November 2, 2016 / Commercial Property Executive / Michael McCormick and Todd Pratt
Amid the rising demand for rentals and advancing rents in major metro areas, motivated by demographic gains and job market strength, multifamily construction is deemed as increasingly profitable in the medium- to long-term outlook. However, regulatory limitations and financing restrictions might impact the projected ROI unless appropriate strategies to maximize project profitability are implemented.
The following considerations might significantly improve project ROI by properly addressing any existing challenges to profitability, laying the foundation for increased property revenues after the project’s completion.
From the planning perspective, optimal site selection and project size are major determinants of future ROI. Finding the best location and properly managing entitlements creates the lion’s share of developer profit. It is prudent to ensure there is existing infrastructure—including adequate water, power and gas—when selecting the location. Connecting to existing infrastructure would provide better cost efficiency (potentially requiring certain upgrades/regulatory approvals) than developing project infrastructure from scratch.
The next important step is determining the long-term and short-term plans for the property. Developing to own promises greater ROI over a longer period of time, while selling the property upon completion is a quicker profit, although yields are typically smaller overall. From the financing viewpoint, selecting the best equity and debt partners and executing proper arrangements for financing can maximize future ROI.
It is also crucial to know the local economy, submarket and demographics in order to better gauge expected levels of rent, the most cost-efficient floor planning and appropriate amenities. Land prices and availability in the immediate 10-block vicinity is another factor to assess the project’s potential value and profitability.
Putting the right team together…