El Paso developers have a message for the Army: We want you—but only if the price is right. Despite an expected influx of 28,000 soldiers and their family members to the El Paso County, Texas, area, through 2012 multifamily developers in the area are wary of building for the military.
As part of the Base Closure and Realignment (BRAC) program, a recent base closing will bring the military personnel to Ft. Bliss, a base within the county. With existing supply in the area, the Department of Defense (DOD) estimates the El Paso area will need about 8,000 new units. The DOD did not return calls for comment.
While that sounds like a great opportunity for work-starved apartment developers, the construction activity has been less than frenzied. In fact, only 800 units have been built over the past three years in El Paso. “There’s room, and there are resources,” says Kathryn B. Dodson, economic development director for the City of El Paso. “We just haven’t seen a lot of apartments coming up.”
What’s the hold up? Uncertainty. Developers aren’t sure that they’ll be able to get financing, even in a market particularly begging for new stock. And even if their banks line up behind the plan, they’re wary of building for the military.
Fear Factors
For many developers, they simply want to know more about these 28,000 soldiers before they make major investments in the area. “Are they looking for apartments, homes, or can they live on post in barracks?” asks Mike Rouen, managing director of military housing for Seattle-based Pinnacle.
Right now, Rouen says the military isn’t sharing enough details about these people and when they’ll arrive in town. “Because it involves the movement of military personnel, nobody knows what the flow rate is,” he says. “The military is the only one that has that data right now. I’m not sure anyone is going to get way ahead on that until they’re sure who is moving and when they’re moving. If I build 4,000 units in El Paso tomorrow and that move gets delayed two years, I could be hurting.”
Still, even if the troops arrive and fill the units, there’s no guarantee that they can stay or afford where they’re living. That leads to lender uncertainty. Right now, the military provides soldiers about $900 in basic housing allowances in El Paso. Take out about $150 for utilities and that leaves about $750 for rent.
“It probably takes $925 in monthly gross rent to amortize new construction,” says Gary Sapp, president of the Southwest Division of Hunt Development Group, a private real estate development company based in El Paso. “We have a fairly significant shortfall in the average soldier’s base allowance for housing in order to underwrite new construction. That number [the housing allowance] ought to rise over time. But in a different world, with low rates and high leverage, it would be easier to bet on it.”
Even if those rents do go up, troops do deploy. “What we’re hearing from the credit markets is what you have here is housing built for a single employer,” Sapp says. “And that employer may move large portions of that employee base on very short notice. You have new risk factors in the underwriting at a time when there is not much appetite for new risk factors.”
Balancing Act
There are ways to mitigate that risk. The City of El Paso, desperate for new housing, is working on code changes to make it easier to build apartments and streamline the permitting and planning process. The government wants to use property tax revenue over a five-year period to reimburse developers that build more than 250 units for any fees, including stormwater runoff fees, parkland dedication fees, plan-checking fees, permit signing fees, environmental fees, and building permit fees.
“The city council is putting all of the incentives it can on the table,” Dodson says. “We’re trying to work to educate bankers and other lending institutions.”
Right now, Sapp thinks the best solution may be what Dallas-based Place Properties is doing with Independence Place. The developer and owner, which also builds student housing, is building units that are rented by the bed. This strategy allows two, three, even four people to live in one unit who can each contribute a portion of their housing allowance to the rent.
But that strategy wouldn’t work for married soldiers or families. “The near-term is that projects like Place Properties’ that have different mousetraps than traditional multifamily, where they can lever the housing allowance from a couple of soldiers to rent shared living space like student housing, will be successful.” Sapp says.
Place Properties, for one, is bullish on El Paso. “The BRAC realignments are in force,” says Brent Little, executive vice president and national development partner for Place Properties “There are a lot of troops movements that are going on right now. It’s phenomenal what’s happening there and the kind of demand they’re looking at.”
Still, without help, Rouen doesn’t see many of his peers following suit, trying to get new developments open by 2011 or 2012. “The lead time to restaff development and construction groups to get that done is a question,” he says. “But ultimately, it’s a question of business risk. How far ahead of this do [developers] really want to get, given the financial markets? If you build 2,000 apartment units, except for the military, I’m not sure that El Paso could readily accept that many units.”
