CityCenter Project Houston

This project was presented to us by Brandon Houston, the 4th great grandson of Sam Houston.

Please click the link for photos of the site.


The project was developed by the midway company, he is a project manager for midway, a position of many responsibilities withing the company. The view is that they expect the project manager to lead a project from beginning through completion through, capital raising, architecture, leasing and construction. He has personally built many different project types. The only type he has not managed is hotel construction.

Midway, a company that started in Dallas has consolidated its operations to Houston, selling off assets in the height of the recent bubble. Their focus in now on development.

They act as general partner on behalf of investors, raise traditional capital from banks and pension funds among others, earn fees on the development, but take the lions share of the construction risk. They have a preferential return structure wherein the investors gain the first percentage of the upside before Midway earns.

He has noticed that it is usually the second generation of tenants that really begins to bring in the income for the investor, as the fist set are simply at pro forma levels.

Midway is not an emergent developer, they do not sell the assets that they have invested in, they build to hold and generate annual income. As such, they do not have an exit cap, but underwrite to a 10 year period.

Project
This master planned mixed use community is the first of its kind within the immediate area, is very large, spanning an apartment building, 2 office buildings, a hotel, and interspersed retail. The site was originally a mall, and came with 2 parking garages, a major boon to the development as the cost for creating this parking, around $10,000 per space was not carried by Midway. They instead designed around the existing parking structures.

Midway believes in pre-leasing a building before construction starts to lower the risk of the project. This extends the time-line for construction, but the trade off is worth it as the developer has managed to survive the recent down turn in the markets.

They have innovated with one of their tenants, Life time Athletic, a fitness facility. Midway asked them to create a new arm for their brand, one aimed at urban living instead of inserting the traditional brand, one that Midway feels is more aimed at the Sub-urban market. Life Time fitness agreed and renamed their brand to Lifetime Athletic, and changed the layout and mix of fitness equipment to more accurately reflect the market.

Another interesting innovation in the project is the usage of economies of scale in a way. The hotel and apartments share facilities with the conference space and athletic facility being shared. Hotel guests receive a day pass to Life Time Athletic when they check in.

Midway avoided the city as much as possible with regard to public money. They also decided to keep the street private to ensure that they had the ability to close the roads and host large scale events, that cover the entire 28 acres of development.

There is however a TIRZ (Tax Increment Reinvestment Zone) district that affects this site. They hope to join with another developer to lobby the city to create pedestrian linkages between the 2 sites.

The recession has a large impact on projects like this one. For instance their Debt Service Coverage Ratio (DSCR) will jump from 1.15 to 1.4 when their loan is renewed. They are confident that they can achieve this jump as leasing is going well. Their policy of pre-leasing also helps to cover this possibility.

Their market is driven by the energy corridor, with many executives from those companies staying in the hotel. Companies include: Exxon, Bp, Shell,and Haliburton.
Local executives live in the area where the average home price is $900k. This development is comparable to the Shops at Legacy or South Lake Town Center.

Occupancy is good with the offices 100% leased in one building, 70% in another both above the market rate, retail is 60% leased and residential is 72%. There are some co-tenancy clauses that are undermining the profitability of the project at the moment, but as the retail climbs above 70% occupancy, the cash-flow will be much better. They also have some rental concessions, 5 month free rent for instance. They seek a net effective base rent of $22 per square foot. They are willing to offer TI's but tend to charge this against the rent. For instance, the rent will increase if they expect to pay large TI's to a certain tenant.

This project is larger than a typical Midway project, which is in the $10m range. This project is in the $50m range. Individual investors contributed large portions of the equity. Their reputation is what he attributes their ability to raise capital too.

Sustainability
None of the buildings are LEED certified but are built to the same standards. They are a green builder but could not justify the cost from an operations saving perspective. They have found that tenants are happy to accept their word rather than a certification in most cases.

The bottom line is that this project is doing well, will in all likelihood be able to continue to meet debt service and has managed to lease up in a market where other spaces are not. This in my opinion is due to the synergistic effect of the mixed use environment working well for them. They are also able to lease above market rates as a result of this effect.