Camden CEO Gets Candid On The State Of Multifamily

In a crowd of suits, Ric Campo’s maintenance shirt stands out. A simple patch that reads “Ric” belies his role as the co-founder and CEO of Camden Property Trust, one of the nation’s largest multifamily REITs. Stewarding 1,600 employees servicing nearly 55,000 units, Campo has his finger on the pulse of multifamily across the country like few can. He sat down with Alara Ventures CEO Alison Malkhassian at Bisnow's full-day multifamily summit last week for a candid one-on-one conversation to cut through the noise in the raucous market. Former colleagues and longtime friends, the two got spirited as they discussed the core issues of the multifamily world.

On lowering return expectations

Malkhassian: “How do you view where we’re at? It feels like purgatory almost. It keeps going and you think it can't get any better and rates can’t get any lower. As someone who tries to invest, I keep thinking that expectations of institutional capital I'm competing with will drop their return expectations and it doesn't happen.”

Campo: “I think people definitely are dropping their return expectations. Camden has. Today we’ll do a 4.5% or a 4% cap rate deal; if you asked me that three years ago, I would've said you're on drugs. Now I'm doing it. That’s the price of poker. If you wanna play, that’s what you’ve got to do. Most institutional investors have dropped their return requirements. It used to be 7.5% terminal [internal return] and now it’s more like 6% or less depending on what type of asset type you're talking about. Definitely return requirements have slowed down.”

On terminal cap rates

Campo: “We know that terminal cap rates are the most ridiculous things on earth. And terminal [internal rate of return]? Give me a break.”

Malkhassian: “[Terminal IRRs] have the biggest impact.”

Campo: “Of course, but at the end of the day, lower your IRR and lower your current requirement on your cap rate, increase your cash flow assumptions and you’ll make your numbers work. If you actually believe fundamentally that interest rates are going up in the future and that cap rates are going to expand 100 basis points, do you know what your net operating income has to increase above and beyond what your current projection is? Twenty-five percent, to keep your IRR fixed. So the biggest BS in the world is terminal cap rates and terminal IRRs because who knows what they’re going to be.”

On investor appetite

Campo: “When the ducks are quacking you’ve got to feed 'em. Today, the ducks are quacking for real estate. Make sure your partners are good though, because when the ducks stop quacking you’ll be stuck. Be cautious feeding the ducks but you might as well do it while they’re here ... If you have the intestinal fortitude to triple the size of your business, the capital is there. There’s $2 trillion in dry powder sitting in private equity that want to get a return and you can deliver.

(Turning to the audience) With as smart as [Malkhassian] is, with her track record, she could do $1B worth of deals if she dropped her return requirements, hired the right people and went out into the market to get it. But guess what? She won’t do that, because she’s conservative. That’s why I call BS on that. (To Malkhassian) Your opportunities are better than mine because you can do what you want. I have shareholders and other constraints on me. I think in the private sector if you’re not doing great business, it’s because you don’t want to because there’s so much money everywhere.”

Malkhassian: “The thing I'm challenged with as a small investor is that I see my investors every day, every week. They’re friends and family, high net worth guys that I'm not going to piss off by not delivering. The problem I’m having is that every deal I've been working, I'm losing out because someone is willing to push things.” 

Campo: “Then lower your return hurdles.” 

Malkhassian: “It’s not me, it’s my capital.”

Campo: “Then find different capital.”

Malkhassian: “I don't want to find different capital.”   

Campo: “Again, another choice. (To the audience) She has a great lifestyle, she makes good money. She’s just not going out on the risk curve. We have over 300 individual shareholder meetings a year; we get lots of pressure, too. The issue is, you have to decide for yourself whether it's BS or not. Whether you're willing to have a 4% terminal cap rate.”

On where we are in the cycle

Campo: “If you think about where we are in the cycle, or where we are in just the last 10 years, we’ve had the longest recovery in U.S. history, not just my business career. Now, it’s also the slowest recovery from a relative basis. We had this incredible demand killer of everything and it's taken a long time to build that demand back. We’re in aging developed countries. What's happening is we’re going to have lower interest rates for longer and there’s not a lot of inflation on the horizon, especially when you factor in the Amazon effect keeping pricing down. It’s a really weird time. The thing that could stop it all is the trade risks, political risks, the risk associated with the polarization of people. If we can deal with those risks, this recovery can go quite a while because we’re not really back to where we were in 2007 in terms of demand.”  

On cap rate spreads 

Malkhassian: “There was a day when the spread between Houston and other markets was 100-150 basis points because there was a perception of a real difference in the risk profile. What’s your national view on that?” 

Campo: “As you said, cap rates were 100-150 basis wider on the coasts than they are in the middle of the country. The idea was the coasts had constraints and better [net operating income] growth. What’s happening today, because of this $2 trillion in dry powder, those spreads are now as narrow as I’ve ever seen. Actually, for certain properties in Houston, they’re the same price as California on a cap rate basis. The spread has narrowed dramatically because of the competition for capital. When you think about that, it’s been really good for us. Not only has the spread on the coasts changed, but [spreads] for new property versus old property have too. The spread used to be the same, about 100-150 basis points. We started selling properties in 2011, we sold about $3.5B in properties, we bought about $2B and developed about $3B. The trade on the old versus the new was 25 basis points negative spread from selling 25-year-old assets and buying 4-year-old assets. That’s unheard of. So what Camden did is we said let’s back the truck up. The average age of Camden products in 2011 was 11 years. Today, the average age is 11 years.” 

On BS'ing yourself 

Campo: “The biggest lie in real estate is the greater fool theory. Every metric you can change — revenue growth, cap-ex, starting cap rate, exit cap rate — you can manipulate every one of those to be what you want it to be. At the end of the day, can you hold those numbers? If you're BS'ing yourself, and your investors understand the right capital structure, go do it.”

On evolving unit mixes 

Campo: “We used to have a higher average square foot, around 1,000. We’re probably in the 850 SF range today. We’re seeing smaller square footage, smaller apartments. People still want their own space. Build a smaller space with more common areas and gathering areas. Overall, fundamentally spaces are getting smaller. We try to make sure we’re relevant to the market.”

On Camden’s strategy 

Campo: “What I’ve learned over the last 43 years in the business is the people who win aren’t the ones who can pick the top or bottom of a market, but the people who can survive the bottom. We’ve slowed everything down and created the strongest balance sheet we can. Slower growth and better capital management are what you really need to do today.”