When does New Construction ever make sense for multifamily?

Question

Many of us buy an already existing property. I am wondering how groups and individuals can afford / see the opportunity to build new? When thinking about this question I am mainly thinking of large commercial properties, but I guess the same is true to duplexes and small multifamily. Are they expecting to build, occupy, then sell? Then who would buy that new and overpriced property? I am looking for multifamily in Kansas City and have had this thought stirring in my head for a little while.

Greg Dickerson · Answer

I have always been a developer so it always makes sense for me. It’s what I do and where the big returns are found. New always sells and rents faster and for more. For others it generally makes sense when inventories dry up and prices for existing assets are as much or more than replacement costs.

Development requires serious expertise and deep pockets but once you learn the business it’s vey rewarding professionally and financially.

Michael Le · Answer

Why do you consider it overpriced? Do you only buy used houses, cars, clothes? Some people value newer items and are willing to pay more for it. In the case of multifamily, institutions/family offices/life insurance companies etc will pay more for a new apartment complex because it's a safer product to put their money into. The returns might not be as higher but they're more interested in wealth preservation than high returns.

Right now a lot of 1980s products in my area selling for close or above replacement costs. So it could make sense to build and have something 30-40 years newer.

David Martin · Answer

@Grant Doyle I think you're only chance for success in this arena is if you have direct control of the construction from top to bottom, so you would have to either learn the in's and out's of construction, or JV with a builder that is willing to sacrifice short term profits for long tail revenue.  Just keep in mind, building the thing is probably the most straightforward part, it's all the work that goes in to play before the first shovel hits the ground and in the background while it's happening that gets you.

Evan Polaski · Answer

@Grant Doyle, as was mentioned, it all depends on your investment views.  The same could be said about single family homes.  A dated home is your best value, but you have to renovate it and spend money.  A renovated home is nice, but you still have an old foundation, and potentially some outdated services.  A new build has a builders warranty, new foundation, HVAC, roof, etc.  and to many people they are willing to pay a premium for that.

With new construction commercial it is similar.  Buy a new property, that typically is also achieving the highest rents in the market, and you are making less money, but maintenance requests are likely far lower, higher quality tenants, and as mentioned, higher rents.

Grant Doyle · Answer

@Chris Salerno and @Michael Le thank you for bringing up your points, was not considering replacement costs vs. build new.

Caleb Brown · Answer

@Grant Doyle

It depends on your goals. If you want only high cash flow then no new build multi won’t fit. If you plan to have an asset for 15+ years that’ll appreciate, be safe, and have a small cash flow new builds would fit.

Hai Loc · Answer

What's wrong with building an A class multi family asset occupy it and then sell it to a private corp..

Obviously this is in a much larger scale..

This is where the coin is made

Marlen Weber · Answer

@Grant Doyle As previously mentioned, a new build has lots of opportunities that an existing building may not, such saving you money on issues like plumbing, foundation, and roofing.

Sam Bates · Answer

@Grant Doyle, I've done both ground up construction and acquisition of multifamily. I believe it is imperative to have development experience or partner with a developer you completely trust. There is significantly more work and risk that goes into development than acquisition so you need to know all the pitfalls that can happen.@Greg Dickerson made some great points about development. Additionally, if you plan to hold a development deal they can be a great investment. We've built apartment complexes, refinanced into long term debt and returned more than 100% of investor capital back to investor while still providing more than a 10-12% CoC return to the investors.  With development deals you typically have a higher tenant quality base so you have less headaches than you would with a C class tenant plus your operational expenses are lower since you have a brand new asset with energy efficiencies that an old product can't match.

Forrest Shealy · Answer

How does one learn development? What books or resources do people suggest?

When does New Construction ever make sense for multifamily?

Most Popular Reply