|Texas Quarterly Apartment Report||Texas Quarterly Apartment Report||Luis B. Torres, Harold D. Hunt, Tyler Rogers, and Weiling Yan||2021-12-10T06:00:00Z||research-article||Residential|
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Texas Economic Overview
Economic activity within Texas improved during the third quarter, and strong growth is expected for the remainder of the year. Increased hiring in September resulted in solid third-quarter payroll expansion, although joblessness in the Lone Star State was still higher than the national average. Moreover, headline wage numbers accelerated in real terms despite rising inflation. Oil industry activity accelerated as oil prices increased, and the global economic recovery continued. Meanwhile, retail sales surpassed a record-breaking $50 billion, but real commodity exports decelerated during the quarter. Containment of the pandemic is vital as additional waves of infection, mainly from the Omicron variant, can weigh on consumer behavior and slow the return to pre-pandemic conditions.
Increasing COVID-19 vaccination rates have contributed to the reopening of the economy. Based on the most current data from the Texas Department of State Health Services, 61.3 percent of the state's population 12 years and older is fully vaccinated1. The Delta variant appears to have reached its extreme point as the numbers of COVID-19 cases and hospitalizations continue to fall after peaking at the end of August. The announcement of a COVID-19 pill that reduces the risk of hospitalization and dying has considerably reduced the uncertainty on halting the pandemic, improving future economic expectations. Still, the National Institute of Allergy and Infectious Diseases is concerned about a possible surge during the winter months as temperatures drop and the appearance of the Omicron variant increases worries of future outbreaks. For additional commentary and statistics, see the Texas Real Estate Research Center's Outlook for the Texas Economy.
The Residential Construction Cycle (Coincident) Index, which measures current construction levels, decreased nationally but increased slightly for Texas as improvements in industry wages and employment outweighed depressed construction values. Construction activity is expected to slow in coming months as indicated by the Texas Residential Construction Leading Index (RCLI), which fell amid lower weighted building permits and housing starts, while the ten-year real Treasury bill yield decreased (Figure 1). Austin and Houston's leading index reflected statewide fluctuations, while the trend decreased in the former and increased slightly in the latter. Dallas-Fort Worth (DFW) and San Antonio's indexes decreased, trending downward despite issuing more building permits and elevating residential starts (Figure 2).
Overall apartment market trends looked strong through September as the majority of the Metropolitan Statistical Areas (MSAs) registered year-over-year positive changes in both occupancy and rents. Only San Angelo, El Paso, and Lubbock registered negative annual changes in occupancy rates, while Midland and Odessa continued to register negative annual rent growth. This caused the Texas average to register positive changes in both occupancy and rent (Figure 3).
Texas nonfarm employment added 95,800 jobs in September, rising 6.7 percent on seasonally adjusted annual rate. Based on the state's solid employment performance, the Dallas Fed forecasts annual employment to increase 5.1 percent in 2021, reaching 13 million workers by December. Hiring in Houston surged during the third quarter, recovering 51,400 jobs compared with the 23,500 positions added during the second quarter. Despite registering the highest number of job gains of the four major MSAs, Houston payrolls remained 3.7 percent below pre-pandemic levels. Austin added 34,000 employees, more than doubling employment gains from the second quarter as the metro benefited from its substantial high-tech sector, which can socially distance and has prospered during the pandemic. Employment increased precipitously in Fort Worth, gaining 30,700 positions after increasing payrolls by just 400 workers in the previous three months. Only hiring in Dallas and San Antonio slowed quarter over quarter, but they still registered quarterly increases of 36,000 and 9,300 workers, respectively. Payroll expansions across the major metros were largely concentrated in the professional/business services and education/health services industries, while goods-producing employment mainly elevated due to rising construction jobs.
Texas' goods-producing sector gained 26,500 jobs during the third quarter after losing 16,700 positions in the previous quarter. Amid increasing oil prices, energy-related employment rose by 7,800 jobs but remained around 16 percent below pre-pandemic levels. Recovering global economic conditions supported the state's manufacturing industry, which added 12,000 employees, while durable-goods payrolls recorded a 6,100-job gain. Construction payrolls expanded this quarter, adding 6,700 jobs after losing jobs in four consecutive months from April to July.
Texas' service-providing sector recovered nearly all jobs lost due to the pandemic, adding 203,400 workers during the third quarter. Leisure/hospitality recouped 28,400 jobs, but arts/entertainment/recreation payrolls remained almost 15 percent below pre-pandemic levels. On the other hand, the transportation/warehousing/utilities industry added 31,400 positions, surpassing pre-pandemic employment by 2.6 percent.
With monetary policy possibly normalizing, starting with the Federal Reserve Bank's tapering of bond purchases, economic growth forecasts for the coming years point to a slow return to the long-run structural trend as the initial and strongest stage of recovery likely reached its peak. It's becoming clearer that inflation pressures will be permanent versus temporary. The ten-year U.S. Treasury bond yield decreased to 1.5 percent during 3Q2021 but was down from pre-pandemic levels of 1.7 percent during 4Q2019. The spread between apartment capitalization rates and the ten-year Treasury during 3Q2021, reverting the downward trend observed during the previous three quarters. The upsurge in the spread indicated more risk and profitability in apartment real estate (Figure 4). The increase in the spread was because of a decrease in the yield for the ten-year Treasury bill due to a lower expected real return as a consequence of lower anticipated future potential growth for the U.S. economy.
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 increased in 3Q2021. 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).
Texas' unemployment rate decreased to 5.6 percent, still higher than the national rate of 4.8 percent. The size of the state's labor force expanded while the labor force participation rate reached 62.4 percent. Texas' major metros reported lower unemployment rates than the statewide average, except in Houston where joblessness fell to 5.8 percent. Unemployment inched down to 5 percent in Fort Worth and fell in San Antonio and Dallas to 4.9 and 4.8 percent, respectively. Joblessness remained lowest in Austin, where unemployment slid to 3.8 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 in 2Q2020 pushed up vacancy rates in the major metros. Declining unemployment rates have alleviated some of that vacancy pressures (Figures 5-8). The eviction moratorium and the Federal stimulus that included transfer payments through stimulus checks and renter/landlord assistance has held down vacancy rates. Also, increasing vaccination rates that have allowed for the reopening of the economy, accompanied by strong job growth, has contributed to decreasing vacancy rates. Going forward, even with the U.S. Supreme Court lifting the ban on eviction on Aug. 26,2021, vacancy rates should continue to fall.
According to the U.S. Census' Household Pulse Survey, 22 percent of Texas renter-occupied households were behind on their payments during September, higher than the national rate of 15 percent (Table 1). Renter-households in DFW registered the same value observed at the national level, contrasting with the Houston MSA value of 23 percent, a higher value than what was observed at the national and state levels. The results are higher for Texas and Houston compared with the June pulse survey numbers.
On the respondents' ability to pay next month's rent, 31 percent of renter households in Texas have no confidence or only slight confidence in making their rent payment next month. This is higher than the 24 percent observed at the U.S. level (Table 2). The DFW MSA recorded a lower value of 21 percent, compared with Houston's 32 percent. With the exception of Houston, where renters' ability to pay next month's rent deteriorated, overall conditions remained unchanged compared with the June pulse survey results.
When considering Texas respondents who were not current on their rental payments, 58 percent of these households stated the likelihood of eviction to be either very likely or somewhat likely in the next two months. This is compared with 42 percent nationwide (Table 3). That same metric, however, was lower in DFW and Houston, registering 24 and 39 percent, respectively. Both the DFW and Houston multifamily rental market outlook improved due to the decrease in the number of households that could be evicted. Continued household stability is essential to Texas' economic recovery.
ENHANCED MULTIFAMILY OUTLOOK FROM COVID-19 IMPACT
- Various factors have contributed to a major turnaround in the apartment market in 2021, allowing it to surpass pre-pandemic levels of occupancy and rent growth:
- The fiscal stimulus served as a bridge for unemployed workers by not allowing their incomes to fall drastically until they re-enter the labor force.
It also prevented businesses from closing permanently.
- Increasing vaccination rates have contributed to the reopening of the economy, especially benefiting service industries that cannot socially distance.
- The lack of single-family homes available for sale, especially those priced below $300,000, has caused strong home price growth, assisting the apartment market.
Some households may have found themselves priced out of the market and will continue to be renters.
- Economic growth, demographic trends (such as young population and migration from out of state), and a limited supply of single-family homes available for sale combined with strong price growth will help drive Texas apartment demand in the remainder of 2021 and should continue during 2022.
- Evictions should continue to increase after the U.S. Supreme Court lifted the ban on eviction on Aug. 26,2021.
- Evictions have been kept low due to government policies, but they are no longer seen as a catastrophic issue facing the apartment market.
- Recovery in the labor market and government transfers benefited households that in the past were temporarily unable to make rent payments on time.
- Unfortunately, some households will probably be forced to change their current living arrangements, but this would not represent the majority of the rental market.
- Eviction increases are expected to be concentrated in type Class C and D properties and would most likely affect small property owners.
- The outlook has changed considerably from catastrophic at the onset of the pandemic to a positive outlook.
- The appearance of new variants like Delta and Omicron have increased uncertainty surrounding the end of the pandemic. A full recovery cannot be secured until the virus is under control.
The Texas Real Estate Research Center estimated 2021 and 2022 apartment vacancy rates and effective rent percent changes for the major MSAs (Tables 4 and 5).
Harris County Evictions and Judgements Rise
The March 2020 eviction moratorium pushed down the number of eviction judgments in favor of the landlord and eviction filings by the landlords in Harris County to unprecedented low levels not observed even during normal business cycle conditions (see figure). After filings reached a trough at the end of June 2020 and a low of eviction judgements at the end of September 2020, numbers began increasing quickly during 2021. The increase in evictions judgements started a year before the U.S. Supreme Court lifted the ban on eviction on Aug. 26, 2021, but they accelerated after the ban was lifted. Eviction judgements are probably further behind than they ordinarily would be due to the backlog facing the Harris County court system. They’re expected to increase going forward.
1 Data up to September 27, 2021. Source: Texas Department of Health Services
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:
2021: 1Q2021, 2Q2021
2020: 1Q2020, 2Q2020, 3Q2020, 4Q2020
2019: 1Q2019, 2Q2019, 3Q2019, 4Q2019
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