Camden Isn't Celebrating The Rate Drop, But It Is Set To Take Advantage Of A Multifamily Market Reset

Unlike the vast majority of operators in the multifamily industry, Camden Property Trust leaders had not been holding their breath for interest rates to drop. 

Houston-based Camden is a multifamily real estate investment trust that owns and operates more than 58,000 apartment units across the country. As an unsecured borrower, the REIT benefited from substantially more options during a challenging financial environment, Chief Financial Officer Alex Jessett said in an interview with Bisnow. 

But the cut is likely to bring more sellers to market, and that would open opportunities for the REIT that plans to upsize its office next year as it moves into new digs at Houston's Williams Tower.

As the multifamily market corrects and construction starts largely halt, Camden’s building pipeline is steady, and it is looking to investment opportunities for more growth.

Last month’s 50-basis-point rate drop, which gave most multifamily owners significant reason to celebrate, doesn’t change Camden’s outlook, he said. Yet the rate cut will push more sellers to the bargaining table since they expect buyers to get better financing, putting Camden in an “incredible position” to take advantage.

“We have one of the strongest balance sheets in all of the REIT world,” Jessett said. “We’re an A-minus rated credit by all the rating agencies. That puts us in rarified air.” 

The multifamily market has been on a roller coaster ride for the past few years, as double-digit rent increases and low interest rates coupled to support a historic run-up in 2021. But interest rates shot up in 2022 while new supply depressed rent growth, causing a stomach-dropping downfall and alarming rates of growth in multifamily loan distress. 

Camden was not along for that ride. Being an unsecured borrower, Camden does not get the same benefits from low interest rates as secured borrowers and is very low levered compared to traditional merchant builders, Jessett said. That means the REIT’s cost of capital was actually higher during the lowest interest rates, he said. 

“We’re [about] 20% levered, and debt is generally cheaper than equity,” he said. “If you're very low levered generally, your cost of capital is a little bit higher because equity costs more. In today's environment, this is flipped because the cost of debt for merchant builders is so much. So yes, we are absolutely at a competitive advantage.” 

Despite the unpredictability of interest rates, Camden's construction pipeline has remained steady, Jessett said. The company has seven communities that are estimated for completion from the second quarter of 2024 to the fourth quarter of 2026, then another seven in its future development pipeline, according to its September investor presentation. 

Camden operates in 15 markets, largely in the Sun Belt, but also in California, Washington, D.C., and Denver. Its current development projects include four apartment complexes in North Carolina and two build-to-rent communities in The Woodlands and Richmond, Texas. 

Camden focuses its projects in high-growth markets, Jessett said, adding that he loves all of his markets equally but looks forward to expanding in Nashville. Nashville claimed the No. 10 fastest-growing city spot this summer, behind metro areas in Texas, Arizona and Florida, according to an analysis of U.S. Census data.

The elevated number of multifamily deliveries today can be attributed to merchant builders taking advantage of low-cost, highly-levered financing in years rates were low, he said.

“Because they had very cheap financing, they could build projects that economically only made sense because of financial engineering,” Jessett said. 

Higher construction and financing costs have led to the ongoing market reset, which ensures those multifamily projects that get built will “actually make sense,” he said. This should lead to better quality products, he said.

The projects that were higher levered and are not generating appropriate returns will cause some distress in the market, but Jessett said banks will likely work with their borrowers to extend loans and make the deals work. 

“I don't think it's going to be a huge amount of distress,” Jessett said. “But there clearly are going to be folks that thought they were going to make a lot of money, and they probably won't.” 

There may be some real estate acquisitions for Camden to come out of that, though the REIT will continue utilizing its investment professionals to make those decisions, he said. Camden hopes to be balanced in building and buying, and is well positioned for the latter since it can raise capital very quickly, he said.

“We also have a $1.2B line of credit that only has, call it, $100M outstanding on it,” Jessett said. “So we’ve got tremendous amounts of liquidity, tremendous amounts of dry powder, and we are absolutely looking for opportunities.”