Bisnow Houston Capital Markets: Investing Where They Ain’tFebruary 04, 2020 | By Wayne O'Neill
Picture a professional baseball player striding to the plate in a big moment. Simultaneously, the other team’s infield shifts to one side of the diamond anticipating the player hitting the ball right to them.
In your mind, you’re screaming, “Hit the ball to the wide-open opposite side of the infield!” After a few failed attempts, the hitter instead hits the ball directly into the shift for an easy out at first base.
After disappointment sets in, you rhetorically ask, “Why not just take the sure-fire base hit instead of trying to hit the ball where everyone else was positioned?” The lessons from the 2019 Bisnow Houston Capital Markets conference follow that same line of thinking.
Why are investors continually seeking construction projects in the same markets or regions that they have always pursued? Why are they chasing the same deals that everyone else is chasing and bumping into each other? Why not look for opportunities in under-served markets or outside of main central areas — the not-so-obvious locations — to find rich investment opportunities?
As the old baseball adage goes, “Hit it where they ain’t!” Based on the current landscape of the capital construction market in Houston, investors need to be thinking about putting time and resources into projects where others are not.
Why Seek New Construction Opportunities in Houston?
While Houston’s economic cycles are typically independent of the national economic cycle because of our region’s self-reliance on energy and the oil & gas markets, there is no escaping the economic reality facing everyone in 2020. The national forecast for 2020 is a possible economic recession. Throw in a trade war and tariffs on goods that are essential to construction, and the local economy is ripe for a slowdown.
The economic uncertainty in a new year and new decade means investors need to be thinking smarter about how they approach investment opportunities in the construction industry. Think of it as an opportunity to find new opportunities, and justify wish list investments projects that would not have passed the test in a strong economic market.
What I heard at the Bisnow Houston Capital Markets conference is that capital investors are still looking to invest in long-term construction projects. The money is still in the market; there’s no shying away despite economic uncertainty. The challenge is that it’s difficult to find the right deal that hits the sweet spot of your target project size and returns, but that can withstand the headwinds of the current economic conditions.
Essentially, investors are tired of hitting the ball into the shift. They know they need a new approach when stepping to the plate. And, the economic situation is forcing them to try the open side of the infield for solid singles and doubles.
They’re looking at new areas of Houston to invest in construction, or they’re looking at different types of projects such as refurbishments or repurposements of old buildings. What I’m seeing is investment funds acquiring older properties rather than tagging along in new projects because it’s cheaper to repurpose an old structure than erect a new building.
In fact, because construction costs are rising so much because of tariffs, right now you could purchase an existing asset for less than you could build it for.
The Role of the Inverted Yield Curve
One of the leading indicators of a recession is the inverted yield curve. What this means is that long-term debt instruments offer lower returns than short-term debt instruments.
We’re seeing that with current interest rates. “Stubbornly low-interest rates are here to stay for the foreseeable future,” declared Weingarten Realty CEO Drew Alexander and Medistar CEO Monzer Hourani during the Bisnow conference.
Unfortunately, design and construction companies are complicating matters. Project scope previously arrived in the marketplace in a structured way. The big question was, “What’s financeable and why?”
This capital market statement of what’s financeable has changed. While companies in design and construction are catching up to the new way of moving scope along, the smart investors are moving shifting their focus to finance billion-dollar deals in other parts of Houston, insulating them from the predicted economic downturn chasing traditional project scope.
Areas such as the Grand Parkway (SH 99), renewed Greenspoint (City North), Generation Park, and suburban locations where rents are increasing such as Conroe, The Woodlands, and neighborhoods near 290 (North-Northwest) should be targets for capital investors that want to hit the ball where nobody else is.
Instead of fearing what the inverted yield curve tells us and trying to move scope along in traditional fashion, take a fresh approach by pursuing the best opportunities the market will give you rather than chasing old deals in saturated markets. There simply aren’t enough of those former types of deals to go around.
“They say ‘bring us the $40-50 million deal.’ I don’t know where these deals are going to come from,” said Lincoln Property Co. SVP Kevin Wyatt during a panel discussion. “There’s not enough of those deals in Houston, Texas, to feed that demand. So they’re all chasing the same deals. That’s the problem I see in the market.”
What I heard during the Bisnow conference is that Investment firms are trying to cull through huge volumes of prospective deals to secure even just a few deals. That has to change by embracing a new approach to capital market investment.
The Next Step for Investment Firms
Smart capital investors are turning to debt funds to finance projects such as refurbishments of old buildings in non-traditional target areas. They’re seeing these structures as opportunities to create mixed-use facilities that follow a work-live-play model in communities that need to retain residents and build neighborhoods.
They’re also employing a more focused investment strategy to narrow in a select number of deals.
Just like the pro baseball player stepping to the plate, smart investors are no longer thinking about pulling the ball into the same old shift; they’re focusing on the open space in the field and targeting that area to get on base.
If more capital investors take advantage of non-traditional construction investment opportunities in the Greater Houston area and get creative with their financing strategies, our business community will be well-positioned to defy the economic forecast for 2020.
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