Minimal New Development Keeps McAllen Office Market in Check
Development of new office space in the McAllen-Edinburg-Mission metro area rarely happens on a large scale. This ensures that the market remains steady, if unspectacular, assuming the fundamentals during both expansions and contractions do not change.
According to CoStar Group, the metro’s office vacancy rate currently stands at 6 percent, while the average asking rent sits at $20.44 per square foot. Modest vacancy compression and rent growth are forecast for the coming years, with the vacancy and average asking rents expected to hit 4.2 percent and $21.30 per square foot, respectively, by 2023.
Throughout the Rio Grande Valley (RGV) region as a whole, office market growth is largely confined to McAllen and Edinburg. There is one signature project — Rio Bank’s new corporate headquarters in McAllen — that will serve as a barometer of how well the market can large additions of quality space.
According to local newspaper The Valley Morning Star, the 125,469-square-foot project carries a price tag of $20 million. Construction began in January 2018 and is slated to open either late this year or early in 2020, with the namesake tenant expected to occupy about a third of the space. Per local sources, the property, which is the largest office building to go vertical in the market since construction of the Compass Bank building in 1997, is about 37 percent preleased.
Projects of this scale in McAllen, Edinburg or Mission are rare. This is mainly because the regional economy is anchored by the industrial sector, specifically by demand for warehouse and distribution space on the American side of the border that is linked to heavy manufacturing activity in the Mexican border city of Reynosa. Most of those users keep small portions of office space and house all their administrative operations inside their industrial facilities.
In the early 2000s, when the 1,200-acre Sharyland Business Park was being developed in McAllen, some speculative, small-shop office space was built nearby to serve the industrial users, most of whose corporate offices were located outside the RGV. Those buildings have been mostly vacant since they were built.
Some freestanding office space exists in Pharr, near the Pharr-Reynosa International Bridge. ScanTech Sciences, a company that provides cold storage solutions for Mexican agriculture, is the main occupant of this space. With this port of entry emerging as the leading import site for Mexican agriculture, the need for more labor to provide efficient inspection, cold storage and distribution of this product will grow. In due time, this demand could translate to more research and development or life science space to built near the border.
While development of pure-play office space in the McAllen-Edinburg-Mission area remains constrained, medical office space in conjunction with larger healthcare projects is another story. The market is seeing tremendous growth from healthcare users in both centralized and freestanding settings. This activity is bringing many high-paying jobs and other types of positive economic impacts to the region.
Doctors’ Hospital at Renaissance (DHR) operates a $2.5 billion, privately funded operation on an 80-acre campus on the McAllen-Edinburg line. The campus houses an acute care heart and cardiovascular transplant facility, cancer center, psychiatric hospital, a women’s hospital and a number of other specialty medical practices.
The City of McAllen has also acquired 30 acres across from the DHR campus for the development of a medical research facility that will be operated by the University of Texas Medical School, which also has a separate campus in the RGV. The market has seen more urgent care centers and freestanding emergency rooms delivered during this cycle as well.
Lastly, NAI RGV recently sold a five-acre site in San Juan, located just east of McAllen, to Rio Grande Regional Hospital, which is owned and operated by Nashville-based healthcare provider HCA. A $12 million healthcare facility is currently under construction at the site. Growth of hospital and medical office space is also happening in Harlingen and Brownsville as well.
Much like WestStar Tower in El Paso or Frost Tower in San Antonio, Rio Bank’s new building in McAllen and the pace at which it is leased up will tell us a lot about the health of the office market. Industry professionals are keeping a close eye on this project as an indicator of how much runway for smaller Class A office projects this market actually has.
Certain pockets throughout the RGV have more room for growth than others, and we see evidence of this in the form of redevelopment plays for smaller projects. Office investors with patient money that are looking for low-risk deals can find strong yield in this market, which is experiencing population growth and an influx of higher-paying jobs via heightened medical activity and trade with Mexico.
While we don’t expect to see many new buildings dot the McAllen-Edinburg-Mission skyline in the coming years, we do expect demand for space to remain healthy from core users — local insurance, accounting and law firms — and for fundamentals to remain strong in the event of a larger economic downturn.
— By Mike Blum, director, NAI Rio Grande Valley; and Brad Frisby, investment specialist, NAI Rio Grande Valley. This article fi