Over­com­ing chal­lenges

An in­vestor says bet­ter times are ahead af­ter the oil bust and hur­ri­cane.

Houston Chronicle Sunday - - BUSINESS - By Ilene Bassler

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.

El­iz­a­beth Con­ley / Hous­ton Chron­i­cle

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