How new apartment deals in Houston are being financed during the oil slump
Low oil prices have made it increasingly difficult for Houston developers to find financing for new apartment projects.
As crude oil prices plunged to $30 a barrel, traditional multifamily investors, such as banks issuing construction loans, have become skittish. Many institutional investors have pulled back from new apartment deals in the Bayou City.
“It’s very tough to get deals capitalized right now,” said Tim Dosch, a principal at ARA Newmark, a Houston-area land brokerage. “Institutional equity is pretty much gone.”
However, there are two groups of multifamily developers who are still buying land and planning new apartment deals despite the oil slump, Tim Dosch said.
There are experienced developers looking to build luxury apartments in prime locations. And then there are developers coming into the market with private equity, so-called “friends of the family” money, as well as international money through programs like EB-5, Tim Dosch said.
This latter group is financing deals with help from investors from a variety of countries around the world. There are the usual foreign investors from Latin America and Asia, but also investors from countries like Australia, Germany, Israel and Turkey, said Tom Dosch, a land transaction manager with ARA Newmark.
These developers and investors still view Houston’s multifamily market as a solid investment in spite of the oil slump, Tom Dosch said.
In recent years, the Bayou City has become a gateway market for foreign investors, similar to other major global cities like New York and Los Angeles. Moreover, despite all the energy layoffs and budget cutbacks over the past year, Houston still ended 2015 with a positive net job growth of 23,000 jobs, primarily in the health care sector.
“As the rest of the world gets unstable, (international investors) want to put their money in the U.S.,” Tom Dosch said.
Multifamily developers operating in this tough financing climate are bringing more equity to the table to get their deals done, said David Marshall, a principal and executive managing director of ARA Newmark Houston.
There are now more low-leverage deals today, where the debt-to-equity ratio has shifted to more equity and less debt, a less risky proposition for traditional lenders. Today, many new apartment deals are financed with 55 percent debt, as opposed to the usual 65 percent to 75 percent, Marshall said.
“Banks are very conservative,” Marshall said. Still, “a lot of foreign investors want to be in Houston as it gets more diversified. That’s been a pleasant surprise.”
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