Developers Push To Make Multifamily Projects Pencil As Competition Shrinks

Construction starts have slowed in D.C. and across the country as high interest rates have made it harder to finance new projects. This has created an opportunity to take advantage of an undersupplied market, if developers can find creative ways to make deals pencil. 

Developers including National Real Estate Development and Redbrick LMD already have hundreds of units close to delivering in D.C., and they said at Bisnow’s Innovations in Construction and Development Summit last week that they are gearing up to start more projects in the coming months. 

“If you're in a situation like today, where costs have gone up and values went down, there's no new supply,” Redbrick Managing Partner Tom Skinner said onstage at the Washington Marriott Georgetown.

“We've both got big projects coming,” he said, referring to his company's Bridge District and nearby project The Stacks. “But there's not much behind us.”

Redbrick’s The Douglass, the first phase of its Bridge District neighborhood in Anacostia, is set to open with more than 750 units and 40K SF of retail next year. Directly across the river in Buzzard Point, Akridge and National Real Estate Development are building over 2,000 units at The Stacks, a 2M SF mixed-use project next to Audi Field.

But those are the anomalies.

D.C.-area apartment construction starts in the third quarter of last year were at their lowest level since 2010 at 891 units, and they sunk again in Q4 to 527, according to Delta Associates' reports. The first quarter of this year saw 2,150 units start construction in the region, but all were in Maryland and Virginia, with not a single project starting in the District.  

Nationally, the number of multifamily housing units — defined as buildings of five units or more — that started construction in July totaled 363K, down from 464K in the same month last year, and well below the pandemic-era peak of 614K in April 2022, according to the Federal Reserve Bank of St. Louis.

“We think this may be the one of the hardest markets we've seen in 15 years to transact in,” Poverni Sheikh Group CEO Eugene Poverni said. “We also think this is one of the best markets in 15 years we see to start projects in because of the challenges that our competition faces.” 

His firm has developed more than $500M worth of real estate and lent more than $385M for projects across the U.S.

Economists are predicting three quarter-point rate cuts this year, moves expected to loosen up some capital investment. That will likely lead to more competition, so these developers are pushing to break ground on their next projects as soon as possible. 

In October, National Real Estate Development is planning to start construction on its office-to-residential conversion at 1625 Massachusetts Ave. NW. The developer plans to turn the 114K SF office property at Scott Circle, formerly home to the Air Line Pilots Association International, into a 157-unit apartment building.

And the firm isn't waiting for an interest rate cut. National Real Estate Development is just weeks away from closing the construction loan, Katherine Hartley, who serves as the firm’s director of development, said at the event.

“The internal school of thought is we plan to just hedge the rate, swap it out from the go and lock in the interest rate in our budget,” she said. “So we might be leaving a little upside on the table if things play out, but we are more comfortable just knowing where we're going to end the day we go in.” 

Redbrick is planning to start construction next year on a 130-foot-tall mass timber residential building at the Bridge District, Skinner said.

"We’re starting to see residential deals, I think, will pencil again," he said.  

It's not an exactly cushy market. Even with three rate cuts, the cost of capital would still be elevated well beyond what it was just a few years ago, and the cost of materials has surged since the pandemic. 

But to move projects forward, Jair Lynch Real Estate Partners is looking at segmentation, the company’s director of development Malcolm Haith said.

The developer has some big projects on the boards, like 585 new residential units planned for the 600 block of Rhode Island Avenue NE and 750 units across three buildings in Alexandria. It is also poised to create 472 apartment units and retail, including grocery, across two phases at the McMillan Sand Filtration Plant redevelopment. 

“What we've been doing is kind of taking a step back and looking across the pre-development portfolio and seeing where there are opportunities, particularly within phasing to break up these bigger projects into smaller chunks so that the equity check and the amount of financing, it makes sense in today's environment,” he said.

“And we think that's successful. So as rates continue to decline, hopefully we can unlock additional pieces to the project,” he added.