ANOTHER CHELSEA GETS AWAY 
Good morning! It’s 2015, oil is already checking out the territory south of $50 a barrel, and Swamplot is ready to begin its coverage of cancellation and delay announcements from real estate developers. We’ll start this one gently, with an Inside the Loop project you probably hadn’t even heard of — though its name certainly sounds familiar: The developers of Chelsea Museum District, a proposed apartment complex atop a podium garage with a bit of retail thrown in planned for the north side of Blodgett St. between Crawford and La Branch, tell the HBJ‘s Paul Takahashi they are “contemplating holding [the] project to see how the multifamily market fares amid low oil prices.” But don’t confuse Trans Unity Investment’s Chelsea Museum District with another project less than a mile to the west at 4 Chelsea Blvd. that used to be called Chelsea Montrose, but has since been renamed The Carter (no, not kidding), and which developer StreetLights Residential has already begun building (see construction photo above from just before Christmas). [Houston Business Journal] Photo: Marc Longoria
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Developers meet reality and slow down new builds. Meanwhile, Houston keeps going on and will be just fine.
And so it begins. As I said months ago, beware the bust: when the market goes off a cliff and developers abandon projects that they’ve already started. Neighbors will be left looking at a muddy construction site. Criminals will start to claim it as theirs. The City will try to get something done about it, but under Texas law, any positive movement could take years.
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Meanwhile the developers will have long since dissolved the temporary LLC they set up for the purpose of building the projects they abandoned. They’ll have ridden off into the sunset, comfortable in the knowledge that nobody lost their shirt, and without any concern or feelings of responsibility for the giant muddy hole they left behind.
So you guys can cover cancellations and announcement delays in real estate but can’t report announcements and groundbreaking of real estate developments. How ironic lets celebrate and bring attention to negative topics in real estate but fail to report the positive things.
Must be nice to be at a point in the project where you actually can stop without incurring more costs. There is a tipping point on every project where you are so far in, that you will lose your more of ass if you stop than if you just keep sledding downhill and finish it in a crappy market.
Photo for this was a bit misleading, as that one is under construction and continuing construction. No photo of the Chelsea site available?
I predict you’ll have plenty to write about on this subject in the coming months. Honestly, if developers haven’t broken ground by now, they’re probably too late to the party. You should also have an ongoing thread about lower rents and other incentives from new apartment complexes desperate to fill units.
This will probably be the excuse Ashby uses to not build.
Swamplot covers real estate developments of all kind–good or bad.
John,
Just because other people are building and buying projects based on estimated 10% annual rental rate growth and 3% cap rates does not mean that they should. If I owned a part of any REIT that had significant investments in Texas I would consider getting while the getting is good.
@John it’s difficult to regard the real estate situation in Houston through a positive lens, imo. I certainly don’t feel good about the garbage that is being built in the city – Montrose, in particular. Is there a positive real estate development that you’d like to shed light on?
John, if you have anything “positive” to add, feel free to share. “Negative” developments are news, too, and If this turns out to be the canary in the coal mine for multi-family and/or luxury developments, then it would have been remiss not to post it just because it made someone sad.
just a month ago all the forecasts were gloomy if oil was to go into the 40-50 range for an extended period. it’s been on that track for months now and oil around 40 for at least a year or so looks to be the reality. time for first time home buyers to start saving up and sharpening their pencils, next year is looking good right now.
This is actually good news for Houston. Houston needs to get its rental market back to more of a renter’s market and less of a landlord’s market. Rents are just getting too high. Continued growth in rent is not sustainable for Houston. Companies are starting looking at places like OKC for their offices as the Houston market is starting to become cost prohibitive both for office space and employee housing. If this all means that apartment developers are not going to be able to keep shoveling in big dollars doing the same lousy Houston wrap apartment complex over and over again, then that is not a problem for me.
You guys do know the oil price drop is artificial, right?
Saudi Arabia does this every few years to put the rest if the world’s producers in line and to flex their power.
The low hanging fruit like small E&P companies will shake loose and have their assets bought up by the big O&G players. In about a year or two the prices will go back up.
Big oil players can weather this and will shed dead weight in their companies.
For real estate, you’ll see a slow down in apartment construction. Single family will continue since there was and still a lack of housing available. Retail is also filling a void and will continue. I’m clueless on office space and I’m sure some other commenters with insight can expound on this topic.
I was waiting for swamplot to post the first story like this after reading it in HBJ. The naysayers seem ready to pounce. Remember, it’s not the 80s. The current construction boom has not followed the same path as back then.
Any developer who underwrote their project based on the continuation of aggressive rent escalations and 100,000+ annual job creation deserves whatever financial bath they end up taking. That wasn’t a good idea even a year or two ago – when housing rental supply was clearly lagging job growth.
While some developers / investors will feel some pain, look on the bright side – all those complaints about how the west half of the urban core has become too expensive might abate a bit if rents soften and concessions return in a big way. Given that hiring of new young highly paid engineers / STEM folks is likely to slow dramatically this year, no more upscale multifamily rental projects need to start for awhile. The overhang of demand vs. supply on the single family side, however, will take some time to work itself out, not least in the urban core. Townhouse-haters, you’ll still have a lot to complain about in 2015, so long as builders can still get their capital lined up.
I would welcome a cooling off period. Maybe the density that is built in the future will be more sensible. Maybe the poorer quality developers will be pushed from the market. As long as Houston is dependent on energy employment for a majority of it’s growth, from office space to residential, we will be subject to the extreme swings that this industry brings with it. That’s just the reality, and consistently stating that “this isn’t the 80’s” fails to accommodate this reality.
True, Local Planner. To be fair, I don’t mind if they call off projects before breaking ground. Do it before signing construction contracts and it hurts less. It’s if they get halfway into construction and then stop that I take issue. We don’t need big, gaping, open construction sites sitting stalled out for years – especially given how hard Texas property law makes it for Cities to do something about them.
@kkb4343
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I know what you’re trying to say when you call the oil price drop as artificial, but its really not a fair description, because the prices actually have fallen below 50$ a barrel, and while it may be due to Saudi manipulation the economic realities of the downstream effects of this are anything but artificial. Small companies, and those heavily tied to tar sands or newer fraking projects, are going to be feeling a strong pinch in the coming year. While the manipulation may be artificial, the downstream ripple of it will be anything but, which is the entire point of the manipulation in the first place.
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On the other hand SA is in for a tough year as it is with the upcoming succession crisis around Abdullah’s abdication and the lack of a strong heir (first heir has dementia and the second heir is the son of a concubine and may not legally be allowed to become king.). This could play both ways, and it will be interesting…and frankly a bit terrifying…to see how it plays out. My guess is that its not a good thing, uncertainty rarely is, especially when they have ISIS knocking on the door.
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In Houston though I think it’s quite fair to say that the previous speculative exuberance in real estate was focused around high value employment growth, and that may be disappearing. I don’t think that we will be losing many jobs, but it’s quite likely we won’t be gaining as many as we thought this summer.
this isn’t really about Saudi Arabia at all, they’re just maintaining market share. It’s about Russia & Iraq pumping out crude at levels not seen in 30yrs and record levels being pulled out of America & Canada. Bonds are tanking and the market looks all but set to finally make a long overdue correction. it’s not the 80’s, but it is 2009 all over again. American and European demand topped out during the last recession and no asian demand means nowhere for all this extra oil to go. Forget any demand levels that were being thrown around in 2014, all income and stock gains are coming to an abrupt halt. There are families that will need to buy and many contracts still to be fulfilled in the coming months, but they’ll be overshadowed by many folks quickly disappearing from the market altogether. a glut of apartments provides further incentive for buyers to sit this one out.
Gotta love Swamplot commenters….
Six months ago the sky was falling because every person in Houston making over $100k/year wanted to live inside the Loop and the skyrocketing rents were forcing all the regular peeps to the East Side, or worse. Now the sky is falling because too many new apartments are being delivered into a softening employment market is going to turn every apartment complex into a Fondren Southwest style ghetto.
Remember, oil prices were already declining when Saudi Arabia forced OPEC to abdicate its cartel pricing power. The proximate cause of lower oil prices is a demand problem in Asia, particularly China, and the OPEC decision was merely fuel to the fire. Moreover, the Chinese economy is going to face some seriously strong headwinds going forward as its population ages, its workforce diminishes in number, and as the legacy of female infanticide catches up with it. It isn’t the lowest-cost low-skill manufacturing destination anymore, and its going to be much more difficult to engineer labor productivity enhancements that will enable it to cope with its demographic problem. This bodes poorly for long-term demand expectations; and I’ll add that India is an uncertain saving grace.
There is also a very real risk of financial crisis emerging in Japan, China, or in the Eurozone that could be contagious globally. The junk bond markets in the US and Europe are especially exposed to liquidity problems, and this impacts the ability of many energy projects to capitalize and also of the industry to reorganize effectively. If this occurs then oil prices will take another serious hit, as will the refining industry, and that could prompt a massive secondary shake-out where M&A activity will be much slower that some of the perennial optimists in Houston are forecasting. (There are some analogies here between this process as it applies to the oil market and the process of a housing market shakeout that took so many years in every major city other than in Texas, nationally, starting in 2007. And that should make us all very nervous.)
Oh, and one other thing about the Texas economy. There are a lot of people that were getting paid tremendous bonuses that will still have jobs but no bonuses. The payroll employment figures are going to be an insufficient and lagging indicator to capture the economic impact of what is happening to price-makers; and what’s going to hit us is going to hit the upper- and middle-class neighborhoods harder and faster, unlike the last recession. Also, if the Fed is serious about ending its policy of quantitative easing or if there is financial turmoil, then it could be a double-whammy for Texas as interest rates climb during a reset of housing demand.
Bernard: the smart ones among us were concerned six months ago. We were concerned a year ago, and more, about overbuild inion Houston’s multifamily sector. How can you not be concerned about it, given Houston’s history?
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To be clear, the new apartments in hip, Inner Loop neighborhoods will probably do just fine. They’ll need to trim rents, but that’s OK, because their rents were too high to boot, and there’s no shortage of people who (assuming they kept their jobs) would be happy to move from suburban apartments that are miles from everything, to Inner Loop apartments that are near bars, restaurants, cafés, etc. it’s the big, new, suburban complexes we should all be worried about. The complexes they’re putting up in Richmond; and Conroe; the behemoth next to Westpark out by Cinco Ranch. Those complexes have lower cap rates, so they don’t have as much room to lower their rents. But they’ll have to do just that if they want to remain occupied. So I foresee a lot of them going into bankruptcy.
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Most of all, I fear for the complexes they threw up out on I-10 near the Energy Corridor. They’ll get a double whammy this go around. Not only will they lose tenants who move to the hip neighborhoods. They’re at ground zero for massive layoffs in the energy sector. It’s going to look a lot like the late 1980s for them (granted, just in that neighborhood, not everywhere like it was back then).
Don’t you think it’s a bit of an overreach to assume that people who live in apartments in Richmond, Conroe and other outer regions will just uproot and move inside the loop because of a potential rental rate decrease? Is it not logical to assume that most renters who live in the outer suburbs do so because it is closer to their employment, family base, school of choice etc….?
It hardly seems plausible that a single mother with two kids who works at Kroger in Katy is going to move 25 miles from her base just because some hip cafes are inside the loop. Plus if rents do fall in the Inner Loop they are still proportionately more expensive than a complex probably facing similar occupancy issues outside the loop. So the differential in rent will still be there. Not everyone finds it a necessity for existence to live inside the loop which seems to be forgotten by a number of people on this board.
Smart builders build at this time and lock in lower cost procurement as some of these are a 2 year build cycle. Also 2015 (after Q1) is a fantastic year to buy commercial real estate too. Oil prices have never stayed low for long periods. This is not 1986. Dynamics in the oil industry are very different. I say follow the money ie the majors and NOCs and stop listening to service companies and independent small oil companies and definitely not Investors.
I wasn’t saying that everyone in the suburbs will move Inside the Loop, JT I’m saying that some will, and combined with other things, it could be enough to make a difference. You also need to remember that a lot of suburban renters, particularly those with children and/or pets, would rather live in rent houses, than in big apartment complexes. Yeah, it’s more work because you have to mow the lawn, but it’s also a lot nicer to have a fenced yard for kids and pets to play in, an attached garage, and that sort of thing.
ZAW-
Having personally closed multi-billions of dollars in multi-family financing my commercial real estate career, I think any comparison to the 1980’s is very far fetched.
I don’t have time to write a whole primer in the subject, but suffice it to say: The Houston area would have to shed 425,000 jobs over the next few years AND multifamily developers would have to be delivering far more project into the market right now to have a similar effect. No matter your outlook on jobs/demand, relative supply is simply not at early 80’s levels right now.
Will there be some pain for apartment owners if job growth goes flat (or worse) in 2015? Yes. But I’ve seen a lot of ups and downs in the last few decades and none are on par with the late 80’s meltdown.
News flash: the energy corridor is now the economic center of town. Downtown is just where companies go to save on rents bc the EC might be too pricey. There are – of course – big legacy companies still downtown but three super majors are between HW 6 and Dairy Ashford.
I hope you’re right, Bernard. Homeowners all over town hope you’re right. If you knew what happened to neighborhoods in the late 1980s – not just he numbers of the crash but the experience of how it affected certain parts of town – you would understand peoples’ concern.
@ Bernard: I have to agree with you, Houston is not as deeply oversupplied as it had been in the early 80’s. But although I disagree with WAZ that there will be numerous multifamily investment bankruptcies, I do think that there will be a large number of foreclosures among those newer properties that haven’t already stabilized their tenant base and among those older or less well-located properties that have been recently traded or refinanced on overly optimistic assumptions. This is not an insignificant number of properties and its likely that foreclosures will crowd out the transactional market for a while.
Meanwhile, its those less sophisticated apartment operators of older properties that really concern me because they will allow deferred maintenance to accumulate in order to cash flow whereas a more sophisticated operator or a bank will endure a loss to keep up the asset.
@ Houstonian: I’m not one to knock the significance or rapid growth that has occurred in the Energy Corridor, but of all parts of town it is probably the most exposed to an oil price shock. Also, no, it is not the economic center of anything other than itself. A centroid of economic activity (which includes the activities of both firms and households) is in the vicinity of Northwest Mall.