Rio Grande Valley Multifamily Market Playing Catch-Up on Class A Product
Commercial real estate sectors in secondary and tertiary markets often suffer from a lack of current, comprehensive data and metrics. Until a few years ago, the multifamily market of the Rio Grande Valley (RGV) was no exception.
Much of the region’s multifamily product consists of “clusters” of fourplexes. In many cases, different investors own different units within these properties, which generally do not have management and leasing offices with hard data.
Consequently, for years multifamily developers and brokers in Hidalgo and Cameron counties operated without reliable information on their market, generally ceding to the ideas that it was overbuilt. Turns out they were incorrect.
Year-over-year rent growth in this market tends to be flat. Fluctuations are short-lived and back-and-forth in nature. But beginning in 2015 and carrying over into 2016, multifamily players in the RGV began to realize that their market was not overbuilt and that in fact, demand for better product was rising.
To better grasp the ebbs and flows of this market, we revert to 2008 and pre-recession data. To simplify our analysis, we use the McAllen-Edinburg-Mission MSA as a proxy for the region.
In 2008, multifamily vacancy stood at approximately 6 percent. By 2011, when the national economy was regaining its footing, vacancy had skyrocketed to roughly 13 percent. In 2015, when one of the biggest building booms in regional history began, vacancy had receded to 9 percent, which for this market is pretty close to equilibrium.
In 2015, oil prices had only just begun to fall and capital was cost-effective and accessible. Development surged as the market added somewhere between 2,500 and 3,000 units during a two-year stretch, many of which were housed in Class A properties. This volume of new deliveries spiked the vacancy rate back to its 2011 level of 13 percent.
Absorption of those units began in 2017 and carried over into 2018. Vacancy has returned to near-equilibrium levels and developers, particularly those of Class A product, are seeing strong leasing velocity. Several Class A projects, such as Midtown Village and Royal Vista, also broke ground in 2017, suggesting that the market for Class A units is far from saturated. These two projects, which will deliver 160 and 144 units, respectively, are slated to be complete this summer.
Although the supply-demand equation appears balanced at the moment, the vacancy swings of the last decade illustrate the fact that perception can be reality. Then again, given that the unemployment rate for this MSA fluctuates by 50-plus basis points from month to month, according to recent data from the Bureau of Labor Statistics (BLS), perhaps volatility is simply par for the course down here.
At any rate, the activity of the last several years has yielded an inescapable conclusion on Class A multifamily product: demand was there, is there and should continue to be there.
Politics Exert Influence
Construction schedules in the RGV remain largely unaffected by labor and immigration politics. Most developers can get an 80- to 100-unit building off the ground in nine to 12 months. We expect multifamily development in the region to continue to benefit from these forces in 2018, which could be the year in which the market discovers just how high its ceiling for Class A product really goes.
But leasing velocity and absorption rates are still susceptible to political influence. In mid-April, Texas Gov. Greg Abbott announced plans to send Texas National Guard troops to the RGV to elevate the military presence at the border. The arrival of these troops could cause a spike in multifamily absorption over the next couple quarters.
In addition, the proposed building of a wall between the United States and Mexico has implications for the RGV multifamily market. Government officials are currently meeting with property owners in the RGV to assess the land and begin pre-construction processes.
While the border wall project is a major political hot button, it does have the capacity to bring more jobs and people to the region. According to local newspaper The Monitor, the project calls for about 25 miles of wall construction in the RGV. While the project continues to be hindered by social opposition and limited financing, it is nonetheless an important political factor for multifamily developers and brokers in the RGV to monitor.
Other Factors at Play
Having an experienced multifamily manager that is adept at marketing the property goes a long way in this market. Indeed, we see discrepancies in the leasing velocities for multifamily properties that outsource to qualified, talented managers and those who opt for in-house management to save costs.
The ability to market effectively and lease up units quickly is paying dividends for certain multifamily developers. Certain properties, such as Mirabella and 2500 N. McColl, have achieved stability within six to eight months of coming on line and are now seeing rents approach unprecedented levels.
For Class A stock, this translates to anywhere from $1.00 to $1.15 per square foot, whereas the rest of the market has historically hovered between 80 cents and 90 cents per square foot. To put these figures into context, however, it’s worth noting that rent growth in 2017 was actually negative due to the volume of new units coming on line.
Other demographic factors are contributing to the growth of the multifamily market. Perhaps because of its proximity to Mexico and supply of immigrant labor, the RGV has generally avoided the labor shortage that has plagued the construction industry since the recession.
By Brad Frisby, data analyst, CoStar Group. This article first appeared in the May 2018 issue of Texas Real Estate Business magazine.