By Brad Frisby, director of land acquisitions, Rhodes Enterprises
Demand for housing of all types continues to outpace supply in the Rio Grande Valley (RGV), and developers’ best efforts to add much-needed product throughout the region appear to be reaching a crescendo.
Like the rest of the country, residential development in the RGV has been stymied and exacerbated by global supply chain disruption over the last year. Nor have developers in the region been spared from the pricing volatility of key construction materials, from basic building blocks like lumber and steel to more precise pieces such as air conditioning units and kitchen appliances.
These factors, along with rising labor costs generated by the reheating of the regional economy, have negatively impacted conventional multifamily construction timelines and budgets over the past 12 to 18 months. While traditional single-family projects have not been hit nearly as hard as their multifamily counterparts, the net result of all this activity has been a widening of the gap between housing supply and demand.
Though the regional vacancy rate for multifamily product is up on a year-over-year basis — about 4.5 percent today versus 3.5 percent at the end of the first quarter of 2021 — rent growth in this space is proceeding at a blistering pace. On average, rates are up 5 percent year-over-year throughout the region as developers have struggled to deliver much-needed inventory.
The market added less than 500 market-rate units in 2021 and will be hard-pressed to match or exceed this total in 2022. However, we could see an uptick in deliveries of traditional multifamily units in 2023, assuming lumber prices remain stable and supply chain networks become less entangled.
As a result of all these factors, there is a growing sense that volumes of new residential development will slow in the second half of the year, particularly with regard to single-family projects. This segment of the market is also impacted by factors unique unto the product type, such as mortgage rates, which are approaching five-year highs above 5 percent for a 30-year, fixed-rate mortgage.
Higher mortgage rates have contributed to potential homebuyers being increasingly being priced out, especially those targeting homes around $250,000 or higher.
Lastly, land prices are going through the roof. At this time last year, there was some speculation as to whether raw land prices, which were as high as $100,000 per acre in blue-chip locations, had hit their ceiling. That trend continued into the first quarter of 2022, although there are signs that it is receding.
On the positive side, the pace of development of affordable housing projects appears to be proceeding at more or less unabated levels. The RGV added about 900 new affordable housing units in 2021, the majority of which were financed with Low-Income Housing Tax Credits. We expect a slight drop in deliveries to hit the market by the end of 2022 due to tax credits being down in this year’s pool from the Texas Department of Housing & Community Affairs.
Healthy demand pitted against modulated supply has also served to further bolster the RGV’s presence on the radars of single-family and multifamily investors. While the region’s rent growth has been impressive by its own historical standards, it still pales in comparison to the blue bloods of Dallas, Houston and Austin, ensuring that investors that have been priced out of those markets can still find acceptable yields in the RGV.
Lastly, the regional economy continues to expand. The reopening of various bridges and ports of entry to Mexico has fueled demand in the shopping, dining and entertainment sectors, leading to an uptick in hiring across those businesses. The government, healthcare and transportation/warehousing industries are also experiencing positive job growth.
With these demand drivers seemingly entrenched and Texas as a whole fully reopened for businesses, we expect to see vacancy rates compress in 2022 while rents and home prices continue to rise. Consequently, investment demand for residential assets of all types should grow throughout the RGV, potentially pushing cap rates to record-low levels.
— This article originally appeared in the May 2022 issue of Texas Real Estate Business magazine.