These days, first-time investors in the Rio Grande Valley (RGV) multifamily market are in for a bit of education.
Misconceptions about the RGV are common due to the market’s actual proximity to the Mexican border and lack of proximity to other major metros, as well as the Trump administration’s dicey relationship with our neighbor to the south.
In reality, the area is an attractive, stand-alone market filled with growth potential. Education, healthcare, retail, international trade, agriculture, oil & gas, port activity — the RGV has it all.
Brandon Miller, ARA Newmark
Hidalgo and Cameron counties make up the fifth- and ninth-largest MSAs in Texas with a combined population in excess of 1.2 million. As a result, numerous investors from larger Texas MSAs, as well as out-of-state investors, are targeting multifamily opportunities in the RGV.
ARA Newmark is currently marketing an 84-unit asset at a high-density intersection in the South Texas market. This metro is awash with high-end retail, healthcare and single-family developments and is thus attracting residents from a variety of backgrounds. Within the first two weeks of marketing, the asset drew six preemptive offers from a diverse buyer base that included two out-of-state buyers.
The volume of retail growth in the Rio Grande Valley in recent years has been astounding specifically, along the Expressway 83 corridor as one travels west from Pharr toward Mission. This area has experienced an exceptional influx of high-end retailers, power centers and grocery-anchored strip centers over the past few years.
The RGV’s high level of development would not be possible without existing and future growth opportunities in all asset classes of commercial real estate.
The La Plaza Mall, one of Simon Property Group’s highest-grossing malls in the country, is perhaps the most visible manifestation of the RGV’s growth. With 1.2 million square feet of retail space, La Plaza is already the largest mall in South Texas and is now undergoing a $100 million-plus expansion that will deliver an additional 245,000 square feet of retail space, simply to keep pace with demand.
East of McAllen lies the Rio Grande Valley Premium Outlets in Mercedes, Valle Vista Mall in Harlingen, the Sunrise Mall in Brownsville and several major retail establishments in between. This collection of retail properties attests to the RGV’s status as a top shopping destinations for both South Texas and Northern Mexico. As a result of this distinction, continued growth is expected, including in the multifamily sector.
International Interest Rises
Many developers who are native to the RGV operate chiefly in the multifamily space alongside developers that specialize in secondary or tertiary markets. Such groups include Domus, Vantage Communities, Brownstone and M Group Development.
Major players on the investment side of the multifamily market include Juniper Investment Group, Raybec, Key Real Estate and Vesta, to name a few.
But for the most part, multifamily investors in the RGV are well-capitalized private groups from the U.S., and, to a slightly lesser extent, Mexico. Though foreign capital investment in multifamily properties is not as prevalent in the RGV as it is to other major metros in Texas, the region is slowly beginning to attract interest from overseas investors.
In terms of notable deal structures and financing considerations in the RGV, there appears to be a heavier focus on CMBS loans, a trend representative of South Texas as a whole. Fannie Mae and Freddie Mac, which tend to be more competitive in major markets, have been losing out on new acquisition and refinance opportunities to smaller banks and CMBS lenders down south.
Agencies are taking a more conservative approach with lower loan-to-value (LTV) ratios and higher debt service coverage ratios. However, this is primarily a factor of the market and not the specific assets. As a result, CMBS lenders have been able to get more aggressive and are currently the predominant lenders in the region. Over time, agencies will likely reconsider their lending strategies in South Texas and become more competitive in this space — opportunity is knocking.
— By Brandon Miller, associate, ARA Newmark. This article first appeared in the August 2017 issue of Texas Real Estate Business magazine.