Holliman Column
With the current tsunami of double-digit devaluation hitting our national housing market sending most economists running for cover, times couldn’t be better for apartments. Multifamily real estate has proven over the long term to be a very wise investment that produces stable earnings and is not subject to the type of volatility that is common with other forms of real estate speculation. The apartment business model is a good one in that it has a direct linkage to the consumer. Other types of commercial real estate are more dependent on intermediary business relationships that stand between asset owners and the consumers ultimately provide their revenues. In any economy especially real estate it is always best to seek ways to tie revenue models as close to the demographics as possible. In commercial real estate multifamily is the best vehicle for doing that. The apartment market in Laredo is in a prime position to benefit from current economic conditions and is well positioned for expansion in 2011 after almost no gains in 2009 and modest gains in 2010.
Demographic Trends Favor Multifamily Developments
The demographic trends indicate positive momentum going forward in the rental housing and smaller multi-family units sectors. This momentum is the direct result of the continuing shift toward single earner and single person households. The greater Laredo MSA has a 36.2% population 18 years of age or younger in contrast to only 7.6% of the population being 65 years of age or older. This younger demographic is expected to be heavy-duty renters and will be looking to rent apartments at double-digit rates over the next 10 years. The Texas State Data Center projects Laredo MSA population numbers for 2020 to be in excess of 344,135 of which 38.4% will fall into what is called the heavy renter demographic. The City of Laredo’s total population is projected to grow at a rate that is double the rate for the entire State of Texas respectively. This bodes well for existing apartment owners, investors and developers.
Laredo Housing Composition Is Changing
Local household composition is shifting where the households that are most likely to own their own home – married couples with children – are remaining flat with only minimal gains and account for less than 25% of all households. Over 30% of new households in Laredo are single earner households which have the lowest home ownership rates and rely heavily on renting to sustain the family unit structure. These demographic shifts are expected to cause single-family home ownership rates to drop double digits by 2012.
In addition being a border city creates increased pressure on single-family home ownership as immigration will create even more new renters within the next decade. Data from the U.S. Census Bureau indicates over 2 million legal immigrants have entered our borders since 2008 and it is expected that 50% of the population growth of the United States will be immigrants with over 50% of all immigrants being renters.
Lenders Reluctant To Make New Loans
Credit markets also remain tight as local lenders are more reluctant to underwrite new home loans. Single family home appraised values have contracted significantly requiring substantial equity from borrowers. To add fuel to the fire a prolonged weaker job market has caused borrowers to have lower income debt ratios and prospective buyers are qualifying for less home now than before the recession. These factors will have a ripple effect that will trickle down to home builders as their projects will be forced to remain at a standstill. Over the next 18 – 24 months all future construction sprawl will be severely limited due to of a lack of liquidity from qualified buyers.
So in essence the bad news is good news for multi-family real estate as these factors will continue to provide positive long-term support for rental trends in Laredo.
Finding The Sweet Spot In Rental Rates
The holistic approach to the local rental game can be summed up in two words: rental rates. Developers that understand the power of targeted rental rates and get it right go on to real estate heaven. Conversely developers that get it wrong find themselves cast in rental purgatory and are punished with everlasting high vacancy rates and sub performing properties. What is the ideal rental rate? Well in order to answer that question a closer look at the local jobs and income numbers are in order. Data from the Bureau of Labor Statistics reveals some very interesting facts. The data shows the population growth numbers to significantly outpace State averages but the average hourly wage of $14.74 per hour is significantly lower than the Texas average hourly wage of $18.90 per hour. Taking the average hourly wage of $14.74 and multiplying it by 40 hours results in a gross pay of $589.60, backing out withholding tax with an average of two dependents leaves a net pay of $526.75. Multiply the net pay of $526.75 x 52 weeks equals $27,391 in annual earnings. The debt to income ratio or DTI is the percentage of a consumer’s monthly gross income that goes towards paying housing costs. The yearly gross income for a single household earner in Laredo is $27,391 / divided by 12 months equals $2,283 per month in total income. The monthly income of $2,283 x .28 equals “$639.12″ and that ladies and gentlemen is the sweet spot rental rate for the Laredo rental market. Basically in a nutshell this is the right number for a median apartment unit of two bedrooms two baths meaning you should price your rents according to this range for best overall results. Notwithstanding these type of gross rent numbers do not allow for luxury apartment developments so it is important that investors and developers proceed with caution and do not stray too far from the path leading to multi-family Nirvana.
