Development site selection is a complex and intensive process, and acquisition teams often spend considerable time touring locations, vetting and underwriting potential sites, and conducting market research to determine project profitability. The decision is high stakes: countless time will be spent securing land or property, navigating zoning restrictions, acquiring vendors, and breaking ground on construction. In recent years, the process has become even more complex amid a difficult interest rate environment and stalled capital deployment, and developers are more cautious than ever before.
Certain factors have historically led developers to write off sites in the selection process, from a lack of confidence in a property’s financial performance, regulatory or zoning roadblocks, or construction labor shortages in the project’s region. However, site selection has evolved in the modern economy, and you should be aware of several emergent trends and the larger role technology can play in the process before writing off a potential opportunity. New migration trends, opportunities to leverage alternative capital sources, a shifting regulatory environment, and the informative power of AI and data analytics all have the potential to change how you think about site selection.
Here’s a closer look at how multifamily site selection has evolved in the modern economy, from a shift in the definition of urban cores to how AI tools have changed the process:
Remote Work, Migration, and Labor Costs’ Influence on Multifamily Site Selection
Housing trends used to be more cut and dry, with sites in urban areas with higher demand and density being the more desirable choice for development teams. However, pandemic-era migration trends have shaken up the market in recent years. For example, Sun Belt markets have increased since the pandemic, with remote workers looking for a lower cost of living and certain weather conditions. Remote work has supported a movement toward more suburban areas, or at least reduced demand somewhat in urban markets.
Migration trends have an impact on multifamily site selection, allowing developers to look outside of urban areas where land is less available and comes at a higher premium. Urban areas continue to have a high level of demand and density, but suburban markets are also experiencing an influx of young professionals. Conducting thorough market research and due diligence can help you identify opportunities in emerging jurisdictions, and in many of these regions, construction and labor costs may be lower as well.
Developers will each have their own methods for conducting market research, but following several best practices can help your team begin the evaluation process. Understanding geographic trends, such as cities where populations are continuing to rise and job opportunities are abundant, is an important first step in the pursuit of a new project. Building positive relationships with community stakeholders, such as local politicians with insight into a region’s regulatory process, can also help you vet an opportunity before breaking ground. Looking at historical market data can also be a valuable tool for understanding how certain asset classes perform in the region you are considering, allowing you to back up decision-making with more than just a gut feeling.
High construction costs and labor shortages may also influence site selection trends. Costs of construction and labor can vary by geographic region, and some developers have opted to focus on markets with greater availability of workers. Florida and Texas, for example, have the highest concentration of construction workers and the most affordably priced labor compared to the national average. Phoenix, Las Vegas, and Houston also have high labor availability. Developers operating in these markets will find it easier to find labor and secure workers at more reasonable costs.
Do you want to learn more about how your team can leverage trends to improve pre-development and set your projects up for success? Be sure to read our full ebook “A Real Estate Developer’s Guide to Multifamily Site Selection“ to gain deeper insights on the subject.
Housing Demand Is Changing the Regulatory Environment
Housing shortages are a major issue in markets across the United States, with estimates positing the market is short 4 to 7 million homes. As a result, most Americans support policies intended to boost housing availability and affordability, according to a survey from the Pew Charitable Trust. 9 in 10 survey participants said they would back efforts to expedite permitting processes, while approximately 49% supported policies such as building apartments closer together or construction on smaller lots. Government officials are taking note of public sentiment, and policies designed to allow for more housing construction are on the rise.
Pro-development legislation is becoming more common from both the federal government and state or local legislators. Policymakers on the state and local levels are increasingly looking for ways to boost more development and address the housing needs of local communities. For example, some jurisdictions are willing to bypass certain sustainability or environmental restrictions if the project contributes to overall community sustainability, such as by providing access to public transit or grocery stores. Projects willing to add below-market units to a market-rate project may also be eligible to bypass or expedite restrictive permitting processes.
Federal government policy is also shifting to support developers and may have an impact on where and how you select sites. In August of 2024, the Federal Government proposed a Housing Supply Action Plan, designed to encourage the production of 2 million new homes and bring them to market. The policy, if passed into law, could change site selection in several key ways. Under the plan, developers could see requirements for transit-oriented development projects streamlined, policy changes to allow for more types of housing to be built under HUD-code, and an expedited housing permitting protocol. .
Alternative Capital Structures Shift Site Selection
In recent years, the cost and lack of availability of capital have been the biggest roadblocks developers face in pursuing new construction deals. High interest rates and economic uncertainty have stalled capital deployment and derailed the national construction pipeline, complicating the site selection process. Development teams have responded to the current environment by seeking out alternative capital structures, prioritizing joint venture equity partners who focus on debt instruments and invest as an equity resource, helping to bridge equity gaps and provide opportunities to secure funding for new projects.
Developers should also keep an eye on the interest-rate environment, which appears to be shifting in a more positive direction. In September, the Federal Reserve Open Market Committee voted on interest rate cuts, reducing interest rates by half a point. The cut was long-anticipated by developers and investors and could motivate investment activity in the coming months. Construction capital terms will likely improve as lenders get more confidence and clarity around the economic outlook. Developers can expect to see construction loan conditions, which typically follow investment, begin to look up in early 2025.
AI’s Impact on Site Selection for Multifamily Developers
Developers are no longer required to rely on gut decisions in the site selection process, and by leveraging the power of data, your team can make informed, impactful decisions. Ai is expected to boost returns in the industry overall. A report from McKinsey found that AI will generate $110 billion to $180 billion in additional value for the industry, and the research found that real estate companies can earn 10% more in net operating income. AI is helping optimize and drive higher returns at nearly every stage of the development process, including site selection.
Modern real estate development software is key to leveraging historical data and analytics can provide unprecedented insights as you evaluate opportunities for your firm. By making data-driven decisions around site selection, you can mitigate risk on a complex project and gain a competitive advantage over competitors still relying on analog methods. AI in particular is offering a new suite of tools for developers looking to evolve their process around site selection and ensure more predictable outcomes on projects. Modeling with AI capabilities can enhance site selection, provide more accurate valuations, and help manage timelines and budgets along the way.
Northspyre is a category creator in terms of AI tools for developers, using predictive analytics to optimize project development. The platform reviews early project budgets to identify where costs can be reduced and select vendors who are likely to bid competitively. You can also use the AI functionality to draft responses to bidding vendors, requesting bids be updated to reflect missing scope or clarify missing items identified by the AI system. Northspyre’s AI functionality gives you back time by automating tedious administrative tasks, and reducing the potential need for change orders or other time-consuming practices.
Read our ebook “A Real Estate Developer’s Guide to Multifamily Site Selection” to learn more about how your team can identify lucrative opportunities and turn discarded sites into your next big success story.
