Other apartment developers have been rushing to complete their latest construction projects. But not Camden Property Trust. Not only has the company put 2 Downtown projects on hold, CEO Ric Campo tells the Houston Business Journal‘s Paul Takahashi, it’s also dawdling as best it can on its planned 8-story, 315-unit apartment complex on the Midtown Superblock.
Writes Takahashi: “Camden has deliberately slowed work on Camden McGowen Station in hopes that construction costs will come down, Campo said. Camden plans to begin vertical construction on the apartment this fall, he said. ‘We’re going really slow on our buyout on the job,’ Campo said. ‘Hopefully we’ll be in a favorable pricing later this fall.'”
- Amid low oil prices, Camden puts brakes on Houston’s multifamily market [Houston Business Journal]
- Previously on Swamplot: Can’t Get Enough Midtown Superblock? New Video Captures Every Puddle, Blade of Grass, Mud Patch
Photo of Midtown Superblock, between Main and Travis, south of McGowen: Adam Brackman
I call BS on the reason. Even if construction prices come down, they won’t come down drastically, they never do. Even if you have 10% savings in construction, you’re losing a huge amount on debt service, taxes, and loss of rental income for every month you delay, which will negate any theoretical savings. The reason to delay is ALWAYS money, or in this case lack there of or frozen financing.
He said previously he’s building this with “Camden dollars,” and that financing therefore wouldn’t be a problem.
I believe it. Concrete is through the roof in price right now and competition is high for tenants. An empty lot pays a lot less is property taxes than an enormous apartment complex. Why rush to get it done if you are capitalized to well enough to not need the immediate revenue?
I’m calling BS on your post. REITs do not have to raise financing on a project-by-project basis. They are capitalized by large revolving credit facilities. Camden has the financing for this project already in place. They really are waiting for lower construction costs.
I also question this statement. For a project of this size, would they not lock in contractors and pricing long before beginning construction? I highly doubt they just go out and find a crane one day at market price, then go find a commercial electrical contractor the next day, etc. How would you be able to estimate or plan the economics on a project of this scale?
A few years back, University of Houston officials were asked how there could be so much construction occurring on campus despite the recession. They said ‘because costs are low right now’. But public finances adhere to different rules I suppose.
Commonsense isn’t making sense. On one hand he speaks of losing a huge amount on debt service and on the other hand he assumes that they can’t get financing. Also, the loss in rental income isn’t relevant since they haven’t even begun vertical construction. As for taxes, they are only carrying the dirt, not any improvements so, that isn’t as bad as you think. Construction costs are actually really high right now. But no, I am sure Ric Campo is full of it and you know what you’re talking about…
commonsense is right. You know what costs more than slightly higher construction cost? Opportunity cost of vacancy, debt services, taxes, insurance, and risk.
However, I can’t imagine they have financing issues… With everyone chasing any yield, a proven operator / REIT shouldn’t have issues with capital. So in terms of what really is happening, who knows.
REIT is just a tax structure best benefiting real estate businesses, but they run like every other business and use construction financing like everybody else. I’m sure they have a fat line of credit (we do too) but it doesn’t mean you can spend the money willy nilly without asking, you still have to provide projections and appraisals to the bank before they release the next draw.
If they said “We don’t feel this project would be profitable in the current economic uncertainty” I might believe them or cite overbuilding of rental properties, I might believe them, but to claim a small theoretical saving is utter nonsense for those in the RE trade. Holding a property that’s meant for an income producing development is an incredibly expensive proposition and a huge lost opportunity.
Real estate is a lot like comedy. Timing is everything. There will be a lot of multifamily units being delivered in Houston over the next two years, especially downtown and midtown. This will all happen as demand will soften, meaning that competition for renters will increase significantly over the next two years. The last thing you want to do is be the last guy into the pool when this happens. But once the energy markets straighten out, demand will come back and there will again be a landlord’s market as no new projects will be proposed for the next few years. By holding back for a year, Camden will have a good shot at delivering when the market turns back around. But you do not tell the local business press that you think the rental market is going to stink for a while when your entire business is the rental market. So, your PR flack comes up with stuff about construction costs.
It depends on the contract. Lump Sum – There is no savings on material, Time and Material – Could be some savings on material if you stagger the project right.
I can assure you that Camden does not need a construction loan for this project or any other. They do not use asset based financing. Camden’s debt is backed by their balance sheet. If Camden needs a couple hundred million dollars, they pick up the phone and call the bond department at any Wall Street investment bank. The bonds get underwritten and sold to the highest bidder, some papers are signed and the money is in Camden’s bank account in a week.
My guess it that waiting until the fall to go vertical might in fact get them a break on construction cost, but it also, and perhaps more importantly, results in the bulk of the completed units being delivered during the prime spring and summer leasing season, rather than fall and winter.
Old School for Comment of the Day – “RE is a lot like comedy…”
Houston may be over-built at a particular price-point right now. Corrections are underway, but, generally, growth in demand for multi-family is solid fot quite a while.
Say, we have a mid-town HOLE… Wasn’t there a proposal for an artificial Houston Beach?
Bernard: “I can assure you that Camden does not need a construction loan for this project or any other. They do not use asset based financing. Camden’s debt is backed by their balance sheet. If Camden needs a couple hundred million dollars, they pick up the phone and call the bond department at any Wall Street investment bank. The bonds get underwritten and sold to the highest bidder, some papers are signed and the money is in Camden’s bank account in a week.”
That sounds sweet. Sign me up! :)
seems to me that the only real reason to hold back is if they don’t think they’ll be able to lease it out in the current environment.
I’ve never had much experience with the development arm of a REIT, so I can’t say what their financial situation looks like. I can say that this property is owned by Camden outright and has been for a very long time. Whatever are the economics of this project, they are most assuredly not the same as an ordinary fee developer who might be more inclined to just hold their nose and jump in.
If Bernard is correct then its very easy to make the argument that Ric Campo is making: Campo expects construction costs to decline in the near future as a function of declining construction volumes; local declines could affect labor prices and national or global declines could also affect commodity prices. He expects to have the ability to finance a project when nobody else can (and really and truly, this is a very good site and however he goes about it he can probably find money). If he is able to build when nobody else is building then even if local economic conditions are sketchy when the project delivers, it will still be the one of the very few new projects when it does put units onto the market, making lease-up easier. The last thing that he would want to do is to deliver finished units while there’s still a glut of vacancy and concessions. Timing like that risks that he can’t fill all of his units within one year, as his own leases start coming up for renewal, and even if he can fill them, it poses a larger sticker shock when he tries to burn off concessions.