Clayco's development arm is planning a major push into suburban apartments designed for the post-COVID-19 world and middle-class tenants.
In what amounts to its first cohesive development strategy in the multifamily sector, CRG aims to build $1 billion of apartments over the next three years across nearly a dozen cities, said Managing Partner J.J. Smith. St. Louis-based CRG, a unit of Chicago-based Clayco, will target projects in Sun Belt markets including Atlanta, Austin, Charlotte, Dallas, Nashville and Phoenix with a focus on suburban sites.
Instead of building higher-end apartments that in recent years have been popular among renters and lucrative for developers, CRG's projects will be meant for workers who earn between 80 and 120 percent of the U.S. average median income. It's a wager that the coronavirus pandemic will continue to make suburban living more popular even after the crisis subsides, and that there's already enough upscale housing to go around.
"What we're trying to do is build for the masses and not the classes," said Smith, who took the reins of residential development for CRG in late March after a nearly 13-year run with CA Ventures, where he oversaw development of around 40,000 apartments across 100 cities.
Most apartment development over the past decade has catered to the top 10 percent of earners, Smith said, partly a result of developers facing high costs of land and construction and more stringent affordable-housing requirements. "We're starting to see some saturation of that market and maybe overbuilding in some (markets)," he said. "I think the middle class has largely been underserved from a new product perspective. We'll do well serving that segment."
Large-scale development for middle-income families fell out of favor with developers decades ago, in part because it's typically deemed too expensive to build given the return through modest rental rates. But a deep recession triggered by the coronavirus crisis has lowered both the cost of construction and acquiring property and made deals easier to pencil out, Smith said. CRG also has design and construction services in-house through Clayco that "gives us a huge leg up," he said.
Many of the new apartment projects, which Smith estimates will cost between $75 and $125 million to build and include between 200 and 400 units, will be built with wood frames to keep costs down and offer rents designed to undercut the highest-tier quality properties in a given market. In addition to Sun Belt cities, the developer is also looking at projects in Salt Lake City, Minneapolis and Chicago, Smith said.
CRG's new strategy also comes as suburban apartments fare better during the pandemic than ones downtown as the public health crisis has raised questions about the future of urban living and made less-dense suburban areas more attractive.
Smith is betting that's not going away even after the crisis is over, nor is the trend of people doing their jobs from home more frequently after proving the viability of remote work. That's why CRG is designing units in its new buildings with pocket offices, nooks for private conversations and what Smith dubs "Zoom-worthy" common spaces for teleconferencing.
The developer made such tweaks in the design of rooms at one project it has underway in Fort Worth, Texas, where it is building a five-story, 320,000-square-foot complex slated for completion next summer.
Smith said he's not concerned about being able to finance CRG's projects even as lenders take a cautious approach to new development with little clarity about when the COVID-19 pandemic will end. He expects to raise as much as $450 million from institutional investors to back the projects—life insurance companies and pension funds among them—some of whom were pushing CRG to pursue middle-class apartment units in the first place.
"We created the strategy in response to what investors were telling us," he said. "We feel we'll be successful."
CRG has developed more than 200 million square feet of commercial real estate projects totaling more than $12 billion in value since the firm's 2011 inception.
The company has recently been on an executive hiring spree in Chicago, bringing in Smith earlier this year and tapping veteran Chicago developer Jack Higgins to help oversee large-scale development projects in downtown Chicago.
Clayco last year hired former Chicago planning chief David Reifman to expand its design and construction businesses nationally and subsequently added former Metropolitan Pier & Exposition Authority CEO Lori Healey as president of its Chicago office.
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November 06, 2020 at 01:25AM
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Clayco unit eyes $1 billion in middle-class apartments - Crain's Chicago Business
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