COMMERCIAL REAL ESTATE PROFILE: Don Paxton

DON PAXTON
Founder, President, Director of Development Beneficial Co

Don Paxton has been involved in the development of more than 175 multifamily communities throughout Florida and two dozen other states throughout his career. In 2001, he founded Beneficial Communities after working for Picerne Development Corp. and Brisben Development. Today, Beneficial builds both market rate, senior and affordable communities. Its portfolio includes the Maple Crest Apartments in Fort Myers and the Oaks at Stone Fountain in Tampa, and the company is planning new communities in Miami, Sarasota and elsewhere in Florida.

What's your assessment of the multifamily market along Florida's Gulf Coast? Still healthy?
I think it is. My general sense is the market remains strong in terms of both occupancy and rents, and wherever we're looking at projects the fundamentals are strong. Occupancy remains up, and that would be the first thing we would see that would dip in a downturn, followed by rents, which trail behind but are more important to the overall equation. Developers are always looking to rents or projected rents to sustain the cost of construction and land and to provide returns to investors.

Beneficial develops both affordable and market-rate rental housing. What are the primary differences in doing one versus the other today?
Affordable projects are intended as a public, private venture that uses tax credits that are not present in market-rate housing. It's simply a way to target funding. But we always look for certain things in a development whether it's market rate or affordable: We and our customers are looking for a good place to live, near jobs and good schools. No matter what we do, we look for the best site available. Affordable projects pair that with different criteria that various agencies are looking for, such as the Florida Housing Finance Corp., which is generally who we work with on those. A good bit of the affordable housing developed in the state comes as a result of an allocation of tax credits that a cadre of developers like us in the state compete for. It's a primary source of equity for affordable housing. At some level when you are capped at the amount of rent you can charge, it affects the features of luxury, not necessity. But Florida has done a really good job in delivering quality products that can't be differentiated from market-rate inventory from the outside.

What are the primary drivers of each?
It's all about supply and demand, and demand is No. 1, and we look at a combination of occupancy and rents to determine that. The question is often how to cultivate land. That comes down to government priorities. In our market rate projects, we look at markets with barriers to entry. We're always looking for the road less traveled. The demand for affordable housing is insatiable. Everybody wants affordable housing, right? With our affordable projects, the government defines affordability for us, as anybody making less than 60% of the median. But competition is so fierce now that only one in 10 projects we go after is funded.
 
Is the amount of capital flowing into the multifamily sector leveling off from two years ago?
Well there's debt and there's equity. Lenders don't like to take a lot of risk when providing debt; equity takes on a lot more risk in a project. There's been, and continues to be, a lot of equity seeking returns and a lot of lenders willing to lend. The question becomes what level of each. If a lender suddenly requires more equity up front, then that means less return for an equity investor. But so far good projects are still going through. The big question remains how long rates will stay where they are and how long ROI levels stay put to mitigate risk.

Are you finding it harder to come by tracts of land suitable for apartments now?
On the market rate side, especially, it is getting harder to find land. Generally the really good sites have already been purchased or are under construction already. We are always looking to cultivate good sites through rezoning. Affordable is driven by the box as the state defines it — and it gets refined every year.

Is it harder now to get a construction loan for a new project than it was two years ago? 
Yes. It's harder than it was in 2014, but it's not necessarily harder because lenders are making it harder. Some have upgraded their underwriting, but it's more of a reflection of where we are in the business cycle for apartment development. We are in a mature stage of the cycle.

What's the outlook for future multifamily development in this region?
We have two things driving demand on this coast: The fact that there had not been lot of apartments built for the past decade and job growth. I don't think there will be exponential growth going forward. But the production of multifamily housing is most closely tied to the number of jobs being added or subtracted, and we're adding jobs now. So growth can and will continue, just not at the same exponential pace.
 
Do you worry that all the new supply coming online and the new inventory that is planned yet will push vacancy rates upward significantly?
With new units coming online, I think there will be an adjustment occurring in our marketplace, and older projects will get punished unless they are reinvested in. I think you're going to see a shift, somewhat, with occupancy, followed by rents. When the crash happened in 2007, there were apartment projects that were still showing $1,000-a-month rents, but they had concessions of $300 per month, so the real rent was $700 a month. This time around, I don't see that, but I do think we'll see some occupancy dips in certain sectors of our market. But I also believe there's enough pent-up demand for new product that you're not going to see newly built projects unoccupied. The market recognizes premium product, and it's for the market to determine who gets rewarded.