Texas Quarterly Apartment ReportTexas Quarterly Apartment ReportJames P. Gaines, Luis B. Torres, Harold D. Hunt, Caleb Smoot, Samuel Woolsey, and Garret Newman2020-08-27T05:00:00Zresearch-article

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Texas Econom​​ic Overview​​

Economic activity contracted sharply in second quarter 2020 due to COVID-19 shelter-in-place restrictions, but then rebounded as the economy re-opened during May and June. Putting the health crisis in a historical context, neither the Great Depression nor the Great Recession nor any other recession over the past two centuries caused such a steep, sudden economic decline. The strength and pace of the recovery are unknown because they depend on health outcomes that allow or impede the complete re-opening of the economy. Barring a second wave of the virus and another economic shutdown, 2Q2020 should represent the worst of the economic slump.

The Texas Residential Construction Cycle (Coincident) Index, which measures current construction levels, dipped slightly as construction values fell and hiring slowed (Figure 1). On the other hand, the Residential Construction Leading Index almost reached the post-recessionary high from December as interest rates continued to decrease and permits and housing starts picked up, suggesting positive momentum in the next few months. At the metropolitan level, Austin was the only major Texas metro where the leading index decreased, pulled down by multifamily building permits (Figure 2).

Overall market trends continued to change during June as more Metropolitan Statistical Areas (MSAs) like Austin and Dallas started to register year-over-year negative changes in occupancy rates. Due to the difficulties facing the oil industry, Midland-Odessa’s apartment market continued to struggle significantly during June, registering lower change in occupancy rates and negative rent growth. Additionally, Victoria continued to register significantly lower occupancy (Figure 3).

The Texas economy lost 1.4 million jobs between March and April but recovered 475,000 of those jobs between May and June. In June, although Texas nonfarm employment gained 225,200 jobs, hiring slowed from the prior month. Jobs remained 6.7 percent below year-end 2019 levels. Employment by sector in the major metros recovered in June at varying degrees, with the leisure/hospitality sector making up the lion's share of gains across the board.

Fort Worth and Austin ranked highest in percentage terms, adding around 30,000 positions each; however, the count remained at negative 6.0 and 6.9 percent YTD, respectively.

Job growth accelerated in Dallas where the workforce gained 63,300 employees. San Antonio payrolls were down 5.6 percent YTD despite expanding by 28,500 jobs. Houston recouped 46,900 positions, but the rate of increase slowed in June, leaving employment 6.8 percent below year-end levels.

The upsurge in COVID-19 cases hindered Texas' economic recovery in June. Further waves of infections could reverse increased mobility and spending, affecting future recovery. For additional commentary and statistics, see Outlook for the Texas Economy.

Texas' goods-producing sector shed 3,400 positions in June, although data revisions revealed 7,200 rather than 4,100 jobs were added the previous month. The mining/logging industry decreased by 6,400 workers, but the decline continued to slow. Market expectation for the oil industry in 2020 continue to be weak, with production expected to continue falling through the end of the year. Oil prices are expected to range between $40 and $45 per barrel through much of 2021. Hiring in nondurable goods manufacturing stalled, while the durable-goods sector laid off 500 employees. Only the construction industry expanded goods-producing payrolls, albeit modestly, hiring 3,500 workers.

Services-providing employment decelerated, adding 228,600 jobs but falling 14,000 short of the prior month. Most of the slowdown is attributed to ambulatory health care services and food services/drinking places. On the other hand, arts/entertainment/recreation payrolls expanded by 28,500 after three monthly decreases and a standstill in May. On the bright side, 42,000 retail employees were called back to work, an improvement over the previous month. Recovery was widespread with only miscellaneous store retailers and nonstore retailers taking a step back after modest increases in May.

Continued uncertainty stemming from the ongoing spread of the coronavirus kept interest rates at historically low levels as expectations for future inflation and growth are currently dim. Even before the pandemic, the spread between apartment capitalization rates and the ten-year yield widened at the end of 2019.  Spreads have continued to widen during the first half of 2020, indicating increased risk and profitability in apartment real estate (Figure 4). The wider spread is projected to continue through the remainder of 2020. Multifamily real estate risks could increase even further due to the future uncertainty created by the COVID-19 pandemic. 

Overall apartment cap rates for Houston and San Antonio remain the highest, followed by DFW and Austin. 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).

Even with the recovery slowing in June, the unemployment rate still fell to 8.6 percent after reaching a high of 13.5 percent in April. Joblessness in each major metro fell by more than 4 percentage points. Austin's metric was the lowest at 7.3 percent, while unemployment sank to 8.2 and 8.4 percent in Dallas and Fort Worth, respectively. San Antonio's jobless rate was 8.3 percent. Only Houston exceeded the state average with 9.6 percent unemployment. The fall in unemployment is important for multifamily vacancies given the relationship between unemployment rates and vacancy rates. The longer unemployment lasts, 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 (Figures 5-8).

​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​

2019: 1Q2019, 2Q2019​, 3Q2019, 4Q2019

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