From: MULTIFAMILY EXECUTIVE May 2009

Posted on: May 19, 2009

Looking for the Bottom

For the largest multifamily builders, 2008 was rough—and 2009 will likely be worse. By Les Shaver

The falloffs came fast and hard across the board last year.

In 2007, Hunt Building Co. built 9,366 units of rental housing, landing the El Paso, Texas-based firm squarely in the No. 2 spot on Multifamily Executive’s Top 50 Builders list that year. This year, it will take the No. 3 spot, with its 2008 starts plummeting 63 percent to 3,476. Lane Co. in Atlanta, which was No. 7 on the list in 2007 with 4,367 units started, saw a whopping 88 percent drop in its 2008 unit count to 522. It is now coming in at No. 47. Even the No. 1 multifamily builder in the country—Dallas-based Trammell Crow Residential—saw its starts fall 25 percent from 10,936 units in 2007 to 8,194 last year.

Yes, 2008 was a bad year. All in all, only 15 companies on this year’s list saw their starts go up in 2008. The core of the problem: After the Wall Street meltdown and subsequent stiffening of credit requirements, new lending came to a halt by the early fall of 2008. Now, the problem is that lenders effectively left developers stranded at the altar at the close of 2008, says John A. Schaffer, CFO of Contravest, a Lake Mary, Fla.-based firm that started 866 units in 2008, landing it the No. 38 spot this year.

“A lot of lenders have been out of the game for 60, 90, or 180 days,” Schaffer says. “[Just] when you think everything is fine, they’re getting the word out at the last minute that, as a corporation, they’re pulling the plug on any new financing.”

But that’s not the only concern. Even if the lending spigots loosened, apartment developers are still uncertain as to who will live in those new apartments after they open for lease-up.

“We don’t want to start new development at the moment until we have more clarity on the economy,” says David Stockert, president and CEO of Atlanta-based Post Properties, whose REIT dropped off this year’s list due to a drastic falloff in starts, going from 1,131 in 2007 to 147 in 2008. “You’ll have little supply produced over the next 12 to 18 months. I’m assuming that in 2009 people will hunker down, and maybe you will start to see things loosen up in 2010.”

Stockert isn’t alone in that sentiment. Almost every company on this year’s list of Top 50 Builders expects its starts to fall further in 2009. And, in some cases, the decline will be dramatic. Birmingham, Ala.,-based Colonial Property Trust (No. 41) started 742 units in 2008. But this year, the REIT expects to start nothing. Trammell Crow Residential only expects to start 2,000 units—after nearly 11,000 units started two years ago.

“2009 is going to make 2008 look like a cake walk,” says Donald Phillips, owner and managing director of Phillips Development and Realty, a Tampa, Fla.-based builder that started 2,430 units in ’08, taking the No. 11 spot.

To deal with the downturn, developers are taking drastic actions. Many companies, such as JPI in Las Colinas, Texas, have been forced to downsize to stay afloat. Lane Co. jettisoned former CEO Bill Donges and brought back the company’s founder. Many other firms, such as San Francisco-based BRE Properties, announced sweeping layoffs. Colson & Colson, a Salem, Ore.-based firm—traditionally a Top 10 company—declined to participate in this year’s list and continues to remain mum about its financial health. Miami-based The Related Cos., the builder of flashy South Beach high-rises during the height of the boom, also declined to participate.

Even those firms such as ContraVest, which are seemingly well situated with existing equity partners, have had to make tough choices. The company has laid off workers, cut salaries, reduced benefits, and consolidated office space.

In Schaffer’s words: “We’re [looking at] cash flows to try to make smart decisions today to keep as much cash on hand as possible to weather the next two years.”

Steve C. Bodner CEO

SC BODNER CO. (No. 22)

Despite staggering economic conditions, multifamily owner, manager, and builder SC Bodner Co. is planning a hefty 1,000 starts for 2009. With 1,550 starts in 2008, the Indianapolis-based company plans to capitalize on its successes last year, a list of accomplishments that includes exceeding the lease-up goals in a variety of markets; introducing and streamlining new construction/accounting software for added efficiency; and analyzing business module and team strengths to more effectively match operational needs.

Last year, the company, which owned about 3,000 units, sold its holdings in Columbia, S.C. , and entered several new markets, including Omaha and Bellevue, Neb.; Savannah, Ga.; and Mobile, Ala. In 2009, it has several goals: implementing standardized best practices for greater efficiency; securing and retaining top talent to ensure industry leadership; and maintaining aggressive timelines for project completion to continue to achieve successful lease-ups.

Looking ahead, SC Bodner plans to capitalize on its ability to adjust its advertising, outreach, and retention methods to capture the multimedia interest of residents and prospects throughout its portfolio; and to provide value-added benefits and eco-friendly options in order to minimize long-term concessions. Tanya Y. Coachman

Jack Dinerstein CEO

The Dinerstein Cos. (No. 8)

Dinerstein, a Houston-based builder of apartments, started 2,884 units in 2008, landing it among the Top 10 largest multifamily builders in the country. This year, however, doesn’t look like the firm will be quite as active: Dinerstein projects 882 starts for 2009.

The firm, which owns and manages about 1,500 units, shifted some of its asset allocations last year, entering the San Diego and Tampa, Fla., markets, while leaving Columbia, S.C., and Baton Rouge, La. Among its most active markets for starts last year were Southern California and Central Florida. Also last year, the company opened a Southern California office and obtained a substantial amount of financing for new starts—not an easy task considering the belt-tightening experienced in the capital markets during the last six months of ’08.

This year, the firm plans to establish an acquisition and debt fund, though Dinerstein is quick to point out that the lack of liquidity and job losses will be major challenges to overcome in ’09. T.Y.C.

Steve Ogier President of Construction

ContraVest (No. 38)

ContraVest is acting modestly in 2009. While the Lake Mary, Fla.-based firm started 866 units in 2008, it is projecting a little more than a third of that (300 units) for this year. Its starts last year were concentrated in the South and Southwest, with the firm entering Texas, Arizona, and Florida, while leaving South Carolina.

One of the firm’s major accomplishments last year was its on-schedule, under-budget completion of construction on eight apartment communities throughout its portfolio. The firm’s ’09 goals include breaking ground on two new apartment developments; stabilizing seven new properties; and rolling over financing on three apartments and two land loans.