We just launched our latest investment offering—a Build To Rent development in Lockhart, TX—and the response from investors has been overwhelmingly positive. This is our second consecutive development deal, and we’ve found that many investors are interested in this space and our long-term business plan.
One question we’ve received from investors is whether Wildhorn is shifting away from the value-addValue-add is a strategy where an investor or property owner seeks to increase the value of a property by making significant improvements or changes to it. The goal is to enhance the property's appeal, functionality, and income-generating potential, which can lead to higher rental income, increased property valuation, and improved overall performance. View Definition space and pursuing only ground-up developmentA term used to signify starting a project from an empty plot of land or an undeveloped site, rather than renovating or expanding an existing structure. View Definition deals. The answer is no; we are multifamily operators through and through with a strong focus on Central Texas. This remains our sandbox.
That being said, should a great opportunity arise in Austin, San Antonio, or anywhere along the I-35 corridor, we want to be ready to seize it – whether it’s a value-add project or a compelling site for future development. We want to have the flexibility to make the most of all types of opportunities that present themselves.
Through our experience partnering with developers over the years, we have learned the unique set of rewards and challenges that come with real estate development. In this article, we thought we’d share both the advantages and the common pitfalls associated with real estate development–and our strategy for overcoming these challenges–so you can be equipped with knowledge when evaluating different development opportunities.
Key Highlights of Ground-Up Development Projects:
When we think about ground-up development in Central Texas, we get excited about:
- Catering to Market Needs: We understand the importance of meeting product demand in the ever-evolving rental market. Through development, we have the opportunity to create properties that align with current rental trends and emerging demands. This applies not only to amenities but also to specific asset types. Because of the growing demand for single-family rentals and Build-To-Rent communities, new development allows us to meet these needs in our market.
- Capitalizing on Emerging Areas: Central Texas is not only witnessing growth in established cities like Austin and San Antonio but also in surrounding areas along the I-35 corridor. Ground-up development provides us an opportunity to invest in emerging markets with untapped potential. These areas have lower competition and offer more favorable land prices, allowing investors to maximize their returns as the market continues to expand.
- Mitigating Competition and Overpaying Risks: While the competition for existing multifamily properties in Central Texas can be intense, ground-up development provides an alternative avenue to bypass price escalations. By creating new supply, investors can sidestep the risks of overpaying for existing properties and secure a more predictable cost basis, ultimately enhancing the potential for better returns.
Common Pitfalls of Ground-Up Development:
Evaluating a Developer’s Experience
The first thing you’ll want to note when reviewing a development deal is the developer’s experience. Have they completed a similar project before? You’ll also want to make sure that they are not new to the market. Each city has a different entitlement process, and these processes can also vary within the same city.
The second thing is the developer’s competitive advantage. What makes this developer better suited for the project compared to the other developers? Are their interests aligned with the sponsors? Proceed with caution if they don’t have an answer.
→ We recognize how important it is to include a seasoned partner in any endeavor into the ground-up space. Working with experienced partners enables us to leverage their wealth of expertise and skill set. We firmly believe in allowing them to do what they do best, while we contribute our own expertise from an operator’s perspective.
With decades-long relationships established with our developers, we enter partnerships with a strong foundation of trust and shared values. Knowing this, we prioritize our mutual success, aligning the partnership in a way that ensures our win is their win.
Entitlement Risks
Entitlement is the legal process in which a real estate developer or landowner seeks to obtain government approval for their development plans. This can include zoning, utility approvals, design use, and use permits. This is where local expertise can become very valuable as each market has its unique set of rules and processes for entitlement.
Challenges during the entitlement process can slow down the development process significantly, hurting construction time.
→ Before we start involving investors, we make sure the entitlement process is complete and the city has green-lit the project. Construction has a clear path ahead, which ultimately reduces the time between funding and asset stabilization.
Construction Timeline:
Construction timeline is generally the hardest factor to evaluate. Supply shortages and weather delays can occur, as well as any other number of issues that could prolong the construction period and delay returns to investors. You’ll want to pay attention to the point at which you are entering the development process of the deal.
→ We always introduce development projects to investors when they are truly “shovel ready”, meaning the vertical construction is ready to start. At this point in the process, entitlement is complete, permits are in hand, floor plans have been drawn up, and the general contractor has been selected. This significantly reduces the construction timeline and the number of variables that could cause delays.
Final Thoughts
Through our own experiences acquiring brand new deals from developers, and partnering with them on ground-up projects, we have developed our own set of strategies that have served us well. We continue to be excited about ground-up development and the possibilities that come with it. We are also not walking away from value-add deals. We remain bullish on Central Texas, and will continue leveraging our knowledge and expertise to find great investment opportunities.
If you have any questions or if you’d like to share your own development evaluation process, we’d love to hear from you.
Sean serves as Wildhorn’s Director of Asset Management. Born and raised in the Northeast, Sean moved to Texas in 2014 to continue his education and has been here ever since. At Wildhorn, Sean is responsible for asset and portfolio management for the firm’s growing portfolio in Central Texas. Prior to joining Wildhorn, Sean served as an Asset Manager for Austin-based GVA, overseeing business plan execution and construction management for a multifamily portfolio of 5k + units across DFW, Tennessee, and South Carolina. Additionally, Sean’s professional background spans middle market sponsor and CRE banking for BBVA and WAFD respectively.
