As a multifamily investment sales brokerage firm, Greysteel has transacted close to 2,000 units in El Paso over the last 12 months.
To say the El Paso multifamily market has been hot would be an understatement. But with a sudden pandemic causing economic chaos, jobs are at risk and multifamily owners are facing ever-increasing pressure.
First, let’s talk about how El Paso has recently performed. Demand for multifamily product in El Paso has been particularly strong lately, and we’ve been able to bring new in-state and out-of-state investors into the market at cap rates never before seen in El Paso.
Many of these investors are surprised to learn that El Paso is the sixth-largest metropolitan area in Texas and the 18th-largest city in the country. As cap rates on multifamily properties have compressed across the United States, El Paso has offered a safe haven for higher yields that can be elusive in major markets with high levels of competition.
Jack Stone, Greysteel
El Paso also has a diverse public/private sector that barely felt the pain of the 2008 recession — cumulative job losses totaled less than 3 percent of the total employment base. Job growth has expanded steadily, and employment was approximately 13 percent above the pre-recession peak in February.
Now, as we enter another bear market with COVID-19 putting most of the country in limbo, El Paso will, like every other market, feel some pain. If you’re reading this, you probably already understand what’s at risk.
With tenants unable to work, owners will collect less rent, and some will inevitably find it difficult to make their debt service payments. To make matters more complex, the Texas Supreme Court has ordered a temporary pause on evictions that was scheduled to remain in effect until April 19 at the time of this writing.
Further, El Paso has a lower median income than the U.S. average ($45,954 versus $64,500 for the country). The bulk of the market’s multifamily properties are workforce housing, which will bear the brunt of the downturn. Nonetheless, Fannie Mae and Freddie Mac are offering forbearance provided that landlords suspend all evictions for renters unable to pay rent due to the impact. Other lenders are likely to offer similar forbearance options or workarounds.
On one hand, El Paso’s real estate community should be encouraged by how well the market handled the 2008 recession. But unlike 2008, we are currently faced with a situation that we’ve never come across — at the time of this article, citizens holding jobs in nonessential services remain under strict “shelter in place” and quarantine mandates.
But there’s hope that the virus will be less effective in warmer climates like El Paso. And El Paso doesn’t have a dense population, with only 2,500 people per square mile versus 26,403 in New York. Compared with the likes of Dallas (3,645), Houston (3,662), Austin (3,358) and San Antonio (3,000), El Paso’s relative lack of population density could ultimately be a positive factor in limiting the spread of COVID-19.
Lastly, the diverse market will help El Paso weather the storm — to an extent. In particular, there’s the public sector that El Paso can lean on like the strong military presence via Fort Bliss and William Beaumont Army Medical Center, which employ nearly 50,000 people combined.
El Paso will continue to maintain a large force of border-related employees and agents. While it’s difficult to predict how public policy may affect military and border employment, the solid base of government jobs in El Paso should provide a strong hedge against a more prolonged economic downturn.
There will be some hurdles. Loans will take a bit longer to execute since third-party logistics are still being figured out. Loan proceeds and agency financing will also be impacted by a downward trend in rental collections for a period of time.
But as the situation continues to evolve, the industry is getting creative. As brokers, for example, we’re implementing virtual tours, among other things. And we’re helping owners get through any difficult times by analyzing their properties and finding ways to minimize their expenses and capitalize on any lost income potential.
At the end of the day, people will always need a place to live and there are few better places to invest in than multifamily housing, especially in markets with solid fundamentals like El Paso. It will get worse before it gets better, but there’s no question that the El Paso market will come back strong like it always has.
— By Jack Stone, director, Greysteel. This article first appeared in the April 2020 issue of Texas Real Estate Business magazine.