RCA Insights

Apartment Developers Not Buying Dirt Like Before

By on January 7th, 2021

Development site sales were a bright spot for the U.S. market in 2020, with investment activity for the year through November down only 5% from a year earlier, according to Real Capital Analytics data. Who is buying these sites and the reasons why have changed from earlier in the cycle.

Apartment development has led construction activity in this cycle, representing 44% of the value of all commercial property starts since 2015. The apartment sector was the first to see price recovery following the Global Financial Crisis and given the stable yield characteristics, the sector moved up to become the most heavily traded property type in the U.S. With rising prices and growing investor interest in the sector, development was the next logical step. In other words, if you can’t buy it, you build it.

The dirt is important though. Before delivering a new apartment property, a developer needs to secure an appropriate site for a project. Tracking the sale of development sites, those developers focused on constructing apartments pulled back from their purchase activity in 2020 relative to those buyers with little activity in the apartment sector.

apartment developer shares of land over past 3 years

Builders are going to build whatever property type is of most interest to the market. There is a certain degree of specialization though, with some only building logistics facilities, others apartments and so on. Categorizing every developer in our system based on the percentage of their book of business tied up in apartment projects, those where 80% or more of their starts were for apartment buildings are more of a pure play around apartments.

These pure-play apartment developers were responsible for nearly a third of all development site acquisitions in the previous two years, but in the 12 months through Q3 2020 were behind only 22% of all such acquisitions.

The pullback by apartment developers in 2020 was probably not a function of Covid-19 but broader market trends that were underway even before the pandemic hit. Apartment cap rates in the 6 Major Metros of the U.S. had been creeping upward since the middle of 2017 as investors priced in the uncertainty surrounding the combination of burdensome local regulations and shifting demographics as millennials began to age out of cities. Cap rates continue to fall in the non-major markets, perhaps suggesting that the where of the development game for apartments is simply shifting in the near term.


Haley Crimmins and Alexis Maltin provided additional data analysis for this article.

A version of this article first appeared in US Capital Trends, released December 16. The 2020 annual review edition of US Capital Trends will be published January 20.  

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Also by Jim Costello on RCA Insights:

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Jim Costello

Jim Costello

Senior Vice President

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.