Question

Suppose that you work for Camden Property Trust (Links to an external site.), a multi-family REIT in the southern US, and that your company wants to add another apartment building to its investment portfolio. After conducting a thorough market analysis, you have narrowed your search to three properties located in different areas in Houston, Texas. All of the properties have a similar number of units, and the units are also similar with regard to mix and sizes. The primary differences is the supply and demand in the different market areas, and the consideration of newer versus older properties

Option 1: The first property is currently built and operating in a middle income area that has a shortage of housing. At this time, the building has no vacancy, but there are some new apartments being built nearby that will soon be competing with this property. This is the oldest property, and will likely be impacted by the new construction in the area that may take away tenants.

Option 2: The second property is currently under construction, and is being sold because the developer has run out of money, and is unable to finish the project. However, it is likely that your firm could complete the building at a favorable per-unit cost. The market area is close to equilibrium, but with some excess supply, and the completion of this property would add even more. However, it would be a new building – something that is often attractive to potential tenants.

Option 3: The third property currently has a relatively high vacancy rate. However, the market area has become an increasingly desirable area to live and demand is expected to grow. There is also little threat of new competition here because there are no sites available to build additional apartment complexes. Given these vacancy considerations, which property would you choose? Are there other investment factors that may be impacted by these considerations?

Answer 1

Camden property trust is a Houston based Real Estate Investment Trust that owns and operates apartment communities in the United States. Currently the company owns 180 apartments according to its website. The apartments are made up of 62,266 units. The company was founded by Ric Campo and Keith Oden back in the year 1982. Camden buys and develops land, builds apartment homes, and manages apartment communities.

Camden property trust wants to buy another property and they are torn between three options. The first option is a property that is currently built and operating in a middle income area that has a shortage of housing. At this time, the building has no vacancy, but there are some new apartments being built nearby that will soon be competing with this property. This is the oldest property, and will likely be impacted by the new construction in the area that may take away tenants. This house has the advantage of few houses in the area. The advantage of this house is that there are new houses that are under construction and there is the fear of people moving from the house to the new ones. According to my view the house will not lose many customers since considering that some people may move to the new houses there are the loyal ones and those who don’t like moving from house to house due to the processes that are involved in the moving. Costs are another factor that may make the old house to maintain the current tenants. This risk is still higher due to the new properties and hence would not opt for the property

The second option is a property that is under construction and is being sold because the developer has run out of money, and is unable to finish the project. However, it is likely that your firm could complete the building at a favorable per-unit cost. The market area is close to equilibrium, but with some excess supply, and the completion of this property would add even more. However, it would be a new building – something that is often attractive to potential tenants. The property is under construction giving it the advantage of the attraction based on it being new. The disadvantage with the house is that there is a big supply of properties so even the one under construction will be at a huge competition making it a big risk compare to the other two risks.

The third option is a property that has a very high vacancy rate. Since the market has become increasingly desirable to live in, the demand is expected to grow. There is also little threat of new competition here because there are no sites available to build additional apartment complexes. I would actually prefer a property in this area since there is a high demand. Most of the properties will be occupied as the area develops. A company like Camden can be able to find an existing property in the area that would be on sale. The threat of competition is there but will be suppressed by the population and the desirability to live in the area.

The other factor that made me chose the third property is because the population is increasing in the area and this is making the place best for the property investment.

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