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2010:Developers
Diversify to Stay Recession-Proof
- 02/01/10
By Jerry Ascierto
The Great Recession has already claimed some of the industry’s
largest owners and developers—Fairfield Residential, Bethany Group,
Lembi, Babcock and Brown, Opus Corp. The list goes on and on and
will likely swell some more before the next upturn.
But some developers are surviving, and even thriving, in today’s
market by re-engineering their business plans and turning their
focus to recession-resistant sectors such as receivership business,
student housing, and historic renovations. The overriding trend is
to diversify.
Receivership Business
For instance, the Laramar Group was mainly a value-add developer in
the past, but as acquisition-rehabilitation business dried up, the
company began mapping out new profit centers.
One initiative was setting up a new receivership division in early
2009 to capture the coming wave of distress. That division, which
had no units under management in mid-2009, now manages more than
4,100 units at 51 properties across seven states.
“This was not something that Laramar had done in the past, but now
it’s a profit center for us,” says Dave Woodward, CEO of the
Greenwood Village, Colo.-based firm. “And who knows what that could
grow into.”
Student Housing
Or consider Buckingham Cos. The Indianapolis-based developer and
manager began in 1984 when company president Brad Chambers, then a
20-year-old college student, bought a single-family rental. Chambers
would go on to acquire one community a year after that, and the
company began new construction development around 1990.
Today, the firm employs 450 people, owns about 5,500 units, and fee
manages another 13,000. Buckingham hasn’t had to lay anyone off
during the recession. In fact, the company’s corporate staff has
grown by 20 in the last two years. One of those hires was Brent
Little, who previously led the student-housing platform of Place
Properties, helping to transform that company into a national
presence. Little hopes to do the same with Buckingham.
Buckingham broke ground on its first two university developments in
2008, one adjacent to the University of Notre Dame campus, and
another near the University of Kentucky in Lexington. Those two
deals will be completed by mid-year, and Little is already hard at
work on expanding the company’s higher education focus. Buckingham
hopes to start three more developments this year, one of which is a
student housing deal across from the Indiana University-Purdue
University Indianapolis campus.
For the past six recessions, enrollments have continued to increase
in major colleges and universities, and the current recession is no
different. “Obviously there’s no appetite for condos right now, the
appetite for large high-density urban deals has pretty much dried up
as well, and conventional deals are tougher to get financed,” Little
says. “And so student housing is one of the safe havens essentially
in the multifamily industry right now.”
Little was with JPI in the late 1980s and early 1990s, and sees
parallels between then and now. Some of the industry’s largest
developers such as Trammell Crow and Lincoln Properties stopped
developing during that downturn, but JPI invested heavily, and by
1995, the firm was the largest multifamily builder in the country.
“That’s the opportunity out there today. This is the bottom of the
market,” Little says. “So build into the down market and sell in the
up market five years from now.”
Back to the Drawing Board
In recessionary times, anything goes. And sometimes, you have to
move away from an old business plan, even if it was your company’s
guiding document for decades.
For example, the Wallick Cos., a Columbus-based owner, manager, and
developer, retooled itself just before the recession took hold,
paring down a business unit that was the foundation of the company
for more than 40 years. Wallick began life in 1966 as a construction
firm, and the company’s management and development efforts grew out
of that focus. But over the years, the construction division began
weighing the company down through its massive overhead expense.
“The emphasis of the business has gradually changed over the years,”
says Howard Wallick, one of the company’s three owners. “For over 40
years it was a construction business, but we see ourselves primarily
as a management business now.”
To that end, the company merged with Cincinnati-based Stern-Hendy at
the beginning of 2009, which grew its management portfolio by 40
percent, to about 12,000 units. All of those new fees coming in the
door have allowed the company to pursue some development work. For
the first time in the company’s history, it will use historic tax
credits this year on a rehab of the Berwick Hotel, built in 1894 in
Cambridge, Ohio.
“A recession is a good time to grow, which we’ve been doing over the
last 18 months,” Wallick says. “The Stern-Hendy deal has given us a
steady cash flow through the recession and positioned us to be able
to really go after those tax credits.”
On the flip side, Cohen-Esrey has transformed itself from a
services-oriented business to a full-scale development operation
over the past 15 years. The company has concentrated on a variety of
asset types: value-added market-rate deals, historic renovations
using historic tax credits, and affordable housing development using
low-income housing tax credits.
“The only way to make a development operation work is to have a
pipeline that’s so full with such diverse projects that it doesn’t
matter what’s happening in the marketplace, you’ve got something
always popping for you,” says Lee Harris, president of Overland
Park, Kan.-based Cohen-Esrey. “That’s what we’ve been able to do,
but it’s taken us at least four years to ramp it up.”
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