|Texas Quarterly Apartment Report||Texas Quarterly Apartment Report||Luis B. Torres, Harold D. Hunt, Clare Losey, Kristina Richter, and Garret Newman||2021-03-15T05:00:00Z||research-article||Residential|
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Texas Economic Overview
The COVID-19 pandemic didn't just end the longest economic expansion in Texas' history, it also pervaded every facet of the state's economy. Global shutdowns in the spring weighed heavily on the manufacturing, energy, and trade sectors as industrial output plummeted, and the West Texas intermediate (WTI) crude oil spot price dropped from an averaged $58 per barrel in 2019 to $39 per barrel in 2020.
Conditions improved as factories reopened with social distancing and mask-wearing mandates. Cautious public and consumer sentiment had a greater impact on oil demand and the leisure/hospitality sector via extremely reduced business and pleasure travel, dining at restaurants, and trips to museums and other contact-intensive recreational businesses. Many of the direct stimulus checks Americans received went to paying off debt, building up savings, or paying rent/mortgage rather than being spent on consumer goods and services.
Labor-market conditions deteriorated compared with strong 2019 levels. Layoffs could have been worse if not for federal loans to small businesses that incentivized employee retention. One of the few bright spots, Texas' housing market boomed with record sales amid historically low interest rates, although depleted inventory is a significant headwind in 2021. The nature of the pandemic-induced recession for 2021, however, suggests a silver lining. If the virus is contained through vaccinations, immunity, and continued measures to prevent the spread of the disease (e.g., social distancing, mask wearing), economic activity and mobility may recover to pre-pandemic levels in the short-term. For additional commentary and statistics, see the Center's Outlook for the Texas Economy.
The Texas Residential Construction Cycle (Coincident) Index, which measures current construction activity, flattened in 2020 as industry hiring was sluggish during the pandemic, particularly in multifamily. The Texas Residential Construction Leading Index, however, reached an all-time high in 2020 due to record-low interest rates and strong building permits and housing starts, indicating construction activity will pick up in the new year especially in single family (Figure 1). These metrics in Texas' major Metropolitan Statistical Areas (MSAs) trended upward, especially in Austin and Houston, supporting a positive outlook (Figure 2).
Overall market trends continued to decline during December as more MSAs started to register year-over-year lower changes in both occupancy and rents, while other MSAs continued to record negative changes in occupancy rates, and in some cases other registered negative numbers in both rent and occupancy change. This caused the Texas average to continue to register a negative value in both rent and occupancy change. Due to the difficulties facing the oil industry, the apartment market in Midland/Odessa continued to struggle during December, registering both negative rent growth and negative changes in occupancy rates. Additionally, the Austin, Houston, and Laredo MSAs registered negative numbers in both categories (Figure 3).
Texas shed a record-breaking 431,150 nonfarm jobs in 2020, amounting to 3.4 percent of payrolls, the greatest annual percentage decline since 1945 but less than the national loss of 5.8 percent. Moreover, Texas' labor force participation rate ticked down to an all-time low of 62.7 percent as more than 81,500 Texans exited the labor force amid pandemic-related disruptions and uncertainty. Women in the 25-to- 34 year age group were more likely than men to leave the labor force to take care of children amid in-person school closures. The total contribution to the labor-force contraction, however, was double for men than for women in percentage terms.
Houston shed 122,700 nonfarm jobs, a steeper decline than the state average in percentage terms (3.9 percent). Leisure/hospitality accounted for more than a third of the decrease, followed by the goods-producing sector. The other major MSAs registered the largest drops in leisure/hospitality and education/health services employment. Although Fort Worth regained all the retail layoffs from the previous year plus some, total payrolls still shrank by 35,500 employees (3.3 percent). Transportation/utilities was the bright spot in San Antonio with double-digit annual growth, but the metro still cut 33,400 positions altogether (3.1 percent). In Austin and Dallas, hiring in the financial activities sector offset some of the overall contractions to cap losses at 23,000 (2.1 percent) and 49,250 jobs (1.8 percent), respectively.
Texas' goods-producing sector decreased by 87,000 workers with 45,000 of the discharges energy-related. Due to still-diminished employment levels from the 2015-16 oil bust, however, 2020 mining/logging losses were less than half compared with the mid-decade industry downturn, with hiring resuming, albeit modestly, in the fourth quarter. More than 24,300 manufacturers were laid off, mostly in Houston and Fort Worth's durable-goods industry. While, the construction industry laid off more than 17,700 employees with the majority of losses in Houston.
Service-providing employment marked its worst year on record (series starting in 1990), falling by 344,100 positions annually. Coinciding with the economic shutdown, almost 1.3 million jobs were lost in March and April alone. On the subsector level, only transportation/utilities and financial activities eked out modest gains, increasing 1.3 and 1.2 percent, respectively. Leisure/hospitality payrolls declined by 13.9 percent, or 194,000 jobs. Education/health services shed 46,800 positions. Other service-providing services, including personal/laundry services, posted the second-largest percentage decrease of 5 percent.
Economic uncertainty surrounding the COVID-19 pandemic prompted investors to purchase safe-haven assets at an accelerated rate during the first half of the year, pulling interest rates to historically low levels. Expansionary monetary measures by the Federal Reserve and development on the vaccine front generated both higher inflation and growth expectations, pushing interest rates up in the fourth quarter, but the ten-year U.S. Treasury bond yield still fell 125 basis points in 2020, averaging a record-low 0.9 percent. Even before the pandemic, the spread between apartment capitalization rates and the ten-year Treasury yield increased at the end of 2019 and continued up to 3Q2020. This increased spread indicated increased risk and profitability in apartment real estate (Figure 4). This trend ended during 4Q2020 due to the increase in the ten-year Treasury yield. The announcement of two COVID-19 vaccines at the end of 2020 reduced the future uncertainty created by the COVID-19 pandemic reducing the risk on multifamily real estate.
Overall apartment cap rates for Houston and San Antonio remain the highest, followed by DFW and Austin. The spread with the ten-year Treasury bill decreased during 4Q2020. 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).
Almost 4.2 million initial unemployment insurance claims were filed during 2020 (with more than 40 percent submitted in March and April), about three-and-a-half times the number in 2009 compared with just two-and-a-half times nationally. Although the data around the holidays is more volatile, Texas claims climbed in December as COVID-19 cases surged, a divergence from the U.S. eight-month downtrend. Meanwhile, the statewide unemployment rate rose more than 4 percentage points annually to average 7.7 percent. Among the major MSAs, joblessness was highest in Houston, where the rate shot up to 8.6 percent due to a higher-proportion of energy-related jobs in the metro. The metric in San Antonio and DFW was lower than the state average at 7.3 and 7.1 percent, respectively, but Austin maintained the lowest rate of 6.2 percent, although unemployment still increased considerably. The decrease in unemployment after the 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 unemployment rate increases during 2Q2020 pushed up vacancy rates in the major metros, but the eviction moratorium and the Federal stimulus that included transfer payment trough stimulus checks and increases in unemployment benefits pushed down vacancy rates (Figures 5-8).
According to the U.S. Census' Household Pulse Survey, 17 percent of Texas renter-occupied households were behind on their payments during December, lower than the national rate of 18 percent (Table 1). Renter households in DFW registered a lower value of 15 percent, contrasting with the Houston MSA value of 18 percent, recording a similar value than what was observed at the national level but higher than the state.
On the respondents’ ability to pay next month’s rent, 37 percent of renter households in Texas stated they have no confidence or only slight confidence in making their rent payment next month, higher than the 31 percent observed at the U.S. level (Table 2). Both the DFW and Houston MSAs recorded higher percentages of 42 and 40 percent, respectively. This is a troubling sign for both renters and landlords going forward.
Fifty-seven percent of Texas respondents who were not current on rental payments stated the likelihood of eviction to be either very likely or somewhat likely in the next two months compared with 52 percent nationwide (Table 3). That same metric, however, was higher in DFW at 74 percent compared with Houston, which registered 49 percent. The DFW multifamily rental market outlook is worrisome due to the high numbers of households that could possibly be evicted. Federal eviction moratoriums are in place until March 31, 2021. Continued households' stability is essential to Texas' economic recovery.
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
2019: 1Q2019, 2Q2019, 3Q2019, 4Q2019
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