Maximizing ROI for Ground-Up Developments

By Michael McCormick, McCormick Construction & Todd Pratt, Evolution Strategic Ventures: The key strategies to maximize project profitability.
Michael McCormick and Todd Pratt

Michael McCormick, President & CEO, McCormick Construction, and Todd Pratt, Founder & Managing Director, Evolution Strategic Ventures

Amid the rising demand for rentals and advancing rents in major metro areas, motivated by demographic gains and job market strength, multifamily construction is deemed as increasingly profitable in the medium- to long-term outlook. However, regulatory limitations and financing restrictions might impact the projected ROI unless appropriate strategies to maximize project profitability are implemented.

The following considerations might significantly improve project ROI by properly addressing any existing challenges to profitability, laying the foundation for increased property revenues after the project’s completion.

From the planning perspective, optimal site selection and project size are major determinants of future ROI. Finding the best location and properly managing entitlements creates the lion’s share of developer profit. It is prudent to ensure there is existing infrastructure—including adequate water, power and gas—when selecting the location. Connecting to existing infrastructure would provide better cost efficiency (potentially requiring certain upgrades/regulatory approvals) than developing project infrastructure from scratch.

The next important step is determining the long-term and short-term plans for the property. Developing to own promises greater ROI over a longer period of time, while selling the property upon completion is a quicker profit, although yields are typically smaller overall. From the financing viewpoint, selecting the best equity and debt partners and executing proper arrangements for financing can maximize future ROI.

It is also crucial to know the local economy, submarket and demographics in order to better gauge expected levels of rent, the most cost-efficient floor planning and appropriate amenities. Land prices and availability in the immediate 10-block vicinity is another factor to assess the project’s potential value and profitability.

Putting the right team together in the initial stages of the project helps minimize costs and expenses on labor and materials. It is crucial to bring in the general contractor early in order to ensure proper evaluation of potential costs, challenges and opportunities to improve project profitability. Other key team members to bring in early include architects and engineers, as they are able to provide a more detailed breakdown of potential risks and ways to mitigate them. Determining the most cost-efficient construction method is also key, as the approach to and pace of project execution are going to drive the team. Depending on each individual project situation, such methods might include design-build, prefabricated construction and integrated project delivery.

Collaboration between the GC, developer and design team typically results in the most successful project layout. Features such as floor planning, number and types of units, building height, design and capacity of parking based on city parking requirements, as well as the types of onsite/offsite amenities must be suited for the projected demand from would-be tenants, without exceeding or underserving their needs.

Project-appropriate amenities aid in boosting rents and are a prominent value-add factor. Onsite amenities revolve around comfort, convenience, technology and entertainment. Selecting amenities based on local demographics to ensure the best experience for residents at the lowest cost to the developer is essential. Offsite amenities are just as important, and include proximity to transit, schools, recreation and entertainment.

Among the aforementioned methods to maximize ROI for ground-up multifamily developments, location is critical in determining many subsequent revenue-related project characteristics. It is also important to ensure early collaboration of the entire project team to properly evaluate and address challenges and cut costs. Finally, ensuring the structure’s long-term sustainability and timeless design significantly enhances its value and will provide a higher profit upon sale or long-term cash flow.