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Investors Take Notice as RGV Multifamily Market Emerges from Pandemic Lull

Pictured is The Monarch, a 200-unit development in Pharr, and one of the few projects coming to an RGV market that greatly needs more supply of Class A product. Developers of all types of housing are competing for sites in the region, driving land prices to 15-year highs.

By Brad Frisby, associate, NAI Rio Grande Valley

As the national economy and society as a whole move toward recovery from the COVID-19 pandemic, multifamily investors of all varieties, eager to deploy capital into the space, are increasingly looking at markets in the Rio Grande Valley (RGV).

While the region’s multifamily investment market has unquestionably experienced its share of decreased activity over the past 15 months, deal volume and velocity have really picked back up through the first two quarters of 2021.

Brad Frisby, NAI Rio Grande Valley

Brad Frisby, NAI Rio Grande Valley

Many investors that are targeting the RGV are banking on its solid fundamentals holding through the recovery and are eyeing deals with five- to 10-year holding strategies in mind. Although the RGV remains something of a seller’s market — many multifamily deals are trading at sub-6-percent cap rates — buyers are willing to pony up to be in this high-growth market.

This holds especially true when one considers the RGV as an alternative to Dallas, Houston or Austin. But it’s precisely from those markets that we continue to see an influx of capital looking for multifamily deals.

Prior to the pandemic, the annual combination of limited new deliveries and steady job growth in resilient industries like healthcare, education and logistics for international trade kept this market’s vacancy rate low and its pace of rent growth healthy. Now, as we emerge from the global health crisis, the market is reverting to those trendlines once again.

In the metro area of McAllen, the RGV’s largest city, the multifamily vacancy rate was approximately 3.5 percent at the end of the first quarter. The federal eviction moratorium likely has some bearing on the vacancy rate. In addition, the various forms of stimulus relief and federal aid have ensured that collection rates have remained close to their pre-pandemic levels.

But the general tightness of the market has held as developers have broken ground on new projects or received approval for others. Aside from the initial disruption last spring, development of new multifamily projects in the RGV has generally proceeded as planned.

The supply side of the market remains constrained. Despite the United States-Mexico border having been closed to nonessential traffic during the course of the pandemic, regional population growth has persisted, putting pressure on demand for housing of all types. In McAllen, demand for rental properties is especially high due to the city’s growth among young residents, many of whom are pursuing undergraduate or graduate degrees within its burgeoning higher education system.

To meet that demand, developers are racing to acquire and assemble tracts of land wherever possible. Raw land prices — as much as $100,000 per acre in some areas — in the RGV are the highest they’ve been since the years leading up to the Financial Crisis.

In terms of construction, local developers are dealing with high steel and lumber prices and labor shortages, just like the rest of the country. But demand for housing outstrips supply to such a heavy degree that even with record-high land and construction costs, developers are not slowing down. In addition, we are seeing more national and out-of-state developers enter the market, drawn to its strong fundamentals and population growth.

It bears mentioning that much of the new supply in the pipeline is affordable housing. Of the 900 or so new units that are slated to come on line in 2021, more than half are affordable residences that will be financed with Low-Income Housing Tax Credits. Approximately half of those affordable units have already been delivered.

In terms of market-rate Class A or B product, we expect to see somewhere between 300 and 400 new come on line in 2021. There’s no question that the market needs and is ready for more development of Class A properties, but the aforementioned economic constraints are keeping supply growth of this product type in check.

Supply growth throughout the RGV as a whole should be greater in 2022. Among the major projects that are slated for completion next year are La Sienna, a 300-unit community in Edinburg; The Monarch, a 200-unit complex in Pharr; and 4700 Ware, a 200-unit property in McAllen.

Rent growth for Class A product, of which new deliveries are scarce, has hardly skipped a beat. We are currently seeing rent growth of anywhere from 5 to 10 percent on a year-over-year basis within the Class A space. Demand for both affordable and market-rate units is expected to remain strong as job growth resumes at a healthy pace in 2021.

— This article originally appeared in the May 2021 issue of Texas Real Estate Business magazine. 

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‣ NAI Global
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