The dawn of an era: NAHB Multifamily

Change is in the air as Leonard Wood steps down from chairman of the NAHB Leadership Board next year. The organization is revving its engine for the national market and the question looms: Who will step in to take it to the next level?

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Ron Terwilliger and Leonard Wood, two titans of the multifamily industry and the former and current chairmen of the NAHB Multifamily Leadership Board, will share the spotlight as co-hosts of NAHB Multifamily’s Pillars of the Industry awards conference and gala that will take place April 11-13 in Hollywood, Fla. The two multifamily giants talked with MHP recently about their views on the multifamily business today and their expectations for the future. Both men also unveiled a few surprises.

Leonard Wood, Wood Partners
Perhaps the most unexpected recent news about Wood Partners is the pending retirement of the co-founder of the company that bears his name. It’s hard to envision the multifamily universe without Leonard Wood. But don’t worry — he’ll still be around.

“I’m not going away. I’m just going away day-to-day,” said Wood, who expects to stay involved in the multifamily industry on a personal level, following his retirement from his position as managing director of the company in November.

The succession plan Wood Partners execs began formulating a couple of years ago to insure the company’s continued prosperity well into the future, was an obvious clue that Wood didn’t plan to spend the next 20 years at its helm.

“Wood Partners has grown a lot and it’s really more than I wanted to do and part of what we’ve told everybody is that it’s not going to die when I leave or when Jerry Durkin or Jim Simpson leaves. It’s going to be ongoing and this is just the first of what I hope will be a number of transitions over the years where young people move up and take over,” said the multifamily veteran.

Wood plans to turn the company’s reins over to Durkin, another of its founding partners. Wood, Durkin and Simpson, along with 50-some other Trammell Crow Residential (TCR) employees, left that company in 1998 to form Wood Partners, following a major liquidation by TCR that involved the sale of numerous operations across the country.

“After all these sales, it was obviously time to rethink the future,” Wood said of the dispositions that left TCR with operations in the Carolinas, Georgia, Florida, Washing-ton, D.C., and some Western states. “For me, now was as good a time as any for a fresh start,” he said at the time.

Wood’s new company’s first project was The Dakota in Atlanta, a mixed- use community with around 160 condominiums in joint venture with his old friends at TCR, where he spent 16 years as a partner.

Since the Atlanta-based company was formed, it has grown to 13 offices around the country, most recently adding an office in Salt Lake City, Utah, and has developed more than 29,000 apartments and condominiums. The company has a current pipeline of almost $2
billion, including the recently announced plan to JV with Donald Trump and Florida-based Dezer Properties to build Trump’s first Atlanta project.

The $300 million development of Trump Towers Atlanta seems a fitting jewel to crown Wood’s achievements at the company he grew into one of the largest multifamily developers in the country.

Under Durkin, who will become the company’s new managing director, and Durkin’s as-yet-unannounced successor, Wood expects the company to continue its strategy of following its customers. Five years ago, Wood Partners began building condos, as that market was heating up, but the cooling of both the single-family and condo sectors has prompted the company to reduce its concentration on the for-sale market to 25 percent of the $800 million to $1 billion of multifamily development starts this year and about the same next year, Wood said.

“Condominiums certainly had their day in the sun and it’s returning now to normal. I think multifamily’s got a bright future and some of the people are going to rent and some are going to buy and that formula will change a bit over time,” said Wood, who refers to his company as a multifamily operation, to cover all the bases.

The multifamily industry’s bright future will be driven, in part, by the efficiency density lends to residential development, which is particularly appropriate in this era of green building, limited vacant land and scarcity of municipal money for creation of new roads and infrastructure, he said.

“Conceptually, I like everything about multifamily. It uses less land, people tend to live in smaller spaces, they live closer to their work and entertainment, and bigger buildings probably are a little more energy-efficient than free-standing buildings,” he said, predicting that the U.S. may become more like multifamily-friendly Europe as population grows.

However, the NIMBY hurdle remains among those who believe density means low quality, perhaps a hold-over from the apartment building frenzy of the 1970s and 1980s that resulted in thousands of apartment communities across the country that now are showing their age — and many of them didn’t age very well.

“If people are going to accept living in smaller spaces, then they’re going to want them to be nice,” said Wood, adding that higher quality finishes and amenities will be necessary to entice tenants. And, if communities are going to accept multifamily, it’s up to the industry to build the kind of developments people will be eager to embrace in their neighborhoods.

He believes the solution to that problem is two-fold. On the one hand, higher quality communities with better design will change the nay-sayers’ tune from “It’s going to ruin the schools, it’s going to cause more traffic, it’s going to wreck the neighborhood,” to hymns of praise.

That may seem optimistic, but Wood thinks the right kind of PR by organizations like NAHB Multifamily, the National Multi-Housing Council and the Urban Land Institute could make that vision a reality.

Nor does the trend toward smaller living spaces in denser communities herald the end of the American Dream of owning one’s own home. “That dream’s not going anywhere,” he said, explaining that the definition of home-ownership is broadening to include condos. “It’s part of our culture and I don’t see it changing, but I think part of that dream is going to be that it’s not the end of the world to live closer to work and have less to take care of and have a nice building and not have to maintain it on the weekends,” he said.

Wood expects the company he founded to continue along the green path, focusing on energy-efficient appliances and building techniques. He believes the trend toward more smart growth is essential as cities, schools and roads become more crowded. Development of environmentally friendly buildings is part of a strategic initiative for Wood Partners and the company plans to become a leader in the movement. “Again, it’s part of following our customers and I believe they’re going to demand it,” Wood said.

He also would like to see workforce housing become a bigger part of Wood Partners’ business, because of the steadily growing need for affordable living spaces. Wood Partners opened an affordable housing division about four years ago and between 10 and 20 percent of the company’s current development falls into that category today. But, the increased cost of construction materials and labor make it hard to pencil out building future affordable communities without increased subsidy.

Wood believes that both green building and affordable housing are the burning issues for Wood Partners and the rest of the multifamily industry and he plans to remain involved in the business, despite his retirement from the company that bears his name.His term as chairman of the NAHB Multifamily Leadership Board doesn’t end until April 2008 and he plans to see that through. He also has some charitable and educational pursuits to which he’d like to devote more time. And he plans to keep on investing in real estate with his friends because, he says, that’s what he does best.

Ron Terwilliger, Trammell Crow Residential
Ron Terwilliger reveals a surprising business plan and some new strategies in response to steadily growing demand in the multifamily rental sector. The man at the helm of one of the nation’s largest multifamily real estate companies says Trammell Crow Residential (TCR) has more offices today than ever before and contemplates building more multifamily housing this year than at any time in the company’s 27-year history.

The Dallas-based company that has built more than 200,000 units from coast to coast, has doubled its development capacity over the past four years in anticipation of tremendous opportunity toward the end of this decade, when the rising tide of echo boomers enters the renter pool. Today, with 23 offices in almost every major metro except the Midwest, Terwilliger forecasts multifamily starts of at least 15,000 units this year — 90 percent market-rate rental and 10 percent condos — 3,000 units more than expected just eight months ago. “We’re looking at 17,000 or 18,000 units in 2008, if things don’t change,” he said.

But Terwilliger doesn’t see anything on the horizon that threatens to disrupt the flow of capital into the real estate space, believing investors will continue their romance with the apartment business, which is less volatile than other industries and the stock market. With inflation in check, he expects cap rates to remain low and debt financing plentiful and at narrower spreads than ever before, at least through the next election. “The whole market is priced to perfection and it’s hard to see what can upset that balance,” said Terwilliger, who forecasts rent growth in the 4 to 8 percent range in many of TCR’s markets, but none in the Midwest, where the company has no presence.

Perhaps the most compelling reason Terwilliger sees for bullishness about multifamily rentals is that the premium to own, typically in the 30 to 40 percent range, now is around 80 percent, outweighing the tax benefits and even the satisfaction homeowners derive from presuming equity upside. With all the stars aligned, he says the only constraints on TCR’s business plan are finding the sites, entitling them and securing the investment partners who provide a buffer from market risk with their equity. Joint ventures have been Terwilliger’s strategy since his early years in the business and, “in order to have a get rich slowly scheme for us, I don’t see that changing,” he said.

TCR has seen a change in process, however, forced upon the company over the past two or three years by escalating construction costs. Rather than fast tracking construction and risking subcontractor cost hikes after financing is in place, TCR is taking a more disciplined approach that, unfortunately, lengthens the building period from the time land goes under contract to project completion. “We are trying to complete our plans and get subcontractor prices before we finalize our financing and commit to our joint venture construction partner what the guaranteed construction price is,” said Terwilliger. TCR also avoids, whenever possible, concrete and steel-frame building that competes today with materials and labor in the commercial sector, favoring wood, which is relatively inexpensive and has benefited from the recent slow-down in the single-family home market.

The company will continue with three product lines — 10 percent allocated to a cost-effective market-rate product built mostly in the Southeast and the Southwest and 50 percent to suburban garden with higher rent and more upscale finishes built within inner ring suburbs. The other 40 percent will be higher-density, urban, semi- luxury product that might be high-rise, but more likely four stories over parking.

“We’re trying to anticipate what our rental market wants and they seem to want a mixed-use environment, not always in the urban core — although we’re doing more urban than before. But we continue to build in the suburbs because, if you look at the spectrum of housing needs and affordability in this country, most people can’t afford the $1.50 to $3 per square foot rent that more urban product requires and they’ll be satisfied paying $1 per square foot out in the suburbs,” he said.

Housing affordability is what keeps Terwilliger up at night and has attracted much of his charitable focus. He recently committed $5 million to create an Urban Land Institute center for workforce housing that will bear his name and gifted another $5 million to the Enterprise Foundation for establishment of the New Enterprise Terwilliger Fund for promotion of affordable housing. But the champion of workforce and affordable housing, who also serves as vice chairman of the board for Habitat for Humanity International, isn’t including subsidized housing in his company’s business plan going forward. The rent increases allowed by the Section 42 tax credit program don’t offset today’s higher construction and land costs. “On a typical 950- square-foot apartment, there’s almost nowhere we can build it for under $100,000 per unit. Frequently its $150,000 or more,” said Terwilliger, who thinks the only solution is an increase in government subsidies.

On the subject of green building, Terwilliger has yet to see consumers either requiring or paying more for a green-built unit in the rental housing industry or the lower priced condo market. He expects green building will be required by zoning authorities someday and his company is working with architects to figure out how much more it will cost. “But if it costs more and you don’t get any more for it and it’s not required by local zoning codes, it’s going to come slower. Conceptually, we’d like to get there, but if you go to an investor today and say a development will yield 7 percent, but if I do green building it will yield 6.5 percent, not many will want to do it at 6.5 percent,” said Terwilliger, who refers to TCR as an investment builder, not a long-term or core holder.

“Our normal business strategy is to build it, lease it, season it a little and sell when market conditions are good,” he said. But with so much money chasing multifamily, TCR has sold a number of properties as soon as certificates of occupancy were received. Terwilliger views that relatively new phenomenon as a condition of the market today and doesn’t expect it will last long.

With such a huge pipeline, TCR is focused on sourcing land. “The period of going out and finding green fields to build on are beyond us in many markets. These days, we’re knocking down old apartments, warehouses and office buildings, trying to build on parking lots of retail centers and, sometimes, on brownfields that have been cleaned up,” Terwilliger said. And, while the company isn’t looking to pick the bones of broken condo deals, he thinks single-family homebuilders with large, well-located land banks they need to move off their balance sheet may be a good source to tap.

Unlike his old friend Leonard Wood, Terwilliger has no plans to retire any time soon. “I love the business and currently have a lifestyle that gives me the flexibility to pursue a good personal life and an active charity life. Some people think I’m retired now,” he said.