CUZ
#<UNK>, that's a great question.
Every now and then in this business you wish you could go back, but we were talking about that the other day.
I think when we had the opportunity to buy into Houston, it was a huge positive step for our Company to establish ourselves in a rapidly growing market of size and scale and be able to get in there and inherit a team which is a tremendous team.
And if you look at the results that team generated, both while Houston was still going strong and in my opinion more importantly as Houston started cooling off with us getting ahead of those big leases, they just did a tremendous job.
It was interesting to me a sort of light came off at the end of the tunnel for me about six, nine months ago.
And I can't remember what conference it was at, but I started each individual meeting with the investors and said is there anything that I can say to you in this investor meeting about Houston that's going to change your mind about Houston and they said no.
And so, I think what then happened was you looked at the size and scale of what you had in Houston mixed together with your other assets and you realized that you needed an opportunity to let more visibility come into the Houston portfolio without the distraction of the other cities because it really wasn't nearly as bad as people were thinking it was.
And that was a key element of our conversations with Parkway is they had a similar situation and by putting a ring fence around those assets, we now have a tremendous group of assets in Houston which we think will outperform the downside and the upside with the management team 100% dedicated to that and I think that will appeal to a certain type of investors.
So I think that the logic about which we made the decision was good, I think the way in which we executed while we had the assets was good, and I think the way in which we're now pulling the assets together is just fantastic and I couldn't have more confidence in Jim and the Parkway team to work with our collective teams in Houston and get a tremendous amount of value out of those assets for the shareholders.
I'm equally glad that the shareholders of the new Cousins are benefiting from these collective assets in both companies.
They are largely overlapped.
I mean that was one of the amazing things about Parkway and Cousins not just in cities; but also in terms of quality, urban best submarkets and put that in its own company that can stand on its own and really distinguish itself in these other markets.
So, that's what I was trying to get across in my excitement in my opening remarks.
<UNK>, I think it's early for that.
I think as you see our further information come out in terms of as we get toward 2017 and start showing some numbers on where we think 2017 is and we've had further time to get through the transaction part and look at the asset part that you'll see more of that.
But at a fairly low level if you look at these three cities that are new to us, they meet our criteria.
They've got growth rates above the national average, they've got new building rates way below the national average, and in certain submarkets you're seeing near $30 rents get achieved for the right assets.
So, there's nothing in those new markets for us that are unusual in terms of the characteristics that we look for in highlighting a Cousins market, but it's too early to comment on long term.
I'll take the first two and let <UNK> take the others.
When we had an in-house contractor, those were back in the days when we were building houses and so when we got out of that business, we got out of that altogether.
So, we do not have a contractor.
Our land positions are really very light and the majority of the land that shows up in that 1% is residential land that we would consider non-core and are continuing to work to settle down.
So <UNK>, I would hope that as soon as a little bit of the luster gets off the multi-family [rose], and I'm not smart enough to know when that is, that we would be in a position in these key submarkets and cities that we've highlighted to pick up a site or two that would give us the flexibility to be in a better position to build when the right time comes in the next cycle.
I'll let <UNK> or <UNK> comment on 191.
<UNK>, we didn't quite hear that the last part of your question, if you could repeat that.
The recent leasing activity that we have, those commencements are all at the beginning part of 2017.
And they do as you would expect have some degree of free rent.
And I would tell you in terms of what we're seeing in Atlanta as it relates to that, it's anywhere from kind of half a month to a year of free rent per year of lease term.
You got it right, yes.
Certainly as we look across our various markets, there is varying degrees of speculative construction underway.
We see a little bit more of it in Austin and Charlotte and there's virtually none in Atlanta.
But I think what's really driving our comment is taking a more cautious approach is just feeling like that we're kind of late cycle from an overall macroeconomy perspective.
So, we will continue to take a cautious approach.
That being said, we're continuing to see some pretty good activity from large customers who have built to suit oriented opportunities and we'll continue to look at those if they provide very attractive risk adjusted returns.
But as a general statement as we feel a little bit late cycle, we will take a cautious approach across all of our markets as it relates to speculative space.
The Decatur project, we feel very good about.
As <UNK> mentioned earlier, in a general sense we believe it's late cycle in the multi-family space as well.
But that particular project is so well positioned and really a very unique kind of urban location here in Atlanta over in Decatur, directly adjacent to MARTA station and so we think that is defensively positioned as you'll find for a multi-family site in the Sunbelt.
Really everything that we've talked about today, we've already sold in 2016 and so have fully funded.
We wanted to take the capital markets risk out of our development pipeline including the Avalon project.
So, the only thing that you would see us look to sell another asset if the purpose of that sale is to generate capital for a development need with a new development prospect.
And I would tell you, as <UNK> said, really the only type development prospect that I think you could see us take on today would just be another project like an NCR where you had a big company with good credit that wanted to do a long-term lease and it made sense, also the Dimensional Fund Advisors.
I'm long enough in my career that I've learned that I'm not smart enough to guess when the cycle is going to go down, but I'm willing to give up some of the fourth quarter just to make sure I'm ready for the first quarter of the next one.
<UNK>, that's a perfect question.
And I think what we see is that in all of these cities and we can name them that we're in, there appears to be what I would call an urban light node and it tends to be where the high income suburban household demographic is.
The Domain in Austin would be one and it's a way out from the city in terms of how we think of urban, but then once you get there; you look at household formation, you look at densities, you look at income levels, you look at school levels; then it tends to get led off with a mixed-use project as this one did.
And this one actually started and then cratered during the recession and then restarted.
But the first phase, which included single-family homes to buy, to rent offices, retail, et cetera, has just been a huge success.
And the second phase, there are only two phases of it, gave us comfort.
The other thing that gave us a lot of comfort is we had about six months of pre-development and as <UNK> alluded to, the pipeline of leasing and we're quite confident of some announcements that we'll have coming up validate our thesis.
It really is a topic we debate in here.
I think when we first got to know the market, we thought of this more as probably a merchant build because of the distance out from the cities.
But then when you start to look and you go here's a whole site with all this infrastructure and there can only be one other office building program for which we control that site, maybe we define a category of urban light and hold it for a longer period of time.
So, that would just be a jump ball for us to call a couple of years out when the thing's leased up.
<UNK>, I'd just add to that.
As we think about the type of asset we want to own long term, it's those that are going to come in at premium rents.
And we're obviously just coming out of the ground on the office building, but as we have some transparency on the rents they're achieving on the multi-family side, on the retail side in this project, and the sales that they're doing; they're very much Buckhead like.
And so as we look at that, I think that gives us a lot of confidence and/or perhaps inform our long-term decision once we stabilize the asset.
<UNK>, we've never given specific guidance on any one particular development project just from a competitive standpoint.
But I think we've given past guidance that our development pipeline is penciled out to a mid-8.5% GAAP yield on a weighted average basis and we think with the addition of this project that that remains relatively unchanged.
There is premium in the market for Avalon relative to what's there.
But we really think about Avalon, its competitive set isn't just what's around it because there's truly nothing like it.
The competitive supply for the most part of surface part type assets and we've seen a real demand for customers in that market.
As I mentioned a lot of large cap technology type companies, large financial institutions who are very much focused on recruiting and retention of the less caliber employee and really see this as an opportunity to locate out in that submarket versus having to go to Buckhead or the Central Perimeter.
So there will be a premium, but we think we're very close to validating that.
But as <UNK> said in his earlier remarks, the office rents on an early basis look more like Buckhead office rents.
<UNK>, there was good activity as we detailed in the past in 2015 in really all submarkets; Downtown, the Galleria, even out west.
As we moved into 2016, we've seen activity really slow and I think it's probably a function of buyers' expectations continuing to increase and sellers holding firm.
One of the things that we've always looked at as we evaluate the Houston market and I think it's important to note is really the quality of the underlying owners within the market, particularly in our urban submarkets in the Galleria and Greenway Downtown.
It's very, very large well capitalized groups like in Invescos and JP Morgans who own those assets on a very low leverage basis and they have the ability to take a long-term perspective.
So, we just haven't seen that bid-ask spread narrow to the point where we've seen a lot of transactions this year.
Great question, <UNK>.
I would say we look at it through a couple different lenses.
First, I wouldn't say that we're underwriting to a specific cap rate.
It's really more what's the spread over that going in yield relative to where we see spot cap rates today.
And obviously even with the build-to-suit, we like to have a healthy development margin and that will even ---+.
In terms of what that particular margin is, it's very dependent on the underlying credit of the customer that we're working with.
I don't want to go into specific details again to kind of put us at a competitive disadvantage in the future, but we do underwrite a margin to protect ourselves.
We also look at as we're doing these projects, what is the overall project cost and therefore what does that translate into in underlying rental rate to make sure that we're not developing a too specialized building or put ourselves in a position with a kind of way above market rate.
So, we kind of look at all those various factors to ultimately determine whether it's the right transaction for us and put a price on it.
Business as usual.
I don't want to get too much into that until we can get past some of the merger conversations.
But at the end of the day, two things that drive where you look to go and the part of the business we're in.
One is you've got to look at the cities and you've got to have the dynamics that allow you an opportunity to go in there and be successful.
And then the second is the human talent, which is the most important part like a Tim Hendrix that we have in Austin that are very much embedded with the core values and relationships that are necessary to make those.
And I think that the key drivers for us is looking at both, you have to look at the cities, but you also have to look at the competition that's there and see if there is an opportunity to bring your value and then you have to either have somebody on your bench or find somebody that can really bring you to the table quickly as a local sharp shooter.
I would give an example of that is that's one of the reasons we were comfortable buying Greenway is we had a 20-year team there with [much] of shared value and so when it came down to figuring out how to do some of those big leases early, we were able to act like a local sharp shooter even though we had not been in the market a long time.
But we are excited about the opportunities post-merger, but it will be driven by really looking at cities and those dynamics.
There's the population dynamic, there's the competitive dynamic, and then there's the human dynamic, and those will be the things we'll continue to look at.
It's all incremental.
I mean if you look at where we are; we've been in Charlotte a long time, we've been in Austin a long time, we've been in Atlanta since our founding, and we've been in and out of other markets.
We've been in Dallas, we've been in Fort Worth, we've been in other markets.
So it's not unusual for us to take a look at two or three or four other markets, but we're going to always be driven by quality of return versus scale and that's the game.
As you get the densification that's occurred in the Sunbelt and in these urban submarkets, there is an opportunity to have concentration and diversification and return and that's always going to be more important than scale.
We appreciate everybody being on the call today.
These are exciting times at Cousins, I hope you hear that in our voices and in our answers.
We look forward to talking to you all as things move forward and appreciate your continued interest in our Company.
Thank you.
