The Core Apartments

Michael Morgan presented this apartment complex in Houston to us, along with Clark (Kent I had to wonder) and the leasing manager, Crissy.

Please click the video for project images.


The Core sits on a street that has a vibrant night life with many clubs and bars up and down the street. It meets a demographic of people who are just out of college and typically have not started families yet. This is not to say that there are no families in the complex, but the majority of the renters are younger, singles who appreciate the nightlife.

Personal story
He shared some of his personal story with us. His father was the only member of his family to survive the holocaust, and came to america with a 5th grade education, but still managed to build a large real estate portfolio for himself. His favorite quote is “there is no substitute for hard work and common sense.”

Michael started his first development when he was 32, with an 11 million dollar project, of which he had to front around $1 million in personal equity. Things have changed since then as he has built good relationships with his investors, a pension fund, Archstone Smith has contributed the lions share of equity for many of his deals. On this project he only had to contribute $170k for a $42m project. A good track record and reliable name is very key to Mr Morgan.

He has a view that the real estate market is cyclical, and will always be so. Thus a developer must be defensive, plan for the worst or suffer in the down cycle. Michael feels that many developers made just this mistake in the recent bust.

Vertical Integration
His company is vertically integrated which allows him some more room to exercise his considerable construction, management and leasing experience.

He takes a project all the way from construction, through initial leasing toward stabilization and into property management. His fees on the construction side and development are all set aside to cover the personal guarantees that exist on the property. This structure is carefully negotiated with the bank to risk only specific assets against the loan on the new one.

Partnership and financing structure
Michael uses a limited partnership to hold the assets that he develops. He offers a preferred return to his equity investors, above which they are 50/50 partners. this presents a balancing act for this project under the current market, as the appraised value is at break even to proved the pref return, but no upside for the developer. The asset will therefore be held and managed for a period longer, until it stabilizes and values increase to the point where a sale will generate some equity return for Michael.
Archstone Smith is only asking for 2% pref return on this project.
As a side note, it turns out that Lehman brothers bought Archstone Smith, paid 2008 level pricing for the assets in their portfolio and subsequently this deal of $22b contributed to Lehman’s downfall.

Leasing
Michael is a strong believer in getting the property in a position where drive-by traffic volumes are high. He does not invest in projects on side roads. This has helped him lease this project to its current level of occupancy at 98%.

The rooms are designed to lease, based on Michael’s experience in the market. He dictates what size rooms and how they should be laid out to his architects while leaving them some room in other areas to express creativity.

Brownfield
This site was a brownfield, and required some remediation. The clean bill of health was necessary to secure insurance for the project. The site has some wells on it that will need continued monitoring for the next decade to ensure the site does not become contaminated again. Insurance covers this unlikely event.

Market
Michael has noticed Cap rates starting to decline, a positive indicator for the market. This is only true of residential apartments, the best of class asset to have owned during the down cycle. As always, he recommends grabbing every penny you can out of your property as real estate according to his view, is flashy and sexy on the outside, but inside, every dollar of additional income counts.