Why Development?
While generally higher risk, development presents higher investment returns and the opportunity to own properties below market costs
Benefits of Development
Discount to Market Costs: New developments can often offer the opportunity to own an asset at a significant discount to the cost of purchase. Developers often target a 20-30% discount to comparable trades on new apartment construction, offering a more affordable way to get into long-term ownership or the opportunity to flip newly constructed projects for a profit
Information Advantage: Similar to public equities, the market for trading Commercial Real Estate has become more competitive in recent years, with data on such properties becoming democratized. As such, the opportunities to find great deals have become few and far between. The development market is significantly less institutionalized and thus contains more upside potential
Higher Achieved Rents: Historically, rent premiums have existed for lower vintage product; as such, developing new properties presents the opportunity to bring new apartment stock to market and attract higher rents than from aged secondhand properties
Lower Maintenance Costs: New development projects offer the opportunity to own a new building full of unused systems. When purchasing a property, there is little opportunity to fully understand the quality of maintenance conducted by the previous owner. As such, similar to purchasing a new vs. used car, development projects often have lower upfront maintenance and lack the asymmetric information challenge
Matched Market Needs: Developing a new property provides the opportunity to tailor the features of that property to the latest market trends and needs rather than being constrained by design trends and decisions made under prior market conditions
Improved Risk-Adjusted Returns: Development projects tend to have higher returns than acquisitions. While there are also additional risks, many of these risks can be mitigated through experience, strategic investment and design decisions, conservative underwriting, and strong management skills.
Why Multi-Family?
Within Real Estate, apartments have historically presented the best risk-adjusted returns
Drivers of Higher Returns
Shorter Lease Terms: Apartments have shorter lease terms than other property types, allowing landlords more frequent opportunities to reset rents to match market changes. This also removes the holdout problem associated with longer leases and thus requires landlords to spend less on upfront buildout
Product Differentiation: While other real estate types such as office, industrial, and retail compete on location, their primary differentiator is cost. Apartments cater to individuals who tend to have nuanced living preferences and, therefore, compete more on design and offering than on price
Lower Tenant Leverage: With a more diversified tenant base, individual tenants have less leverage and, therefore, less ability to negotiate lease terms
Lower OPEX: With less common space and the ability to bill back the majority of expenses and any damage to tenants, apartments tend to have lower OPEX costs than other property types
Drivers of Lower Risk
Supply Demand Imbalance: As the nation has experienced historical population growth, residential has seen the largest supply-demand imbalance of any property type, lowering rent volatility
Diversified Tenant Base: With the most diversified tenant base, apartments avoid the vacancy risk associated with losing an anchor tenant, which is prevalent in other property types
Why Garden-Style Apartments?
Garden-style apartments have several benefits that make them more cost-effective, lower risk, and higher returning investments
Benefits of Garden Apartments
Lower Unit Costs: Simplified designs, lower material costs, lower labor skill requirements, and broader location options allow Garden projects to be built at a significant per-unit cost discount relative to other product types
Higher Investment Efficiency: Relative to other product types, Garden projects utilize reduced unit types and identical building designs to reduce overhead design costs, meaning a higher percentage of investment goes to the final product
Lower Construction Risk: Typically three stories tall, Garden projects adhere to simpler building codes. Additionally, through phasing by building, any design deficiencies can be ironed out early in construction at smaller scales, reducing overall construction risk
Higher Operating Efficiency: Garden-style apartments have lower operating requirements, allowing for higher Net Operating Income margins
Lower Vacancy Rates: Garden-style apartments tend to have more tenant stability, combined with pent-up demand for affordable housing, Garden apartments have lower historical vacancy rates
Higher Returns & Lower Risk: The combination of the above factors leads Garden-style development projects to have a historically higher return and lower risk profile than other development types
How Do We Manage Risk?
Ridgeview leverages a combination of industry best practices and innovative strategies to mitigate and postpone risk for investors
How does Ridgeview Drive Value Through Design?
Ridgeview leverages a wide breadth of strategic design choices to cut costs without sacrificing product quality
Sample Design Choices
Reduced Unit Counts: Upfront coordination of building and unit design can allow for significantly reduced unit types, often to one unit type per bedroom count and an ADA unit. This reduction can have significant design cost savings, allows GCs to operate at a greater scale, and reduces delay and construction risk
Simplified Exteriors: Ridgeview believes, and data shows, that developers traditionally place a higher emphasis on building exterior aesthetics and material selection than tenants. Through intelligent material selection, reduced building modulation, and architectural color selection, significant façade cost savings can be achieved with minimal rent impact
Analytics Chosen Features: Surprisingly, many developers still operate on “gut feeling” or personal preference when choosing apartment features and finishes. Ridgeview believes in an analytical-driven approach, leveraging preference and rent premium data, along with feature costs, to deliver improved project returns
Strategic MEP Design: Mechanical, Electrical, and Plumbing design is rarely looked at through a financial lens. Coordinating with design teams and knowing the cost associated with selections can dramatically decrease costs without reducing building quality
Single Building Type: To maximize site density, many developers have several different residential building types for one garden project. Doing so has immaterial benefits but can increase Architectural, Structural, and MEP design costs, which scale by the number of buildings; doing so also adds construction complexity and thus costs and risk
Optimized Site Plan and Civil Design: While requiring additional coordination between the developer and the designers, site plans and civil designs can be optimized early on to reduce costs through methods such as: drive ailed reduction, shortened water and sewage runs, Geotech coordination to reduce soil work, optimized landscaping plans, etc.
Other Revenue Sources: In many cases, apartment buildings can drive returns through non-traditional revenue sources, which can be strategically combined to offset costs
How Do We Drive Value Through Operations?
Ridgeview leverages a combination of industry-leading technology, analytics-driven operations, and entrepreneurial incentive structures to provide cost-effective operations without sacrificing tenant experience