As land prices escalate in the metro area, one multifamily builder has found a way to get started on a new, ground-up development: tear down its current property.
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Atlanta-based Perennial Properties filed permits March 16 to develop a 98-unit apartment building at 1791 Piedmont Ave., the current site of Perennial's Oak Knoll apartments.
Perennial CEO Tim Schrager said the project — sandwiched between the Piedmont Heights and Morningside-Lenox Park neighborhoods — comes after two years of planning with area neighborhood input and could start as soon as October.
For Perennial, it was time for something to happen to Oak Knoll. The property — built soon after World War II — has lived "beyond [its] useful life. And that's really why we're tearing it down," Schrager said. “We're going to do something a little different."
Schrager said the project will be geared to a different resident: empty nesters and renters by choice, those who are more apt to want larger unit sizes. The average size of the units in the new building will be 1,200 SF, he said.
While apartment redevelopment is not unheard of in Atlanta, it has been very unusual this real estate cycle for an owner to demolish an existing property and start from scratch instead of just selling it to another developer.
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“The fact is that several properties have reached a land value higher than the cash flow value,” Norman Radow, founder of Atlanta apartment firm RADCO Cos, said. “We have properties … [that] are getting near the point where there's a redevelopment opportunity.”
The recent escalation of pricing for multifamily land inside the Perimeter — especially in the hottest submarkets of Buckhead, Midtown and Downtown — have made redevelopment plays financially viable. Since 2012, the cost per unit a developer pays for land has jumped from $24K/unit to $32K/unit, with the biggest spike occurring in 2015 and 2016, said Ladson Haddow, a vice president at the multifamily research firm Haddow & Co.
“It all depends on the property and the location,” Haddow said. "At the end of the day, is there enough upside in the potential redevelopment compared to the current improvements?"
And with some owners seeking to hold apartment assets for the long haul, redeveloping an existing apartment project is making more sense, given the potential costs to buy sites elsewhere within the city.
Despite land costs, Radow said redeveloping a cash-flowing property from the ground-up is “fraught with risk.”
“Where new builders are getting crushed today are on cost overruns and delays, with the emphasis on delays,” Radow said. “It's just that very few of those owners have the ability to redevelop it and [instead] sell it to people who do.”
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