Developers Bldg Market-rate Units to Lease for Less

Credit: National Apartment Association

By Joe Bousquin for National Apartment Association HQ
Since the end of the Great Recession, the hallmark of this apartment cycle has been luxury units, usually located within the urban core, with a slew of amenities.
Of course, those kinds of communities don’t come cheap, to develop or to lease. The $300K per-unit development cost this cycle has been justified by the ability to push rents that have gone through the roof as well. In many markets today, $2,500 a month just gets you in the door.
The result has been an attainable housing scourge like no other: 49.7 percent of American renters are now classified as “cost burdened” — meaning more than 30 percent of their income goes to rent. Nearly 300,000 renters were added to those ranks in 2018 alone.
But a funny thing happened on the way to the apex of the housing crisis in 2019: For-profit apartment developers started to produce more “attainable” or “workforce” housing apartments that lease out for less. Generally targeted at residents making 60-120 percent of Area Median Income, they’ve been developing these communities without using government subsidies.
Why? Because with that many cost-burdened renters — more than 20 million households nationally — that’s where the overwhelming majority of demand is today.
“Developers build based on what we know and whatever’s hot in the market at that point,” says Henry Torres, president of Astor Companies. “Right now, attainable housing is hot.”
For Kevin Smith, Senior VP of Development for 29th St. Capital, the rise of ground-up attainable housing projects has emerged to fill the market vacuum left by the singular focus on luxury to date.

Big and Small Strategies for Attainable Housing

Developers are building ground-up, obtainable apartments today with a variety of strategies, from smaller units at smaller properties, to larger developments with higher unit numbers aimed at a broader segment of the population to gain economies of scale. They’re going in eyes wide open to only make land deals where they make sense, and on lots that can either accommodate surface parking, or where municipalities will give them abatements on parking ratios. In some cases — but not all — they’re scaling back on amenities and finishes.
Developers also are standardizing designs as much as possible to gain efficiencies with their general contractors, and buying materials and components in bulk via national purchasing programs to keep costs in check. Finally, while they’re not taking government money and all the strings attached to it, they are taking advantage of federal Opportunity Zones, as well as local entitlement allowances and waived impact fees designed to entice the development of attainable housing.

Filling the Gap

“Workforce gives market-rate developers a unique opportunity in the marketplace today,” says Kyle Bach, CEO of Annex Group. “It lets them fill the gap between affordable housing and luxury apartments.”
He also sees developers using uniform designs, finishes and in-unit amenities across multiple developments to gain buying power from purchasing in bulk.
That’s the approach taken by Continental Properties, a developer of 23,000 units. Currently, 57 percent of the firm’s portfolio units are attainable to renters making 80 percent of AMI in its markets.
The firm uses what it calls a “prototypical product,” based on a garden-style, two-story design with direct access to most units, which eliminates the need to build and maintain non-rentable space. While elevations may vary across different regions, the guts of the communities remain the same.
“We build the same base product in all of our markets,” says Continental CEO Jim Schloemer, who co-founded the firm in 1979. “We will change the exterior or skin to match the geography, so you might have a Rocky Mountain style in Denver, more of a Southwest style in Phoenix and a Carolina Low Country in Charleston. We make modifications to the exterior materials, but we use the same building prototype in all of our markets.”
Doing so helps the firm leverage its buying power with suppliers nationally. “We know a year in advance exactly how many plumbing fixtures of a particular type we need, and we know the kitchen cabinetry, because it’s all designed to be the same in all of our communities,” Schloemer says.
That approach also enables the builders Continental works with to attain velocity, much as single-family builders do when knocking out the same design over and over again in a suburban subdivision.
“The biggest efficiency comes from repeat construction by our general contractors and their subcontractor base,” Schloemer says.
Read more at National Apartment Association HQ.

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