Days 5 & 6, Houston, TX

On Monday, we met with urban planners for the city of Houston. We met Richmond Coward, Brian Crimmins, and Ryan Albright. I was very impressed with these guys as they seemed very clued in to the Houston market and all the issues that go along with it. They told us that Houston is a playground for experimenting with different product types before taking them to other markets. This is because of the lack of zoning in the city. They cited chapter 42 and 26 of the urban planning many times saying that chapter 42 is the bible of houston planning. Chapter 42 discusses the no height restrictions on buildings while chapter 26 deals with parking ordinances that is a big issue in Houston. The city does not offer many incentives to encourage urban infill development, but since the city of Houston and Harris County pay for infrastructure that could be an incentive in itself as developers should want to develop where the infrastructure already exists. Although I mentioned above that Houston does not have zoning many parcels of land have deed restrictions attached to them which the city enforces. So if a developer purchases a piece of land with a use in mind he better check the deed restrictions to make sure he can use it in the intended manner.

WEST AVE.

After our visit with the city officials we made our way over to West Ave where we met with Josh Landry. West Ave is a mixed use development with first floor retail and residential on the upper floors. The average unit size for the development is around 1080 square feet with a rental rate of $1.98/SF. There are 397 apartments and they are 89% leased at the moment. West Ave. is currently offering 2 months free rent in concessions.

There is just under 200,000 SF of two story retail in this project. It is currently 41% leased. The interesting part of the retail space is the second story and how it can be flexible space. The developers would like to keep the space flexible as they can switch it back and forth from office and retail depending on what the market dictates. They also mentioned it can be turned into loft apartments, but that would be a last resort as then it could not go back to office or retail.

Josh told us that their development company focuses on putting their projects in EPNs (Established Premium Neighborhoods). This development is located in River Oaks which is one of the most affluent neighborhoods in Texas.

CORE APARTMENTS

After West Ave. we went over to meet with Michael Morgan at the Core Apartments. I really enjoyed hearing his development philosophy and was appreciative of the financials that he provided us. His philosphy of development was to limit your downside and let the upside take care of itself. He told us that too many developers go broke, but his philosphy had kept him business for over 25 years. He also believes in not over extending yourself and taking on too many projects so that you can give proper attention to projects. He suggested always setting up guaranteed corporations to avoid having to personally sign loans.

The project itself had a completed cost of about $43 million with 25% of the equity coming from a public REIT. The project caters to young just graduated students and one of the managers claimed it became a frat house on the weekends. It is 326 units and it is 98.8% leased with a rental rate of $1.62/SF.

LOW INCOME HOUSING

The next day we started our site visits at Bray's Crossing. This is low-income housing project. They rehabbed an old apartment complex and turned it into single room occupany dwellings. The Hope foundation is in charge of this development and they are a non profit organization that gets the money for these projects through city and state funding as well as donations from foundations and corporations. The kind of tenants they attract are minimun wage workers and people in drug rehab or were formerly homeless. A cool feature on the project is the sound wall. The property fronts Gulf Freeway (Interstate 45) so it could be quite noisy, so the sound wall was put in place to muffle the sound of passing cars.

Bray's crossing has 149 units. We then drove over to Canal Street which is also a Hope foundation project and has 133 units. It was completed in 2005 and is 100% leased with a 3 month waiting list to live there.

CITY CENTRE

Our final stop in Houston was the City Centre. Midway Development Company developed this giant mixed use development. The project contains office, retail, residential and a hotel. This is my kind of project in that there are ZERO public dollars in the project. All $500 million of the total costs come from the private sector which the Michigan State Teacher's Fund making up 60% of the Equity needed in the project. I really liked their strategy of development in which they would not start construction of a certain phase until it had reached a pre-leased milestone so it would be able to cover its debt service upon completion.

Right now the retail in the project is 60% leased. One office building is 100% leases while the other is 70% leased. There is 425,000 square feet of retail space going for $35/SF, 450,000 square feet of office space going for $22/SF, 244 hotel rooms, 22 condo units, and 525 rental units going for $1.50/SF in the development.