|Texas Quarterly Apartment Report||Texas Quarterly Apartment Report||Luis B. Torres, Harold D. Hunt, Clare Losey, Kristina Richter, and Tyler Rogers||2021-06-01T05:00:00Z||research-article||Residential|
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Texas Economic Overview
Economic activity within Texas moderated during first quarter 2021 but remained on the path to recovery despite weather-related disruptions in February. Robust hiring in March resulted in solid first-quarter payroll growth, although joblessness in the Lone Star State was still higher than the national average. Moreover, inflation-adjusted headline wage numbers flattened compared with year-ago levels while initial unemployment claims surged unexpectedly. On the bright side, oil prices rebounded, contributing to increased export values. As Gov. Greg Abbott removed business restrictions amid downward-trending new COVID-19 cases, consumer confidence improved and supported an optimistic outlook on the service-providing sector. The relative health of the state's economy and favorable business practices attracted migrants and firms from other parts of the country, bolstering population growth and housing demand. Containment of the pandemic is vital as additional waves of infection, although becoming less likely as vaccination rates increase, can weigh on consumer behavior and spending and slow the return to pre-pandemic conditions. For additional commentary and statistics, see the Texas Real Estate Research Center's Outlook for the Texas Economy.
The Texas Residential Construction Cycle (Coincident) Index, which measures current construction levels, increased to its highest level in a year due to improved industry employment, wages, and construction values. Construction activity is expected to remain strong in the coming months as indicated by the Residential Construction Leading Index, which rose to an all-time high in March amid elevated weighted building permits and housing starts, offsetting growth in the ten-year real Treasury bill (Figure 1). Similarly, the leading indexes in North and Central Texas trended upward, but Houston's metric continued to decline, suggesting an impending slowdown in construction (Figure 2).
Overall market trends improved during March as more Metropolitan Statistical Areas (MSAs) started to register higher year-over-year changes in both occupancy and rents, while other MSAs continued to record fewer negative changes in occupancy rates and, in some cases, other registered less negative numbers in both rent and occupancy change. This caused the Texas average to register a negative value in occupancy change but a positive in rent change. Due to the difficulties facing the oil industry, Midland/Odessa’s apartment market continued to struggle during March but it did show some improvement while still registering both negative rent growth and negative changes in occupancy rates. Additionally, Austin, Houston, and San Angelo registered negative numbers in both categories (Figure 3).
Texas nonfarm employment added 99,000 jobs in March, rising 4.3 percent on a seasonally adjusted annual rate (SAAR) despite shedding 2,400 jobs in February during Winter Storm Uri. The surprisingly strong gain pushed the Dallas Fed's annual employment forecast up from a 6.0 to a 6.6 percent increase to 13.21 million workers. Hiring in Houston remained robust in the first three months of the year, recovering 34,800 jobs and almost matching the previous quarterly gain. Total payrolls, however, were still 6 percent off from pre-pandemic levels, a larger gap than the other major metros. Austin added 16,700 employees in the first quarter, exceeding the state in terms of SAAR growth (5.5 percent). San Antonio and Dallas registered net quarterly increases of 10,600 and 10,100 workers, respectively. Payroll expansions were largely concentrated in the leisure/hospitality, retail trade, professional/business services, and education/health services industries across the major metros. Only in Fort Worth did employment decline, shedding 2,000 positions during the first quarter due to Winter Storm Uri. Goods-producing employment decreased, but the transportation/utilities sector was the main deterrent to growth.
Texas' goods-producing sector regained a record-breaking 32,100 positions in March, pushing the first-quarter net total to 38,500 workers. Amid increasing oil prices, energy-related employment rose by 10,600 jobs in the first three months of the year but remained more than a fifth below year-ago levels. Recovering global economic conditions supported the state's manufacturing industry, which added 9,200 employees, nearly half of which were hired in Dallas or San Antonio. Durable-goods payrolls expanded every month in the first quarter, resulting in a 7,900-job gain. Meanwhile, construction payrolls had sluggish growth the first two months of the year but accelerated in March, adding 18,700 quarterly jobs.
Despite Texas' service-providing sector being the hardest-hit major industry last April, employment fell only 3.1 percent relative to the February 2020 peak (compared with the 3.6 percent nonfarm decline) after hiring 97,100 workers in the first quarter. Leisure/hospitality recouped 20,500 jobs in 1Q2021, but arts/entertainment/recreation payrolls remained a fifth below pre-pandemic levels. On the other hand, the transportation/warehousing/utilities industry added 10,700 positions, surpassing year-ago employment by 6.6 percent.
Climbing oil prices, accelerating vaccination rates, and optimistic national economic data during the first quarter resulted in higher growth and inflation expectations for 2021. The ten-year U.S. Treasury bond yield increased to 1.2 percent in March, almost reaching pre-pandemic levels. The spread between apartment capitalization rates and the ten-year Treasury yield started to decrease after 3Q2020. The decreasing spread indicated less risk and profitability in apartment real estate (Figure 4). This trend was helped by the increase in the ten-year Treasury yield. Increasing vaccination rates has reduced the uncertainty surrounding the end of the pandemic, allowing for the full reopening of the economy and reducing the risk on multifamily cap rates.
Overall apartment cap rates for Houston and San Antonio remain the highest, followed by Dallas-Fort Worth (DFW) and Austin. The spread with the ten-year Treasury bill continued to decrease in 1Q2021. Austin continues to be the least risky and lowest return market for multifamily real estate based on its spread with the ten-year Treasury bill (Figure 4).
The number of Texans filing initial unemployment insurance claims shot up to 370,200, its highest level since May 2020, after increasing the last three weeks of the month. The surge was unexpected amid downward-trending new COVID-19 cases and the termination of capacity restrictions for businesses on March 10. Initial claims ended the month higher within the major MSAs as well. Texas' average weekly continued unemployment insurance claims, however, it declined for the eighth consecutive month, suggesting improved conditions for laid-off workers seeking new job opportunities. Nevertheless, the labor market still has a long road to recovery with total claims six-and-a-half times greater than pre-pandemic levels a year ago due to the rise in initial claims. Anecdotal evidence from the service sector points toward the lack of available applicants and generous unemployment benefits as major impediments in rehiring workers. To eliminate the incentive of remaining unemployed, Texas is opting out of further federal unemployment compensation related to the COVID-19 pandemic effective June 26, 2021. This will reduce minimum unemployment payments from $19,240 a year to $3,640 a year.
Despite the increase in hiring during March, Texas' unemployment rate was unchanged at 6.9 percent, still greater than the national rate of 6 percent, as the size of the state's labor force expanded, pushing the labor force participation rate to 62.3 percent. Joblessness in Houston also flattened, albeit at a higher rate of 8.3 percent, while the size of the local labor force expanded for the second straight month. On the other hand, unemployment inched down to 7 percent in Fort Worth and 6.8 and 6.7 percent in San Antonio and Dallas, respectively. The metric remained lowest in Austin, where the jobless rate slid to 5.5 percent. The decrease in unemployment after 2Q2020 is important for multifamily vacancies given the relationship between unemployment rates and vacancy rates. The longer unemployment rates remain elevated, the stronger the negative impact on vacancies and rents. As expected, the increase in the unemployment rate during 2Q2020 pushed up vacancy rates in the major metros, and the declining unemployment rates have alleviated some of the pressures on rising vacancy rates (Figures 5-8). In addition, the eviction moratorium and the Federal stimulus that included transfer payments through stimulus checks and renter/landlord assistance has pushed down vacancy rates.
According to the U.S. Census' Household Pulse Survey, 10 percent of Texas renter-occupied households were behind on their payments during March, lower than the national rate of 14 percent (Table 1). Renter households in DFW registered a lower value of 8 percent, contrasting with Houston's value of 18 percent, recording a similar value than what was observed at the national level but higher than the state. This is an improvement to the December pulse survey numbers.
On the respondents’ ability to pay next month’s rent, 23 percent of renter households in Texas stated they have no confidence or only slight confidence in making their rent payment next month, equal to the 31 percent observed at the U.S. level (Table 2). DFW recorded a lower value of 18 percent, contrasting with Houston higher percentage of 35 percent. This paints a much better picture for both renters and landlords going forward compared with the December pulse survey results.
Forty-six percent of Texas respondents who were not current on rental payments said they were either very likely or somewhat likely to be evicted in the next two months compared with 42 percent nationwide (Table 3). That same metric, however, was higher in DFW and Houston, both registering 54 percent. Even though the pulse survey results improved from December to March, the multifamily rental market outlooks in both DFW and Houston are worrisome due to the high numbers of households that could be evicted. Federal eviction moratoria are in place until June 30, 2021. Continued household stability is essential to Texas' economic recovery.
Emergency Rental Assistance Programs and Eviction Moratorium
The Federal Government's Emergency Rental Assistance (ERA) programs enacted by Congress are assisting households that are unable to pay rent or utilities, and they are alleviating some of the eviction problems facing the apartment market due to the pandemic. They provide relief to landlords who haven't received rent payments, affecting their ability to cover operating costs and make mortgage payments. Two separate programs have been established: the ERA1, which provides up to $25 billion under the Consolidated Appropriations Act, 2021, which was enacted Dec. 27, 2020; and the ERA2, which provides up to $21.55 billion under the American Rescue Plan Act of 2021, which was enacted March 11, 2021. The funds are provided directly by the U.S. Treasury to states, U.S. territories, and local governments.
Households eligible to receive assistance must demonstrate that one or more individuals within the household has qualified for unemployment benefits or experienced a reduction in household income, incurred significant costs, or experienced other financial hardship due to the Corona virus pandemic; one or more individuals within the household can demonstrate a risk of experiencing homelessness or housing instability; and the household has a household income at or below 80 percent of the area median income. There are some differences in eligibility between ERA1 and ERA2, like the introduction in ERA2 that a low-income family is also eligible to receive assistance, but overall the eligibility requirements are similar.
The Texas Rent Relief Program is for both tenants and landlords. Through the program, they can apply for unpaid or future rent assistance. In the case of the tenant application, households can apply for unpaid or future rent or utilities. They can apply directly and invite their landlord to participate. If the landlord does not want to participate, they can still apply by themselves. The landlord can also apply for unpaid or future rent on behalf of tenants. All payments must be used to satisfy the tenants' rental obligations, and the tenant must sign the application.
The Texas Relief Program can help renters with past-due, current, and up to two months of expected rent costs, utility, and home energy expenses starting as far back as March 13, 2020. After the initial three months of current/future assistance, the tenant can apply for three additional months of assistance if funds are still available. This means households could potentially request assistance for up to 11 months of past-due bills.
The ERA1 paid $1.3 billion to the Texas state government. Local governments of Texas' major MSAs received funds as follows: Austin, $47.1 million; Dallas-Fort Worth, $201.2 million; Houston, $196.6 million; and San Antonio, $60.5 million. ERA2 allocated $1 billion for the state, $64 million for Austin, $170.2 million for DFW, $207.4 million for Houston, and $60.6 million for San Antonio.
The renter assistance will provide some needed help to households facing eviction when the national eviction moratorium ends June 30, 2021. The March 2020 eviction moratorium has pushed down the number of judgments in favor of the landlord and filings by the landlord in Harris County to unprecedented levels not observed even during normal business cycle conditions. After reaching a trough in August 2020, those numbers have started to increase. The only issue with the eviction data is that it lags for the entry of new cases pushing up most recent numbers. In addition to the eviction moratorium, transfer payments like additional unemployment benefits provided by the federal government have helped households continue to make rent payments on time even after finding themselves unemployed.
For an analysis of Austin's, DFW's, Houston's, and San Antonio's apartment markets (including tables and figures), download the full report.
Previous reports available:
2020: 1Q2020, 2Q2020, 3Q2020, 4Q2020
2019: 1Q2019, 2Q2019, 3Q2019, 4Q2019
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