Overcoming challenges
An investor says better times are ahead after the oil bust and hurricane.
Rockspring Capital has found investment opportunities amid the energy sector downturn and Hurricane Harvey’s aftermath. Jim McAlister, CEO of the Houston-based real estate private equity firm, says those challenges have not overshadowed the region’s strengths. He recently shared his thoughts with the Chronicle.
Q: Has Houston’s economy fully recovered from the downturn in the energy sector? A:
Not yet. But the headwinds are turning into tailwinds. In speaking with energy executives around town, the typical cycle for a recovery is 21 months or so. This cycle has been 42 months, and they are finally seeing light at the end of the tunnel.
Energy companies are hiring again. In addition, the national economy is doing great, which helps to accelerate Houston’s energy and non-energy industries, which are already doing very well. Q: Did your firm take advantage of Houston’s energy sector slump? A:
The downturn allowed us to buy certain assets, such as energysensitive residential assets, at a discount to the previous asking price and the sales price of comparable assets. Q: Did Hurricane Harvey impact Houston’s real estate market? A:
Harvey had little impact on the real estate market overall, although some neighborhoods in Houston still have a lot of damage from flooding, and these neighborhoods will take many more months to recover. Harvey’s effects are seen more in the residential space than in the commercial space.
Generally, the storm is forcing a re-evaluation of some specific floodprone areas. Moving forward, flood plain maps will be more conservative and builders will be held to higher standards in these areas, which will add costs to the developers. But we see this more as an opportunity than as a setback.
General economics and strong fundamentals are driving the economy and the market, and Harvey had zero effect on that, particularly singlefamily lots. The market is doing great in most every sector except the office sector. Q: Why isn’t the office sector picking up? A:
The office sector was overheated because the energy sector had become too hot around 10 years ago. Q: How does Rockspring Capital operate? A:
Acting as our funds’ general partner, we buy undervalued real estate assets in the Texas area and get these properties ready for future development. We have defined and foreseeable exit strategies for our real estate investments. We also buy up covered land plays (transitional areas), determine what uses would be most optimal, and reposition assets where the demographics or land values have dictated a different use.
We then prepare the areas to be transitioned to more advantageous uses. These properties are often older, light industrial or multifamily properties that have leases in place which generate income while we position the properties for their transition to a higher and better use. These opportunities are unique in Houston because the city doesn’t have zoning laws.
Our investors — pension plans, foundations and endowments, wealth managers and high net worth individuals — are our limited partners. Investors from all over the world invest in our funds, although our investors are primarily from U.S. and Canada.
Q: How is the retail sector doing in Houston?
A: Retail is doing well in Houston. Unlike many other places in the country, Houston was not overbuilt and has grown at a very sustainable pace. Some malls are even expanding, and brick and mortar companies are still attractive in many areas.
Big box stores are not popping up as much as before, particularly during the last four years. In general, when a developer buys a large area of land and decides how to divide it up, the developer will allocate less acreage to retail than in the past, but it will still provide for smaller retail stores in the area. There is still steady demand for that category.
Q: Has the decline in retail stabilized?
A: Yes, for now. Most people already have access to the internet, and there still remains a need for physical retail stores. But there may be a dramatic change in technology in the future that causes a further decline — technology changes fast, and so you never know.
Q: Why does Texas, and particularly Houston, attract so much investment from foreign investors?
A: The zoning and land use laws in Houston are very businessfriendly. Cities with less restrictive governments and less land-use regulation are more resistant to downturns. They don’t get hit as hard during a recession.
More importantly, Texas has very strong fundamentals: good population growth, including migration and immigration from Latin America, plenty of water, land and great weather. States compete for workers, and we get many from Latin American countries coming into Texas. It’s also easier to make money in Texas. Strong landowner rights, no income taxes, good medical care (people come from Latin America to access Houston’s Medical Center), low housing costs, and ready supply of economical labor. All these factors are very important — we have a good recipe for growth and opportunity.