Penciling Profit Despite Tight Margins

Three Keys to Profitable Multifamily Projects

In 2024, developers are navigating an environment of elevated costs across land, debt financing, insurance, building materials, and labor. This economic backdrop makes achieving profitability in multifamily projects increasingly challenging.

To mitigate these pressures, developers are shifting their focus from luxury to practical and convenient amenities, favoring builder-friendly suburban locations over complex urban sites. Additionally, with limited opportunities to raise rents on market-rate apartments, many are turning to affordable and workforce housing, where incentives can offset some expenses and support positive returns.

Specifically in the Atlanta region, we’re seeing market-rate developers starting to change their model to embrace more of an affordable product. Unfortunately, that puts them behind the eight ball because they may not know the tricks of the trade and they are competing with affordable housing developers that already know the business and are thriving.

Success in this high-cost landscape requires a multifaceted approach. Developers are focusing on proven, cost-effective design elements, avoiding costly missteps, and reducing unnecessary spending throughout the development process. By drawing on the expertise of affordable housing specialists and industry veterans, we can help clients avoid pitfalls and adhere to best practices.

Here are three key cost-saving considerations to deliver profitable multifamily developments despite tight margins:

1. Strategic Site Selection

Site selection is one of the most significant determinants of project cost. It affects not only the price of land but also the effort and expense required for municipal approvals, the removal or renovation of existing structures, site preparation, and any municipal improvements necessary in the surrounding community.

A lot of developers are steering clear of urban infill projects right now because it is hard to pencil. Redevelopment is almost as expensive as new construction, and the costs associated with tearing down existing buildings can be eliminated by choosing a vacant lot on a metro’s perimeter and building from the ground up.

In the current trend we’re seeing, most new projects emerging in suburban communities involve vacant land that is ready for new construction. These areas are often more accommodating to new housing, particularly affordable housing, offering additional incentives or expedited approvals that significantly reduce costs.

Developers should engage early with municipalities to understand any long-term expectations they may have for the area, ensuring that proposed projects align with those plans and avoid potential conflicts. By strategically selecting sites and aligning with municipal goals, developers can navigate the complexities of the current market and achieve profitable outcomes.

2. Market-Aligned Amenities

Evolving occupier preferences and developers’ desire to reduce construction and operating costs are changing the type of amenities offered at new multifamily properties. Successful projects provide amenities that deliver a return on investment and avoid duplication by taking advantage of area resources, such as access to parks, transportation, and services that add to their projects’ appeal.

Consumers have moved past striving for high-end appliances and square footage in their units. People have started equating excess square footage with higher heating and cooling costs. They’d rather be in a multifamily development that’s accessible to food delivery services, with an easy-to-navigate protocol set up to get their deliveries and packages quickly.

Working with a general contractor and consultants experienced in affordable housing construction can help multifamily developers avoid budget creep from overspending on fit, finishes, and amenities. Developers that have switched from market-rate to affordable housing may also need to change contractors to avoid market-rate practices and costs in their affordable projects.

See Related: Building a Successful Development Team

3. Leveraging Technology for Cost Savings

Renters are increasingly interested in technology and convenience, and developers are leveraging that trend to enhance the resident experience at a relatively low cost. The ability to control various functions from your phone is a sought-after amenity right now, with smart appliances and platforms enabling residents to adjust heating, cooling, and other systems in their units remotely.

Some technologies, including smart locks, may even lower property operating costs. As an amenity, digital locks give residents unit access with a code, so they don’t have to keep track of keys. For property operators, programmable locks can eliminate hours of labor previously spent replacing locks when units turned over to new occupants. Capturing similar savings opportunities throughout the development process can make the difference between a profitable project and one that ends up underwater.

If you can sit at a computer and reprogram 30 locks in 10 or 20 minutes, that helps reduce cost. Those crumbs of savings add up, and crumbs make a cake.

By focusing on strategic site selection, aligning amenities with market demands, and leveraging technology for cost savings, developers can navigate the high-cost landscape and achieve profitable multifamily projects. These considerations help balance the need for attractive, functional developments with the imperative to maintain financial viability.