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An Investor’s Guide to Financing Multifamily Assets in Lubbock, West Texas

The-Azure-Lubbock-Texas

In November 2017, NorthMarq Capital arranged a $15.8 million loan for the refinancing of The Azure, a 156-unit affordable housing community in Lubbock.

Growing up in Lubbock in the 1990s, cotton fields were everywhere. No growth existed in the southwest part of town, and few new apartments were built.

Today those same cotton fields are housing developments; the southwest part of town is filled with high-quality retail and more than 2,000 apartment units have been delivered since 2015.

Carl Pankratz, NorthMarq Capital

Lubbock is thriving behind its sub-3 percent unemployment rate, strong agricultural sector, university with 40,000 students and a very strong healthcare sector. Available capital and financing options are plentiful. Many have taken notice, however, which has affected rent growth and vacancy in the market.

Economic Overview

One of the biggest misconceptions of the Lubbock economy involves the role of the oil and gas industry. A myriad of investors often incorrectly tie Lubbock with Midland/Odessa in this regard, ascribing to Lubbock the historical swings of an energy-based economy.

But the comparison is pure apples to oranges. Although energy does have an impact, Lubbock boasts more economic diversity than many of its West Texas neighbors. A direct result of Lubbock’s diversity is the unemployment rate, which is one of the lowest in the state at 2.7 percent.

This strong performance in the job market stems from an array of industries, including agriculture, education and healthcare. The business climate also benefits from a low regulatory environment and has seen several relocations recently, including Hoverstate, a technology company that has created 50 high-paying jobs.

Lubbock Apartments 101

Robust employment growth traditionally drives interest in multifamily assets, and Lubbock is no different. Despite experiencing strong population growth of more than 7 percent over the past six years, the 2,000-plus new units delivered have affected vacancy and rent growth.

According to the May ALN Apartment Data Report, occupancy is currently hovering around 90 percent. Effective rents are at 89 cents per square foot and the average asking rent is $745 per month, both slight dips compared to recent years.

There are, however, a number of positives for investors. First, financing for apartments is plentiful and multiple options are available. Second, per CoStar Group, the median cap rate over the past 12 months is 8.7 percent. Lastly, the median price per unit over the last 12 months is about $45,000. These last two numbers suggest there is still plenty of opportunity in this submarket, especially for Class B and C product.

Expanding the Scope

As investors look beyond Lubbock to West Texas as a whole, financing options remain plentiful. However, different regions require different approaches. Let’s consider Lubbock and Amarillo as one entity and Midland and Odessa as another. For Lubbock and Amarillo, available options are abundant.

Agencies: Fannie Mae and Freddie Mac hold differing views in the market. Fannie Mae allows up to 80 percent loan-to-value (LTV) at a 1.25x debt service coverage ratio (DSCR). This view resembles the financing available in many top markets and allows borrowers to obtain high advantage at great rates. Freddie Mac — in both its small balance program and conventional program — allows for great rates, but typically offers a max leverage position of 75 percent LTV at a 1.30x DSCR.

Bridge Lenders: Options are plentiful. In many cases, 80 percent loan-to-cost (LTC) is available at spreads under 350 basis points over LIBOR, with many lenders willing to compete for the business.

Life Companies: Depending on leverage, many life companies are willing to look at these markets at both bridge and permanent loan options at competitive spreads.

Banks: There are few secondary or tertiary markets with stronger banking communities. Many regional banks that do business throughout Texas originated in Lubbock and Amarillo, and many have a strong appetite for multifamily. This allows even those investors with limited experience the opportunity to obtain financing in the marketplace.

Portofino-Apartments-Lubbock-Texas

Low unemployment and a diversifying economy are driving development of Class A multifamily product in Lubbock, such as the newly built Portofino Apartments.

Midland and Odessa create different opportunities for investors and capital sources. While it is difficult to discount the relationship between the energy sector and the multifamily performance, an encouraging trend lies in the operational efficiency of energy providers in the region.

In many ways, energy operators are now profitable at $40 per barrel versus the need for $100/barrel. This reflects how fracking has developed and technology has accelerated all sides of the drilling cycle, with operators able to be more efficient and handle potential downturns better than the past.

These innovations have facilitated a boom in employment and corresponding housing demand. In many deals surveyed, owners are getting more than $300 per unit in rent bumps on renewals.

This market growth has also led to a number of capital options. From an agency perspective, neither Freddie Mac nor Fannie Mae is will to push leverage above 70 percent LTV, outside of LURA, HAP or other targeted affordable deals.

This is based on a history of experiencing losses in the past. Bridge, CMBS, HUD and banks continue to have an appetite for multifamily. Based on the deal, bridge providers have begun to show more interest.

NorthMarq recently worked on a workforce property in the area and was able to source an 80 percent LTC bridge loan. Thus, there is capital in this space. CMBS is also a historical player in the area, and many times leverage can get up to 75 percent LTV. If in need of higher leverage, HUD continues to offer its 223(f) product allowing for high leverage, a 35-year term and a 35-year amortization schedule.

Lessons Learned

In closing, we offer a few lessons learned to help investors.

First, surveys can take a very long time. Given the proximity to the Permian Basin, surveyors are in hot demand in the oil field. Determine quickly if a survey is needed, and if so, order it as soon as possible.

Second, when in Midland or Odessa, get as much occupancy history as possible and be ready to explain dips in 2016. Obviously the entire market was affected by the oil crash during this time period, but come armed with facts showing the overall improvement in the market and growing sustainability in drilling methods. Many properties are showing debt yields over 9 percent, so many lenders will have initial interest — the trick is to keep them interested.

Lastly, make sure to work with people and vendors experienced in working in West Texas. As discussed, not all cities are the same and not all are dependent on the same industries.

— By Carl Pankratz, vice president, commercial debt/equity, NorthMarq Capital. This article first appeared in the July 2018 issue of Texas Real Estate Business magazine. 

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