|Texas Quarterly Apartment Report||Texas Quarterly Apartment Report||James P. Gaines, Luis B. Torres, Harold D. Hunt, Kristina Richter, Caleb Smoot, Samuel Woolsey, and Garret Newman||2020-12-08T06:00:00Z||research-article||Residential|
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Texas Economic Overview
Economic activity rebounded during third quarter 2020 after contracting sharply during the previous quarter due to COVID-19 shelter-in-place restrictions. Putting the health crisis in a historical context, neither the Great Depression, Great Recession, nor any other recession over the past two centuries caused such a steep economic decline. The strength and pace of the recovery slowed at the end of the third quarter due to the incomplete reopening of the economy, fiscal stimulus dissipating, and future uncertainty regarding the pandemic.
The Texas Residential Construction Cycle (Coincident) Index, which measures current construction levels, ticked up due to the improvements in industry wages, employment, and construction values. The Residential Construction Leading Index rose for the fifth straight month amid increased building permits and housing starts and a decrease in the real ten-year Treasury bill (Figure 1). The major metros registered growth in their leading indexes except for San Antonio, where permits and starts fell, pulling the metric down (Figure 2).
Overall market trends declined during September as more Metropolitan Statistical Areas (MSAs) started to register year-over-year negative changes in occupancy rates, causing the Texas average to register a negative value. Due to the difficulties facing the oil industry, the apartment market in Midland/Odessa continued to struggle during September, registering both negative rent growth and negative changes in occupancy rates. Houston also registered negative numbers in both categories (Figure 3).
The Texas economy lost 1.4 million jobs in March and April but recovered 661,000 of those jobs from May through September. Texas nonfarm employment gained 40,700 jobs during September as hiring slowed after broad improvements the previous months. Jobs remained 5.1 percent below the 2019 year-end levels. Employment by sector in the major metros recovered in September at varying paces, but the leisure/hospitality sector made up the lion's share of gains across the board.
Although Austin gained only 1,300 jobs in September, the metro registered the smallest decline of 3.6 percent below year-end 2019 employment. The leisure/hospitality sector accounted for the majority of year-to-date (YTD) losses in Austin and Dallas, where monthly hiring added 10,100 workers, pulling the YTD contraction to 3.9 percent. Employment was 5.8 and 5.6 percent below year-end 2019 levels in Houston and Fort Worth, respectively, amid widespread losses across both goods-producing and service-providing industries despite the monthly addition of 20,300 positions in the former and 2,600 in the latter. Decreases in San Antonio's government sector offset hiring in leisure/hospitality, resulting in 1,600 jobs shed in September and a 5.1 percent YTD decline.
Upsurges in COVID-19 cases could hinder Texas' economic recovery going forward. Further waves of infections could reverse increased mobility and spending, affecting future recovery. The good news for the coming year is the announcement of two COVID-19 vaccines reporting between 90 percent and 95 percent effectiveness. While the initial news of a successful vaccine helps to reduce some of the economic uncertainty surrounding the pandemic, issues remain. These include monumental job loss, stagnate private investment, and a decline in business activity. Also, it will take many months before a vaccine can be administered to enough people to allow the economy to operate at pre-pandemic levels, causing further harm to businesses that cannot socially distance. For additional commentary and statistics, see Outlook for the Texas Economy.
Texas' goods-producing payrolls expanded by 7,700 workers in September, but industry employment still fell 7 percent YTD. Energy-related employment contracted for the seventh straight quarter, although 1,300 monthly jobs were added. The manufacturing sector also posted gains for the month, adding 1,100 and 1,600 employees in durable goods and nondurable goods, respectively. The latter recorded positive quarterly growth but remained below year-end levels. In addition, the construction industry eked out positive quarterly growth as payrolls grew by 3,700 jobs in September.
The service-providing industry added 33,000 monthly positions, bringing the three-month recovery to 179,900 total employees. Still, jobs were down 5 percent YTD with leisure/hospitality losses numbering 239,100. Federal government employment, however, increased 14.8 percent YTD amid mid-year census-related recruitment, while professional/scientific/technical services and finance/insurance were up modestly above year-end levels. Texas' retailers faced slight job losses in September, falling 3.4 percent below year-end employment. Although general merchandisers decreased by 8,900 workers that month, the subsector registered only a 1.2 percent YTD decrease. Electronic/appliance stores and miscellaneous store retailers posted the steepest YTD declines, dropping 21.6 and 11.5 percent, respectively. In contrast, building material/garden equipment/supplies dealers increased 7.9 percent compared with December 2019 levels.
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 Treasury yield increased at the end of 2019 and has continued up into 3Q2020. This increased spread indicates increased risk and profitability in apartment real estate (Figure 4). This is projected to continue through the remainder of 2020, as multifamily real estate risks may increase 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. The spread with the ten-year Treasury bill increased during 1Q2020. 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 state's unemployment rate reversed a four-month decline, jumping one-and-a-half percentage points to 8.3 percent, whereas the national metric continued to decrease to 7.9 percent. Joblessness rose across Texas' major metros, especially in Houston, where the rate climbed to 9.7 percent. The metric in San Antonio increased to 7.8 percent and grew to 7.7 and 7.5 percent in Fort Worth and Dallas, respectively. Austin maintained the lowest unemployment rate at 6.4 percent. The increase in unemployment 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 3Q2020 pushed up vacancy rates in the major metros (Figures 5-8).
According to the U.S. Census' Household Pulse Survey, 13 percent of Texas renter-occupied households were behind on their payments during September, lower than the national rate of 15 percent (Table 1). Renter households in DFW registered a lower value of 9 percent, contrasting with Houston's 16 percent, a value higher than the observed numbers at both the national and state levels.
Regarding ability to pay next month's rent, more than one-fourth of renter households in Texas stated they have no confidence or only slight confidence in making their rent payment next month, similar to the 25 percent observed at the U.S. level (Table 2). Both DFW and Houston recorded higher percentages of 29 and 27 percent, respectively. This is a troubling sign for both renters and landlords going forward.
Half of Texas respondents who were not current on rental payments expected eviction to be either very likely or somewhat likely in the next two months, compared with 43 percent nationwide (Table 3). That same metric, however, was lower in DFW at 42 percent compared with Houston, which registered 56 percent. The oil industry's struggles have translated into layoffs, negatively affecting Houston's labor and rental markets. The Center for Disease Control's federal eviction moratoriums are in place until Dec. 31, 2020. The Federal Housing Finance Agency has extended the eviction moratorium for properties owned by Fannie Mae and Freddie Mac (the Enterprises) until Jan. 31, 2021. The results of the survey highlight the troubling issues that the multifamily market will face in 2021 once the moratorium ends. Continued improvement in household 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
2019: 1Q2019, 2Q2019, 3Q2019, 4Q2019
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