These are challenging times for commercial developers, even those specializing in sectors that had been hot before interest rates began rising in 2022. But that doesn’t mean that all developers have put a halt on new projects.
Consider The Garrett Companies, a real estate company based in the Indianapolis suburb of Greenwood, Indiana, that specializes in multifamily investments, development, construction and asset management. The Garrett Companies announced a 167% increase in completed developments in 2023 when compared to 2022, including new developments in Minnesota and Indiana.
So far this year, The Garrett Companies completed eight projects across five states and has 27 active construction projects currently in operation across the country.
We spoke with Eric Garrett, chief executive officer of The Garrett Companies, about his company’s busy year and the steps developers need to take to navigate the challenging commercial real estate landscape.
Here’s what he had to say.
It seems like The Garrett Companies has had a busy year so far even with today’s high interest rates when it comes to completed developments and new projects.
Eric Garrett: Some of it has to do with timing. Some of those deals should have been closed last year, but delays bumped them into 2023. But still, the activity has been strong for us. We’re excited about next year, too. We have a backlog of good projects that we will start closing on in the first quarter of next year. Next year, we are on pace to duplicate what we did this year or even surpass it by a few projects.
What kind of projects has your company completed this year?
Garrett: We are talking multifamily projects with 200 units or more, ground-up development projects. Several of our projects have mixed-use components, too. They are spread out throughout the country. We have several projects in Colorado and Phoenix. We have projects in Florida, North Carolina and Tennessee. Our projects are spread out geographically.
Have higher interest rates made developing multifamily projects more difficult?
Garrett: It is more challenging. It increases the budget of a project significantly when you are looking at 8% interest rates. On the back end, a lot of people are trying to figure out whether interest rates will be in the same spot or higher 24 months to 30 months from now. Then you have what is happening with the banks. A lot of them aren’t lending. This is causing a lot of back-ups in development. At the same time, construction costs haven’t changed or have gone up, it’s a double whammy.
The difference, though, between what we are doing and what others are doing hinges on our ability to build these projects at significantly lower costs with the same finishes and amenities that our competitors offer. The captive construction company that we have and the related companies that we have built relationships with help us keep our costs in check. That gives us an advantage in today’s market.
Do your relationships with other companies help you get materials for lower costs?
Garrett: A lot of companies have been diving into multifamily over the last few years because it is such a hot sector. But these companies are not quite as tenured in this sector. They don’t have the same vertical integration that we do. A lot of these companies are very good at finding sites on which to develop. They understand the fundamentals of multifamily. But they are not real construction guys. If you don’t know how the sticks and bricks come together, it is difficult to add value on the construction side. They are often held captive by third-party construction companies or designers that overdesign buildings or do things that aren’t necessary. That adds quite a bit of cost to a project.
Just as importantly is our ability to get materials from companies that buy direct from manufacturers across the world. We buy every material that goes into our projects, from the slab up. At the end of the day, we have essentially created an assembly line, controlling the means of production, buying the materials and building projects at a better cost.
Our average returns are often double those of our competitors. You go into the banks with that, that changes the debt deal and the amount of money that the banks will give you. That changes the profile of the deal and allows us to keep doing new projects.
When you talk about certain designers overdesigning buildings, what do you mean? What are some of the overdesigning issues that Garrett Companies might avoid?
Garrett: There are visible and invisible items. If you develop a building with multiple roof sizes or truss sizes, that is a cost factor. You have to strike a balance. You don’t want to build a plain box. You want something aesthetically pleasing. But you are not building a single-family home, either. Trying to put several hundred roof truss sizes in a multifamily building is overkill. By standardizing some of those different sizes, you can produce a run of trusses. That cuts down on costs and time. There are ways to add value to a project without taking away its aesthetic appeal.
What amenities are must-haves when you are developing a new apartment project?
Garrett: You have the items that everyone wants, like luxury pools, spas and cabanas. It seems like we are analyzing a new fitness center concept every month. One of the things we do differently, though, is that we are still building individual units that push over 1,000 square feet of living space. We can build efficiently, so we can keep that square footage. That allows people who works from home to be more comfortable. They get more space to move about during the day. They are not cramped into a smaller unit.
Demand for apartment units has been strong for a long time. What are some of the factors behind this?
Garrett: The year 2008 was such a traumatic change to the housing market. They took a whole group of good renters and turned them into poor homeowners who didn’t understand mortgages. Then, because of the problems with all these mortgages, they turned those new homeowners back into renters. Since then, the mindset around the housing market has been different.
There are many people who have postponed buying their first homes. They realized that housing might not be the best investment for them. Then factor in COVID. People want flexibility. They don’t want to be tied to a home, say, in Indianapolis. They know that they can work remotely, so they might want to live in Scottsdale instead. They might want to live there for a couple of years before moving to Orlando. There are a lot of reasons why the thought process has shifted in terms of homeownership.
You must factor in interest rates, too. The cost of renting is now lower than the cost of owning. Mortgage interest rates are so high, that people can’t afford to buy a house. Assuming that interest rates stay elevated through 2024 and into 2025, I think we will continue to see strong demand for apartments. I think we will see continued rent growth, too.
Today, many developers are struggling to bring multifamily product to the market. A lot of deals have been put on hold. That is bringing down the supply even though demand is increasing. New households are formed every day. They have to go somewhere.
Because of these factors, the demand for multifamily units is only going to increase.
Are there any new apartment projects that your company is working on that you are particularly excited about?
Garrett: I love all my children the same. The thing I like the most, though, is the flexibility that we have. Because of how and where we build our projects, if we want to sell one, we can sell it. If we want to hold it, we can hold it. If we take all 28 or 29 projects that we are working on and keep them all for 15 years, I’d be happy with all of them.