It’s an interesting time in the multifamily development space. Although rents have surged, construction costs, labor, and land prices have increased significantly as well, making it difficult to build anything but luxury projects designed for the affluent renter.

At Atlas, we’ve historically focused on value-add workforce housing. Core to our thesis is that it’s nearly impossible to build middle-income housing today given land costs, construction costs, and general NIMBYism.

Over the past few years, we’ve launched a ground-up multifamily opportunity zone development platform which we’re in the process of scaling. The constants between both investment strategies are that we’re long-term focused, aim to deliver a value product to the market, and mitigate risk through moderate leverage and flexible hold periods.

In today’s environment, this is incredibly difficult to do. It requires a combination of buying land at a solid basis located in a high-rent submarket, devising a unique strategy, and utilizing creative building processes/techniques to lower construction costs.

While this is certainly difficult, it’s not impossible. Here are some of the things we’re exploring today:

Unique Product Types

• High-Density Unit Types: In select urban/dynamic locations, we’re building high-density unit types such as micro units and rent-by-the-bed co-living units. These unit typologies enable us to generate a higher rent per square foot, while offering units at lower chunk rents. These unit types are somewhat unproven and create management challenges, but it’s one way to combat the affordability crisis while also helping deals pencil.
• Unique and Repeatable Design: Many developers devise unique concepts which can be replicated across locations, saving significantly on pre-development and design costs. Christopher Todd Communities, for example, builds single-story rental homes primarily for seniors. They have communities spread throughout AZ, FL, and TX. The repeatable business model, brand equity, and unique design enable them to acquire the ideal site for their product and develop it cost effectively.  EDEN Living is another developer focused on ” horizontal apartment development” in high-growth suburban locations.

Similarly, Penler Development, often builds the same two-story garden-style product.  By utilizing the same plans, architects, GC’s etc. they can reduce pre-development and soft costs.

• Walkable Communities in Suburban Locations: Building lower density garden-style apartments, townhomes, or single-family rentals match the demand today of many Millennials priced out of the for-sale housing market or empty nesters/retirees seeking a more walkable community and active lifestyle. While low-density development may not seem economically viable today, these projects are often built in outlying areas where land costs are lower and they meet an underserved demand resulting in rents rising at an outsized pace.

Finding Cheaper Land

The pricing of infill development sites in prime Opportunity Zones have gone through the roof. There is significant and time-sensitive OZ capital chasing deals in the same ~10-20 markets, driving up prices significantly. Developers must get creative in order to tie up prime sites for a below market basis.

• Land Assemblages: Assembling multiple parcels for a large development site can help lower the total land basis. When buying from a fragmented group of small landowners, you’re more likely to see limited competition leading to better overall pricing.
• Larger Sites in the Outskirts: Cheap land can be found in tertiary markets today or the outskirts of secondary markets. These larger sites are ideal for low-density garden-style, townhomes, and/or single-family rentals which are all in high-demand today. However, the rents must justify development today and these locations must be in the path of growth, leading to outsized rent growth over the 10+ year hold period.
• Entitlement/Rezoning Risk: Developers willing to take on entitlement and re-zoning risks can be rewarded in the form of a cheaper basis. The time and uncertainty associated with re-zoning sites creates risk that many developers aren’t comfortable with. It’s tough to value a site and incur significant cost, without confidence in what can be constructed.  
• Participate in RFPs: Cities dispose of city-owned land via a request for proposal (RFP). Cities often have specific goals in mind for sites so they’re willing to dispose of sites for a below market basis given the developer has a proven track record and is willing to construct a product in line with the city’s goals. This is oftentimes elements such as affordable/workforce housing, environmentally friendly development, and street activation.  
• Land Banking: While this isn’t a strategy enabling development today, if you can acquire quality sites within the path of growth and be patient, land banking can create development opportunities in the future. Big home builders like Lennar own tons of land which they develop at the optimal time in the future.  

The reality is in today’s environment, it’s incredibly difficult to get multifamily development deals to pencil without high rents and optimistic underwriting. However, creative and long-term focused developers continue to tie up sites, devise unique investment strategies, and execute on their development strategy.