Relative to past cycles, the multifamily market of the McAllen-Edinburg-Mission metro area has seen a record number of new deliveries of Class A product over the last four years.
The metro’s population has grown significantly during the current economic expansion. According to the U.S. Census Bureau, the population of the city of McAllen alone has increased by 9.5 percent over the past decade. Combined with a relatively low cost of living throughout the region, the market’s natural growth has prompted greater demand for multifamily product while also allowing more residents to gravitate to higher-quality housing.
Sam Tenenbaum, CoStar Group/apartments.com
With demand rising over the last few years and developers adding record volumes of new supply in order to meet it, 2019 purports to be a year in which developers focus more on leasing up existing projects rather than greenlighting or breaking ground on new ones.
To better understand the depth of supply additions to this market between over the last four years, consider fluctuations in the vacancy rate.
Vacancy Movement
In 2014, just before the building boom began, the market had a vacancy rate of 5.5 percent. At the peak of the construction cycle, which occurred in mid-2017, vacancy stood close to 14.5 percent. Today’s overall vacancy rate stands at 8.4 percent.
Approximately 1,800 Class A units were delivered from 2014 to 2017, which brought the market’s total volume of Class A product to about 5,000 units. The metro area’s total multifamily inventory is roughly 14,000 units, meaning Class A product now accounts for more than a third of the total supply, a very high proportion relative to markets of comparable size.
As the economy has marched deeper into the expansion, absorption has fallen from its highs during the building boom, though it remains strong. With development slowing, our expectation is that vacancies should continue to fall as leasing velocity remains consistent, eating away at the vacancy rate.
Rent Picture
According to CoStar Group’s data, which is based on thousands of rent observations collected each day through apartments.com, the average rent for a Class A unit in the McAllen area is approximately $900 per month.
Applying the standard 30 percent rent-to-income ratio for a Class A unit, we see that a renter needs to earn about $36,000 per year to comfortably afford such an apartment. That’s in line with the median household income in McAllen (about $40,000 per year), meaning even the more expensive apartments are attainable for most households.
However, most real estate investment trusts (REITs) publish their rent-to-income ratios, most of which hover around 20 percent. By using this ratio, the average Class A renter in McAllen needs to earn at least $54,000 to be able to afford a Class A unit. That’s certainly less affordable; however, McAllen’s economy continues to grow rapidly.
New properties are being delivered with the larger arrays of amenities. This is attracting younger tenants who are also drawn to the recently revitalized retail and restaurant scenes in downtown McAllen. The McAllen metro area has also seen a significant uptick in the number of entertainment users that have recently entered the market, which further encourages businesses seeking young talent to target the area. With this economic trend comes more young renters.
Year-over-year asking rents have remained relatively flat over the past 12 months and are expected to perform similarly throughout 2019. Part of that is due to higher vacancies in recent years. However, effective rents are actually showing stronger year-over-year gains as the market burns off concessions that were offered over the past few years as part of leasing up new construction. With limited development in the pipeline, our expectation is that effective rents will continue to rise faster than overall asking rents, potentially prompting development to once again pick up.
— By Sam Tenenbaum, market economist, CoStar Group/apartments.com. This article first appeared in the May 2019 issue of Texas Real Estate Business magazine.