|Texas Quarterly Apartment Report||Texas Quarterly Apartment Report||Luis B. Torres, Harold D. Hunt, Tyler Rogers, and Emma Garza||2021-08-27T05:00:00Z||research-article||Residential|
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Texas Economic Overview
Economic activity in Texas improved during second quarter 2021 and is expected to continue its strong growth for the remainder of the year. Improved hiring in June resulted in solid second-quarter payroll growth, although joblessness in the Lone Star State was still higher than the national average. Moreover, inflation-adjusted headline wage numbers flattened due to supply bottlenecks, generating price pressures and driving up inflation. On the bright side, oil industry activity grew as oil prices increased and the global economic recovery continues. 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.
The economic recovery continues due to increasing COVID-19 vaccination rates that have allowed the reopening of the economy. Based on the most current data from the Texas Department of State Health Services, 54.5 percent of the state's population is fully vaccinated1. Unfortunately, after months of decline in COVID-19 cases, the number of new cases has increased because of the number of people not yet vaccinated and the emergence of the Delta variant, which has shown to be more contagious. This has increased uncertainty surrounding the end of the pandemic. Until the virus is beaten, a full recovery cannot be secured. 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, elevated nationally and within Texas due to improved industry wages, employment, and construction values during June. Construction activity is expected to remain strong in coming months as indicated by the Texas Residential Construction Leading Index, which rose to a record high in June amid elevated weighted building permits and housing starts. Additionally, the decrease in the ten-year real Treasury bill yield nudged the index further upward (Figure 1). Although the metric indicated strong future activity, the trend flattened as growth rates in building permits and housing starts decelerated. Austin's leading index reflected statewide fluctuations in weighted building permits and residential starts while similarly reaching an all-time high. Houston and San Antonio indexes increased even as weighted permits decreased in both metros. The leading index in North Texas flattened as weighted building permits and residential starts decreased. Despite the differences between major metros, the metrics suggested steady construction in the coming months (Figure 2).
Overall market trends improved during June as the majority of Metropolitan Statistical Areas (MSAs) registered positive year-over-year changes in both occupancy and rents with the exception of Midland, Odessa, and San Angelo MSA. Midland and Odessa had negative annual rent growth. This caused the Texas average to register positive changes in both occupancy and rent (Figure 3).
Texas nonfarm employment added 55,800 jobs in June, rising 4.4 percent on a seasonally adjusted annual rate (SAAR). Based on the state's solid employment performance, the Federal Reserve Bank of Dallas forecasts annual employment will increase 5.6 percent in 2021, reaching 13 million workers in December. Hiring in Houston slowed during the second quarter, recovering 19,600 jobs compared with the first quarter's gain of 33,700. Houston payrolls are still 5.4 percent off from pre-pandemic levels, a larger gap than the other major metros. Dallas added 33,400 employees in the second quarter, registering the highest number of job gains of the four major MSAs. San Antonio and Austin registered net quarterly increases of 9,800 and 9,400 workers, respectively. Payroll expansions were largely concentrated in the leisure/hospitality, professional/business services, wholesale trade, government, and education/health services industries across the major metros. Employment declined only in Fort Worth, which shed 1,000 positions during the second quarter as global supply chains negatively affected the manufacturing industry. Goods-producing employment in Fort Worth decreased due to falling construction jobs.
Texas' goods-producing sector gained 2,600 positions in June. Even after registering two straight months of increases, the sector still lost 15,600 jobs during 2Q2021. Amid increasing oil prices, energy-related employment rose by 2,300 jobs in the second quarter but remained around a fifth below year-ago levels. Recovering global economic conditions supported the state's manufacturing industry, which added 4,900 employees. Durable-goods payrolls recorded a 4,100-job gain during the second quarter. Construction payrolls fell last quarter, shedding 22,900 jobs.
Texas' service-providing sector, which was hit hardest by the pandemic, continues to recover jobs. It is 2 percent below pre-pandemic levels after adding 128,500 jobs in the second quarter. Leisure/hospitality recouped 58,000 jobs in 2Q2021, but arts/entertainment/ recreation payrolls remained almost a fifth below pre-pandemic levels. On the other hand, the transportation/warehousing/utilities industry added 11,300 positions, surpassing pre-pandemic employment by 1.2 percent.
Rising oil prices, accelerating vaccination rates, and optimistic national economic data during the second quarter resulted in higher growth and inflation expectations for 2021. However, the liquidity in the financial markets as a consequence of large-scale asset purchases by the Fed that include mortgage-backed securities and U.S. Treasuries, which have pushed down interest rates. The ten-year U.S. Treasury bond yield decreased to 1.52 percent in June after reaching a pandemic high of 1.64 in April. The spread between apartment capitalization rates and the ten-year Treasury yield decreased for three straight quarters from 4Q2020 to 2Q2021. The decreasing spread indicated less risk and profitability in apartment real estate (Figure 4). This trend was helped as the outlook changed from devastating to cautious regarding the eviction moratorium's possible effects on the apartment market. In addition, increasing vaccination rates have reduced uncertainty surrounding the end of pandemic, allowing for the full reopening of the economy and a strong job recovery. This reduces the risk on multifamily cap rates. Both factors allowed cap rate spread with the ten-year Treasury to decrease even after decreasing in value during the second quarter.
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 continued to decrease in 2Q2021. 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 6.5 percent in June, still greater than the national rate of 5.9 percent. The state's labor force expanded, but that didn't increase the labor force participation rate, which remained at 62.2 percent below pre-pandemic levels. Joblessness in Houston also fell, albeit at a higher rate of 7.1 percent. The local labor force expanded from the previous month. On the other hand, unemployment inched down to 6.2 percent in Fort Worth and 6.0 and 5.9 percent in San Antonio and Dallas, respectively. The metric remained lowest in Austin, where the jobless rate slid to 4.9 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 would be expected, the increase in the unemployment rate back in 2Q2020 pushed up vacancy rates in the major metros. Declining unemployment rates have alleviated some of that vacancy pressure (Figures 5-8). In addition, the eviction moratorium and the federal stimulus that included transfer payments through direct payments and renter/landlord assistance have pushed down vacancy rates. Also, increasing vaccination rates have allowed for the reopening of the economy, leading to strong job growth and to decreasing vacancy rates.
According to the U.S. Census Bureau's Household Pulse Survey, 15 percent of Texas renter-occupied households were behind on payments in June, similar to the national rate of 15 percent (Table 3). Renter households in Dallas-Fort Worth registered the same value, contrasting with Houston's value of 20 percent, recording a considerably higher value than what was observed at the national and state levels. This is a deterioration from the March pulse survey numbers.
Thirty percent of renter households in Texas stated that they have no confidence or only slight confidence in making their rent payment next month, higher than the 25 percent observed at the U.S. level (Table 4). DFW's metro increased to 24 while Houston's fell to 29 percent. The overall results deteriorated compared to the March pulse survey results, with the exception of Houston, which showed improvement.
Sixty-three percent of Texas respondents who were not current on rent said eviction was either very likely or somewhat likely in the next two months. Nationally, the number was 44 percent (Table 5). That metric was higher in DFW and Houston, registering 71 and 63 percent, respectively. The Pulse Survey results worsened from March to June. Both the DFW and Houston multifamily rental market outlooks are worrisome due to the high numbers of households that could be evicted. Federal eviction moratoriums are in place until Oct. 3, 2021. Continued household stability is essential to Texas' economic recovery.
Enhanced Multifamily Outlook from Covid-19 Impact
- Various factors 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 while they seek re-employment. It also helped businesses from closing permanently.
- Increasing vaccination rates have allowed the economy to reopen, especially benefiting service industries that cannot socially distance.
- The lack of single-family homes for sale, especially those priced below $300,000, has caused strong home price growth, which assisted the apartment market. Given the steep increase in home prices during the year some households probably found themselves priced out of the market and will continue to be renters.
- Economic growth, demographic trends (such as a young population and migration from out of state), and a limited supply of single-family homes available for sale combined with strong home price growth will help drive Texas apartment demand in the remainder of 2021. This should continue during 2022.
- Evictions will probably increase as the result of the Supreme Court's decision on Aug. 26 to lift the Centers for Disease Control and Prevention's latest eviction moratorium that was set to expire on Oct. 3.
- Evictions have been kept low due to government policies but are no longer seen as a catastrophic issue facing the apartment market.
- Labor market recovery and government transfers benefited households that in the past couldn't make their rent payments on time.
- Some households will probably be forced to change their current living arrangements, but they would not represent the majority of the rental market.
- The household pulse survey results for June show an increase in renter concerns over ability to pay rent, getting behind on rent payments, and on being evicted.
- Eviction increases are expected to be concentrated in Class C and D properties and would probably affect small property owners, but they would not represent the majority of the rental market.
- Some concerns remain, and landlords and renters should be cautious regarding the effects of evictions, but the outlook has changed considerably from catastrophic at the onset of the pandemic to a more positive outlook.
- In addition, the upsurge in new cases due to the Delta variant has 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 1 and 2).
Overall Increase in Living Costs
Sharp price increases are not limited to the single-family home purchase market. They're also occurring in the apartment rental market and in the single-family home rental market. The residential market is experiencing strong housing price increases, which translate into more permanent price increases than temporary ones and have a dampening effect on household budgets.
Apartment effective rent per square foot (AERSF) and the single-family rent price index registered strong annual growth during 2Q2021 in both DFW and Houston. In contrast, the owner equivalent rent (OER) and the rent of primary residency trended downward in both metros, underestimating the increase in the cost of living. The OER and the rent of primary residency lag both AERSF and the single-family rent price index. If the lag relationship still holds, the OER and rent of primary residency should start registering strong annual growth rates in the coming months. This would increase overall inflation since cost-of-living costs are part of core inflation.
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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