Can Luxury Rentals Pencil Out in Lake Charles, Louisiana?

Studios for $1,050 a month, one-bedrooms for $1,310 and two-bedrooms for $1,525.

Those are actual asking rents for “high end,” downtown, market-rate units in the Erdace Apartments, “the epitome of a luxe residence.”

As you might guess, they are not in New York City. They’re in downtown Lake Charles, Louisiana. These markets might as well be on different planets.

A developer in Gotham would make a killing if he could build luxury rentals for $160,000 per unit, which in 2018 is what the Erdace Apartments were projected to cost. A developer building at that price in Lake Charles, by contrast, might not reap enough rent to pay his debt service.

In fact, that seems to be what happened.

The Erdace Apartments opened in June 2020 with in-unit dishwashers, 10-foot ceilings, walk-in closets, granite counters, stainless steel appliances, air conditioning, broadband access and a private patio or balcony.

The building had a clubhouse, lounge, café, fitness center, business center, indoor and outdoor pavilions and a large pool. It tripled the number of rentals in downtown Lake Charles.

Six years later, New York City-based Muss Development and Baton Rouge-based Amesbury Companies took control of the 270-unit complex by acquiring a HUD-insured loan. They paid a mere $137,000 per unit.

Muss and Amesbury plan to spend a few million dollars improving the lobby, facades, hallways and balconies and then rebrand it as the Ryan Apartments.

Muss, which has nearly 60 East Coast properties, 41 in New York, used to be a more active builder in the five boroughs, where development is famously complicated and expensive. Lake Charles is its Louisiana debut.

Upside of tight markets

“We choose to go to the Moon in this decade and do the other things, not because they are easy, but because they are hard,” President John F. Kennedy famously said.

Developing in New York is hard, and some choose it for that reason. For firms with the requisite courage, expertise and access to capital, it can be a lot more lucrative than building in more laissez faire metros.

For real estate investors who embrace that trade-off, easier is not better because it means more competition and market swings.

“Houston has a massive amount of development going on, and we’re staying out of that,” said Britt Winterer, chief development officer of Link Logistics, at an NYU Schack panel discussion last week.

There’s lots of land and it’s easy to build, which triggers booms and busts. “Houston really cycles aggressively,” he said.

Instead, Link Logistics looks for constrained markets with rent growth. Another panelist, Jack deVilliers of the retail REIT Regency Centers, expressed a similar philosophy, though he’s in an entirely different asset class.

“The barriers to entry in our world are extreme,” DeVilliers said. “It’s really tough to get into the market. If you have a shopping center in Scarsdale, New York, I guarantee there’s not going to be a shopping center [opening] across the street.”

Doing projects where it’s simpler is obviously not without risk, as Winterer noted. The Lake Charles complex, which developer Roger Landry in 2016 called a $43 million project, didn’t appear to work out for its investors. Muss took over by acquiring the debt for $37 million.

Delays likely inflated Landry’s cost. He bought the former Sears site, which had been vacant since 2008, from the city in mid 2013 for just over $1 million. It took him until January 2018 to break ground.

The Erdace was going to have more units than all downtown Lake Charles residential projects in the previous 35 years combined.

But by the time it opened in June 2020, other developers seemed to have beaten Landry to the punch. In 2019, the metro area’s population grew by 21 percent.

It has edged down since.