth rate is 3% – both showing a positive variance from national averages. The great news is that people have jobs in our market, but salaries aren’t keeping pace with residential home prices. The gap between the cost to own a home versus rent continues to widen leaving many people priced out of buying. In fact, the latest numbers show that it’s 82% more expensive to own versus rent. Although this contributes to record low vacancy rates, developers are facing challenges in bringing new multi-family to market due to the growing escalation of project costs.
While rental rates are flattening in our market, land prices, construction costs, financing costs and impact fees continue to rise. Apartment Appraisers & Consultants cite a 44% increase in hard, soft, and land costs in the last three years compared to only a 4% rent increase during that same period. As market conditions continue to make it harder and harder to get development projects to pencil and move forward to ground break, we’ve had to implement a three-pronged approach to combat these challenges: engaging our construction team early, partnering with municipalities, and identifying economies of scale.
Early Contractor Involvement
Due to our long-standing strategic alliance with our construction partner, Brinkman Construction, we can engage them very early in the process. This allows us to control costs, solidify reliable subcontractors early, and manage design to the budget. Finding a contractor with awareness of the changing landscape of multi-family construction is crucial to discovering value engineering ideas throughout design and controlling scope from project inception throughout construction completion.
Another important factor that’s driving our current portfolio is partnering with municipalities, Urban Renewal Authorities and Downtown Development Authorities. Meeting the demands for rental product is a critical element for strategic and sustainable growth, so it makes sense for public and private entities to leverage their work together to bring additional units to the market. We have several mixed-use and multi-family projects in our portfolio that would not have moved forward without public support.
The City of Loveland and Loveland Downtown Partnership have been our essential partners of The Foundry project in Loveland, Colo. The development includes two mixed-use buildings, a five-story, 460-stall public parking garage, 102-key hotel, seven-screen movie theater, and one-acre community plaza. The City of Loveland invested in the project by providing the land and waiving use-tax and development fees. This amounts to an investment of $17.6 million through these public improvements. Their support funded the construction of the public parking garage and community plaza.
Beyond the investments from public partners, their buy-in has been invaluable. We’ve been able to align the vision of these community-centered projects with the overall vision of the municipalities to ensure we’re building meaningful places while also catalyzing economic growth. Everyone wins with this model – local businesses, community members, municipalities and developers searching for success in this extended market cycle.
Strategic Economies of Scale and Product Alternatives
The current market conditions are driving developers to take advantage of economies of scale by building larger projects. Labor is such a constraint in Colorado, the larger the project, the more you can drive down the cost per square foot of construction. Since many of the project costs, like land and design, are fixed, the larger the project goes, the more it can optimize amenities and maximize returns. Due to these factors, we’re seeing an increase in larger projects with 200+ units and a decrease in smaller, boutique-sized projects because the economics don’t work.
In addition to creativity with new products, there’s a growing focus on value-add acquisitions. Although hard to come by, class B and C assets with improvement potential are becoming more and more desirable to developers. The return on investment of renovating existing products is higher than building new and offers developers an alternative to competing with the increasing number of class A assets delivering at this point in the cycle.
Although it may have been necessity that initially drove our invention, the tenets of early contractor involvement, public-private partnerships, and economies of scale are real estate rules of thumb that we’ll continue to follow regardless of market fluctuations.Back to News