Core Investors V. Merchant Builders With American Realty Advisors’ Stanley Iezman

By Dennis Kaiser

Connect Los Angeles is right around the corner on June 9^th in DTLA. We caught up with American Realty Advisors’ Stanley Iezman for a sneak peek into his panel: Capital Flows, Construction Costs, Competitive Acquisitions & Cycle Worries.

Q. How are sources of capital available for development investment adjusting to today’s market?

A. Both debt and equity capital are still widely available in the market today, however, developer track record and speed to market are more important than ever. Early cycle developments were difficult to capitalize, but the rewards were great for those that purchased land cheaply, let contracts when labor was hungry, and delivered into an improving market.

Late cycle development presents different challenges. However, given the premiums to replacement cost for core product – primarily in the industrial and multifamily sectors – a good entitled site, with nearly complete construction drawings, a gmax contract, and permits in hand makes a lot of sense for build-to-core investors. Core investors are much more prepared for increasing cap rates than are merchant builders.

Q. What are some of the biggest challenges to bringing a major development to market in the current environment and market cycle?

A. The best way to mitigate the majority of the risks associated with late cycle developments is speed to market. The primary opportunities that exist today are build-to-core strategies and shorter lifecycle, permit-ready industrial.

Core investors are still hungry for product but are concerned about pricing today, as trophy office, industrial, retail, and multifamily product can trade at up to 150% of replacement cost. Core investors can capitalize projects and bring low cost bank debt along with them, which is attractive to developers today. Construction and leasing risks are a reasonable trade-off for acquiring assets at or near replacement cost. It’s important to note that core investors can get creative in structuring to make this “core” capital attractive to merchant builders and build-and-hold developers alike.

Q. How and where is capital finding its way into projects?

A. We are actively financing development projects with both build-to-core and build-to-sell strategies. Generally, we are targeting markets with lower ratios of development to inventory and high barriers to entry. We want to build product that is unique and special to both minimize downside and generate a premium return for our investors.

For example, we will break ground this winter on a 22-story multifamily development in Southern California through a venture with the Richman Group of California that is planned as a long term hold. When the development team plans to hold, rather than sell, it makes very different design and material decisions, as the goal of creating a long-term trophy asset is very different than that of maximizing value and selling in a shorter time frame.