The Millegan Creek Apartments Harvard Case Solution & Analysis

Problem Diagnosis

             This case is based on the analysis of a construction property which is going to be financed through a construction loan. Fleet bank which is one of the largest banks in New England has received an offer from one of the developer for providing the required financing for a construction property for a 390 unit apartment located in Austin, Texas.A range of factors need to be considered by Fleet Bank such as the location, pricing and the product characteristics of the construction property.

Also, a range of other real estate factors need to be considered and the valuation for the property needs to be performed in order to determine the rate of return or return on assets that could be generated by investing in this property. Lastly, the risks associated with this investment also need to be identified and their significance needs to be evaluated before a final recommendation is made to Tom Hayden, the Vice President of commercial real estate at Fleet Bank.

Supply, Demand& Economic Drivers

            The housing market in Austin is ranked as the 6^th largest housing market in the nation and this gives Austin a comparative advantage. Therefore, Austin is considered as the most preferred location for investment in new facilities. The government workforce including that of the state is 110000 and governmental sector jobs of about 3000 have been added in Austin. If we talk about the relative size of the Millegan Creek Apartment,then it could be considered as substantial as compared to the four comparable provided in case exhibits.

However, there are more projects in their phase of development in the current period therefore, the demand for this property would not be sufficient.Nonetheless, the economy of Austin proves it otherwise. Austin has been ranked as the first among all other states as the state with highest economic growth for the past three years and the average growth rate has been 12.2%. Government and the Universities have been the main foundations of Austin

There are about four colleges within the city limits of Austin and therefore, the college students’ demand for the apartments increases in this way. The high technology company’s base has also been quite high in Austin because of its significant presence of the desired climate and the university based research. As a result of this huge attraction the demand for the apartments is also boosted. One of the other positive economic feature of Austin is the active involvement of the community environmentalists. However, for the developers, this might have a negative impact regarding their development costs. One of the other issues for the developers is to replant the trees, which they cut during construction and also the treatment of the rainwater.

If we talk about the apartment market in Austin, then this market has seen significant growth since 1989. The occupancy levels of the apartments has remained at very high levels since 1988 and the current occupancy levels are the highest of all time at about 98.8%. However, there is very high volume of apartments that are being currently constructed and would be completed over the next few years. This would have a negative impact upon the rent levels of Millegan Creek Apartment. However, the situation might be turned into a favorable situation for JPI if the population trend, which has been significantly high in the past continues in the future as well and the local economists believe that this trend is going to continue for the future as well.

The local job market is another important factor, which contributes towards the demand for the apartments in Austin. The unemployment rate in the year 1993 has been 4.5% and around 30,000 new jobs had been added by the local government in Austin over the past 2 years. The future growth rates for jobs in Austin are in the range of 3% to 3.2%. These are the significant factors that would increase the demand for the rental units over the next years in Austin. Overall, it could be said that there are significant economic drivers in Austin which would grow in future and the supply and the demand in the apartment market based upon the current scenarios is high and it is likely to boost in future as well.................................

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