Capital is coming back to the real estate market, interviews with developers in many parts of the United States indicate. And multi­family residential development continues to lead the way.

“If we’re a barometer of what’s happening, clearly the climate has changed,” says Henry Cisneros, executive chairman of Los Angeles–based CityView, a national real estate investment and pension fund management firm, and former secretary of the U.S. Department of Housing and Urban Development (HUD).

CityView has $100 million in investments in the works, including new apartment projects throughout the San Francisco Bay area. Cisneros says his firm is seeing both institutional and new capital coming into the real estate market. “No week passes that we don’t get a proposal for an acquisition or development,” he says. “Judging by the amount of money chasing projects, multifamily is by far the preferred property type.”

Richard Figueroa, director of capital markets for Opus Capital Group, a Chicago-based real estate investment and development firm, says he believes sources of capital will be interested in funding apartments for the near future because demographics indicate continued strong demand. He notes that the majority of the nation’s 80 million echo boomers, or generation Y, and a growing number of the 76 million baby boomers prefer renting over owning because they like the amenities, flexibility, social atmosphere, urban lifestyle, and freedom from maintenance that renting provides. These two groups combined constitute nearly half the U.S. population.

How Deals Are Coming Together

Opus easily secured financing for a $100 million, 300-unit multifamily tower in downtown Minneapolis. Commercial banks and life insurance companies are carrying $65 million in debt, and institutional equity sources and high-net-worth individuals are funding the rest, Figueroa notes.

The Corners, an upscale lifestyle retail center, with 150 residential units
and a large central park, was designed by DDG Architects. The developer,
Marcos Corporation, is in preleasing mode and plans to break ground
on the project next year in a suburb of Brookfield, Wisconsin.

The Denver market also is seeing a lot of residential activity. Evan Lichtenfels, development director for local firm RedPeak Properties, says long-term equity sources are interested in funding apartment projects in Denver because vacancies are at a ten-year low and net effective rents rose 7 percent last year due to both an influx of gen-Y renters and a drop in homeownership.

Homeownership in the Denver area has dropped from 69 percent in 2004 to 65 percent this year, notes Lichtenfels, who points out that every 1 percent drop in homeownership in the Denver area results in 12,000 to 15,000 new renters. And a recent Brookings Institution study named Denver the top city in the nation for gen-Y migration, attributable to the region’s lifestyle amenities, which will also sustain rental demand.

RedPeak has secured funding for two mixed-use projects in Denver, including One City Block, which is being financed by Wells Fargo. This high-density project with 302 apartments and 9,500 square feet (880 sq m) of retail space is located in the hip Uptown Denver district, which is known for its boutiques and lively retail amenities. Designed by the local architecture firm Davis Partnership, the project is targeting a Silver rating under the Leadership in Energy and Environmental Design (LEED) program. The design is geared to gen-Y renters, offering units averaging 700 square feet (65 sq m) in an amenity-rich environment that includes extra storage for skis, snowboards, and bicycles.

Developers are creating higher-density residential development by decreasing unit size, points out Manny Gonzales, a principal in the Santa Monica, California, office of KTGY Group. He notes that in urban areas like Los Angeles, new apartment complexes have about 200 units per acre (500 units per sq m). Though units are smaller than in the past, developers are putting in larger public spaces and higher-quality amenities to compensate for less space, says architect Dale Yonkin, a principal at Marina del Rey–based Nadel Architects. He notes that this strategy helps keep costs more affordable for gen-Y renters. Singles and one-bedroom units designed with generation Y in mind have
500 to 700 square feet (47 to 65 sq m) of space, open layouts that make the units feel more spacious, and trendy finishes, he says.

Yonkin designed the Shores, a $165 million, 544-unit apartment complex on a Marina del Rey waterfront in Los Angeles County. Local developer Jerry Epstein took advantage of financing backed by the U.S. Department of Housing and Urban Development (HUD) to get the project started, securing a $125 million, 42-year permanent nonrecourse loan from Red Mortgage Capital, based in Columbus, Ohio.

The Shores is targeting young professionals and will offer market-rate units with more moderate rents than similar projects nearby, as well as 54 units set aside for affordable housing, says Yorkin. A two-bedroom unit will rent for about $2,000 per month, compared with more than $3,000 for similar nearby apartments.

HUD financing provides an 80 percent loan-to-value ratio, but Yonkin notes that HUD projects must employ an open bidding process, have sustainability features, and pay a minimum HUD-mandated wage for construction workers, all of which increases costs.

Foreign Investment

Residential developers in Florida, which was hard hit by the housing bust, also are back in business. Steve Cohen, senior vice president for commercial real estate at Sabadell United Bank in Miami, an international bank that caters to businesses and high-net-worth individuals, suggests that the south Florida market turned around quicker than people expected because foreign investors absorbed excess condominiums.

Foreign investors are also funding Florida projects. Scott Lee, a principal in the San Francisco office of SB Architects, notes that his company’s Miami office has a number of mixed-use and hotel projects under way, all funded with Latin American money.

Dezer Properties, a New York City–based developer/operator, partnered with Porsche Design Group, a division of the German automotive company, to develop a $150 million, 132-unit, ultraluxury residential tower in Sunny Isles Beach, Florida. However, even though Dezer Properties has a good credit standing and strong equity partner, the bank still requires $110 million in presales to start construction, owner Gil Dezer notes.

Job growth is also boosting real estate activity in Florida cities. David Barker, an attorney at Orlando-based Roetzel & Andress, notes, for example, that Medical City, a new medical/biomedical research, education, and treatment complex in Orlando, will have a positive impact on the region’s housing market by creating an estimated 30,000 jobs by 2018.

Though construction activity in the U.S. multifamily sector is just now getting under way, the design business picked up about a year and a half ago when developers restarted projects that had been on hold since the financial meltdown, Gonzales says. His office currently has 30 apartment projects in the works throughout the West.

Funding Mixed Use

Designed by TCA Architects and developed by Crown Realty Development, the LEX on
Orange, a 310-unit residential project, is under way in Glendale, California.

Most projects getting off the ground quickly are restarts that already have entitlements in place. Bernards, a national commercial builder with five offices in the Southwest, has broken ground on two such projects in Los Angeles, including One Santa Fe, a $160 million transit-oriented project in the downtown Arts District with 438 residential units and 78,620 square feet (7,304 sq m) of commercial space. Designed by Los Angeles architect Michael Maltzan and KTGY, the project is a joint venture of New York City–based Goldman Sachs Urban Investment Group (UIG) and local developer the McGregor Company.

Funding for this project is an example of a post-recession financing scheme, in which developers are financing residential and commercial components separately and using a combination of public and private funding sources. The housing component is financed with tax-exempt bonds issued by the California Housing Finance Agency and low-income tax-credit equity from UIG. The commercial component is financed with a city loan and funding from Clearinghouse CDFI, a private lender based in Lake Forest, California, that funds redevelopment projects. The Los Angeles County Metropolitan Transportation Authority, which owns the site, provided a 78-year ground lease, and locally based Canyon-Johnson Urban Fund put up preferred-equity capital to fill the financing gap, enabling construction to begin.

According to Los Angeles attorney Paul Rohrer, a partner at Loeb & Loeb specializing in public/private transactions, several post-recession financing models have emerged. He notes that some lenders are boosting rate of return to appease investors by structuring deals to share profits as well as collect interest on loans.

Opportunity funds, which pool capital from diverse sources, are among lenders looking for a piece of the action, says Steve Orchard, senior vice president at George Smith Partners, a Los Angeles–based mortgage banking firm. He notes that different types of capital are being combined to provide up to 90 percent leverage in exchange for a cut of profits. Structuring high-leverage deals as a mix of senior debt, mezzanine debt, and preferred equity generates interest rates of 7.5 to 9 percent, plus 15 to 20 percent yields on equity, he says.

Private Equity

Foreign capital is revving up development in south Florida.
New York developer Dezer Properties has partnered with
Porsche Design Group, a division of the German automotive
manufacturer, to build a $150 million, 132-unit ultraluxury
esidential tower in Sunny Isles Beach, Florida.

Los Angeles architect Wade Killefer, a principal at Killefer Fammang Architects in Santa Monica, notes that private equity sources also are driving apartment production. Killefer, who has 45 projects in the works locally, notes that NMS Properties, a local apartment developer/owner, has attracted backing from private equity sources and has begun work on seven new projects—five in Santa Monica, one in Culver City, and one in West Hollywood.

In Washington, D.C., Capitol Crossing, an ambitious $1.3 billion mixed-use development proposed for the heart of the city, is being financed almost entirely by an anonymous private equity source, says Parke Chapman, account executive at New York City–based Rubenstein Communications and spokesperson for the developer, locally based Property Group Partners (PGP).

The 2.2 million-square-foot (204,000 sq m) project will consist of four office buildings, one residential structure with 150 units, and nearly 70,000 square feet (6,500 sq m) of ground-level retail space. It will cover three city blocks and occupy the largest contiguous undeveloped site in downtown. Built partially on a platform over a portion of Interstate 395, the development will restore the connection between the Capitol Hill and East End neighborhoods, which was severed in the 1960s when the highway was built.

This project is to be the city’s first central ecodistrict—designed to showcase sustainable development practices—and the nation’s first LEED Platinum-rated, urban air rights development. However, it is intended to go beyond LEED certification, generating its own power and recycling rainwater to ultimately operate independently of the electricity grid and municipal water supply.

Chapman says the project is in the final stages of the approval process and expected to break ground early next year.

Edward Indvik, chief executive officer of Lee & Associates, an Irvine, California, brokerage firm, says capital is available for commercial development because investors who had been sitting on the sidelines are reentering the market. An example is Common­Wealth Partners, a Los Angeles–based real estate investment, management, and development firm, which has been inactive for five years. It announced in June plans to invest $2 billion over the next year in core office assets in major cities nationwide.

“Even in the worst-case scenario, the market is stabilizing, and where there is high demand, it is robust,” Indvik says. Markets with a constrained supply of commercial property have seen accelerated rentals and absorption, he notes. Expansion is occurring in places with healthy industry clusters, such as Los Angeles, New York City, and Silicon Valley, which have strong media, entertainment, and technology segments.

Despite continued improvement in the hotel sector, funding for new development is still very difficult, notes Robert J. Habeeb, president and chief executive officer of First Hospitality Group, a Chicago-based developer/operator of Marriott-brand hotels. But he says financing is available for well-located value-add acquisitions.

His company is converting historic office properties to hotels in underserved, urban markets. First Hospitality Group partnered with Des Moines, Iowa–based Nelson Development to convert a 1920s-era, art deco federal building in downtown Omaha, Nebraska, to a 152-room Residence Inn. Although the $25 million project is in a secondary market, Habeeb notes that Omaha has steady demand for hotel rooms and a shortage of extended-stay hotels.

Major retail development has been at a standstill since the recession. One exception is the opening in March of an upscale, 700,000-square-foot (65 sq m) mall in Salt Lake City. The project, developed by Taubman Centers Inc., was financed by the Mormon Church.

A major retail center is also planned in a suburb of Brookfield, Wisconsin. The Marcus Corp., a Milwaukee-based hospitality and theater developer/owner, is in pre-leasing mode and plans to break ground on the Corners next year, according to Ahsin Rasheed, chief executive officer of Baltimore-based DDG Architects, the project’s architect. Designed as a community destination, the $150 million, 370,000-square-foot (34,000 sq m) upscale retail and entertainment project includes 150 residential units and a large central park.

The single-family home market is also coming back to life, according to a series of recent economic reports. Charley Freericks, president of DMB Inc., a Scottsdale, Arizona, developer of master-planned communities throughout the West, says homebuilders at its developments are active again after a four-year lull in construction. Increased sales have depleted the new home inventory, allowing an opening for construction once again.

In Mesa, Arizona, DMB has begun work on Eastmark, a 3,200-acre (1,300 ha) development on the former General Motors Proving Ground. Bernards, the project’s general contractor, broke ground in May on the first phase of development, which involves preparing 770 home sites for construction. The development, which has entitlements for up to 15,000 dwellings and 20 million square feet (1.9 million sq m) of commercial space, is envisioned as a model for 21st-century desert urbanism—a sustainable, self-contained community rich in lifestyle amenities and fostering entrepreneurialism.

Eastmark is located in the East Valley’s Gateway area, which planners envision as a major employment center with 100,000 jobs by 2030. “Eastmark will offer the best of both worlds,” says Freericks. The development will provide a sustainable live/work/play environment integrated with an existing community that offers an array of amenities and community services, as well as a diverse employment base.

Employment levels are key to producing the anticipated housing demand, and jobs are on the way for Eastmark. First Solar, a Tempe, Arizona–based producer of photovoltaic panels for power plants, is expected to open a $300 million manufacturing plant next year, creating 600 new jobs at Eastmark. Also, Gaylord Entertainment, a hospitality and entertainment company based in Nashville, plans to break ground in 2015 on a destination resort, which will provide retail and recreational amenities, along with a hotel and convention center—as well as jobs.

In the Washington, D.C., area, infrastructure development has given a boost to multifamily housing, which has been the first real estate sector to surge back to life. Expansion of the region’s Metrorail system is driving new development, says architect Marc Fairbrother, vice president of the commercial office practice at RTKL, a global design firm. He notes that the Washington Metropolitan Area Transit Authority is extending rail service in the northern Virginia suburbs beyond the Capital Beltway to office and shopping hub Tysons Corner, through the downtown of Reston, and on to Dulles International Airport, connecting all these sites to downtown Washington. This massive Silver Line project is generating office and residential development along the way.

“This will be a catalyst for growth for the next 20 years,” Fairbrother says, noting that Fairfax County has already increased density allowances around proposed Metro stations. RTKL is working on several projects along the rail line, including Founder’s Square, a mixed-use complex near the Ballston Metro station in Arlington, a neighborhood that has been transformed since gaining rail service in 1979.

Already convenient to downtown Washington office jobs, such areas of transit-oriented development along the rail line stand to become more convenient once linked by the Silver Line to Tysons Corner and Dulles Airport. Founder’s Square, being developed by the locally based Shooshan Company, will include a 17-story, 257-unit LEED Silver-rated residential tower with ground-level retail and a hotel, which are under construction, and 20-story office building and additional retail space are planned. A 355,000-square-foot (33,000 sq m) LEED Platinum-rated office building, which was developed in partnership with Virginia and financed by Helaba Bank, has been completed at the site and is occupied by the U.S. Defense Advanced Research Projects Agency.