EconSouth (Second Quarter 2004)
Q & A
Developing for Tomorrow
An Interview with Egbert Perry of The Integral Group
The Atlanta-based Integral Group provides real estate, construction management, and property management services. In addition to Atlanta, the company is involved in urban mixed-use and mixed-income projects in Baltimore, Washington, D.C., Richmond, Memphis, Birmingham, and Denver. The companys largest business is multifamily residential development. EconSouth talked with Egbert Perry about Integral and the state of the real estate industry.
EconSouth: Low interest rates have weakened demand for apartments by making homes cheaper to buy. What will happen to the demand for rental units if interest rates rise?
Egbert Perry: I think that will definitely improve the demand. And even if you are at the upper end of being able to rent and the lower end of being able to buy, you have people who are holdouts looking for product to buy. I think an increase in interest rates would mean that the affordability will drop a little bit for homes or condos, and youre going to have people on the margin opting to rent.
ES: How would rising interest rates affect financing for developers and landlords?
Perry: Some people face the prospect that they wont have the very, very low-cost money still in place that would help them through the lease-up period of their project. The interest rate on short-term money is what will determine whether developers go forward and advance some of their projects. If Im in a construction-loan environment for two years until my project is leased up, then the relevant number for me is the cost of short-term money. As long as construction-period rates stay lowand theyre very low nowa lot of developers who are nearing the start of construction will continue to move some of their projects along. But the long-term success of a project is dependent on long-term interest rates. To the extent youre underwriting the deal for the long term, and youre looking for permanent financing, rising long-term interest rates will obviously have an impact on whether you can raise enough debt. So it creates a need to find additional equity capital.
ES: Aside from cyclical factors, demographic trends look generally favorable for the multifamily industry. Have these demographics affected the industry?
Perry: In the urban markets that we serve, were now seeing a lot of older individuals who are deciding to downsize and live closer inthey dont need the big acreage out in the suburbs anymore, and they prefer to live less time or less distance away from the city, from the center of cultural activity. Theyre driving the demand for product in higher-density areas. At the same time, the cost of long commutes, sprawl, congestion, and gasoline and the declining quality of life measures in many parts of the region are actually creating a greater demand for good product in the urban area.
ES: What other factors are likely to influence the apartment market going forward?
Perry: As a country, we have to be concerned about whether the next generation entering the workforce will be able to find the employment opportunities that the generation before found, which will help determine the type and location of housing they can afford. Now, if you look at the cost of delivering a housing unit, there are significant differences between the suburbs and intown. In urban centers the cost of land is so high that it drives the cost of a unit up substantially. As a result it costs a tremendous amount to live in the urban centers these days unless youre in some sort of assisted or low-income housing.
ES: Changing gears a bit, what must happen for mixed-use (residential/commercial/office) developments to gain a foothold?
Perry: Two very big issues have to be tackled. One is land use. Most zoning codes over the last 30 or 40 years have evolved to encourage single-use zoning. So its much easier to get zoning for a single-family, retail, office, or multifamily development, but its very difficult to get approval for a mixed-use development. The other issue is making the public aware of the benefits of density. On the one hand, the public will tell you they are against sprawl. The same public will tell you they are against density; you cant hold both of those positions and expect movement. So the question is, What does density and the mix of uses look like so that a community can readily accept it as a good thing?
ES: What will affect the popularity of mixed-use developments going forward?
Perry: I dont think we have enough good examples of mixed-use places where you can live, work, and play for people to say, Thats where Id like to live. Once we have more of them, I think the educational process will gain momentum.
ES: How are mixed-income residential developments faring?
Perry: Ive been involved in a number of them. I think theyre doing very well. Weve spent 30 or 40 years telling people where they should live based on their income or offering them products specifically driven by their income. People have been segregating based on income. The idea of a mixed-income community is to cut across those different income strata. As a result, you are producing something where people across all economic ranges can live. I would argue thats a healthier environment for all parties. Another way to define it is having varying levels of affordability within the same development.
ES: Is it tougher to get financing for that sort of project?
Perry: Its tougher because the world is aligned along the concept of highest and best use. But best is a subjective word. If its best use that weve been doing in the development world, why have we been spending so much money and so many resources trying to clean our air and water and unclog roads? From a financing standpoint, if youre producing units that you could theoretically sell for a higher price and youre making them affordable, somebody has to subsidize that lower value. If we are to see some sort of subsidies that will allow mixed-income projects to proliferate, I think it will absolutely require some legislative action. If you have a subsidy in place and can therefore demonstrate that your development makes economic sense, then the lenders will lend whatever you need if your deal supports it.
ES: In urban development and redevelopment, what are the main considerations in balancing historic preservation and new building?
Perry: The key consideration is, What is the cost of rehabilitation relative to the cost of new construction? And is that difference offset by the incentives available if youre doing historic preservation? For example, are there historic tax credits? Is that gap closed by utilizing those incentives? If not, youve got to ask yourself if you can really afford to preserve. So its really relative cost issues. Another consideration is that preservation leaves you with a sense of character to the development if you can make the development work. Thats an intangible about which a lot of developers, after the fact, have said, Im so glad I preserved that.