Writer: Max Crampton-Thomas
2 min read August 2021 — Nashville is one of the places to be when it comes to real estate development, says Tim Keach, chairman and CEO of TDK Construction. In an interview with Invest:, Keach shared the biggest ways his company has grown over the last year as well as his outlook for the next year.
What were some of the biggest ways that TDK construction has grown over the last year?
Opportunities driven by investment and the multifamily space during the pandemic were a flight to safety. Preferred equity is a big part of our model. We don’t do joint ventures. We own and control everything we build. Preferred equity companies are overloaded with money, so much so that they can’t place it all. Our relationships in that world allowed us to find sites. The problem was getting approvals and all that, but we expanded quite well regardless throughout the pandemic. We invest probably two to three times as much in our projects as normal development companies do for the simple reason that we have the money to invest. We get excellent leverage and rates from banks as a result. At least four projects in the last 12 months came to us via people who could not get them financed. We gained 100% control of three of those four projects.
How is demand for mixed-use evolving?
We’re not believers in mixed-use purely from an investor standpoint. We get it as a lifestyle choice but many of those projects have a continuous anchor dragging at the bottom: the retail space. It used to be that deals for 300,000 square feet of multifamily had between 5 to 10% mixed-use space. The needle is slowly but surely moving toward 15 to 20% mixed use.
What areas across the region are driving demand?
It’s no secret that we’re big in Raleigh. We closed a $92 million deal in mid-July and have a $75 million project under construction, with four more in the pipeline in the Raleigh area, all land contracts at this point. Two are in the zoning phase and the other two are in the final design and permitting phase. We really like the Raleigh market. We also like Nashville, although we’re not a player for downtown developments. The reason we stick to our product is our money is very patient and suburban-driven.
What long-term trends or shifts are you seeing with affordable housing?
Affordable housing works best with municipal tax PILOTs, which we like. Some cities require 10 to 20% affordable units within a single project at about a 30% discount. You don’t get any help with those, cornering you into absorbing that in your blended returns. We anticipate seeing more of that going forward.
Second, we’re going to see more of what we call “shade and shelter,” with a decline in amenities and final finishes. Brick and stone are poised to go away in places like Florida in favor of cement siding and paint.
What is your outlook toward 2022?
Lumber has been a critical variable that dominates most of our industry’s discussions. Our team is literally operating on a truckload-to-truckload basis. Companies want to buy more to keep their projects running smoother by having plenty of lumber on hand but there’s no sense in having the lumber sit there if the truss company can’t deliver floor trusses to set the walls on. What takes priority is what it takes to get vertical, meaning to get a roof on. Canada probably controls over 50% of the lumber in the world. This is because, in the past several years, they have purchased majority interest in US producers of timber and saw mills. The past administration cut countervailing duties on lumber to 10% before raising it back up to 19%, parallel to its trade war with China. With the pandemic-induced shutdowns, no lumber was being produced. With the raging market need for lumber here, lumber skyrocketed to between $1,600 and $1,900 per 1,000 board feet.
In the second quarter of 2021, the market retraced to about $800 per 1,000 board feet. Normally, it’s about $350 to $400 and it is going to get there quicker than we thought. The problem now, though, is OSB panels, a product you make from chipped wood. We didn’t have any because the saw mills had been shut down. They’re finally restarting activity but they’re still reeling from the pandemic, as the cash market has only decreased 20% off of their high. Who knows how long it will take the cash markets to parallel the futures market, which generally trades within a $20-$40 range of cash.
For 2022, the premium amenity packages are on the cusp of decreasing. The percentage of adjusted incomes is the highest ever in history for housing. You can’t go any higher. The product is going to have to be adapted to income. Regulation needs to be relaxed. That’s one of the reasons that the land development side has become more expensive. Storm drainage for a project generally used to be priced at $250,000 to $300,000 for a 250-unit, 20-acre site. Now it can be as much as $2 million because of retention and water-quality ponds. Some cities are not even letting you put those in and you have to place them underground. Those regulatory municipal demands will prevent housing from getting any less expensive. People are going to be forced to accept less because of the environmental costs. But we see the number of units growing. The demand for housing is going to at least be steady for the foreseeable future, the only difference that I see is that it will have to trend towards “shade and shelter”.