|Texas Quarterly Apartment Report||Texas Quarterly Apartment Report||James P. Gaines, Luis B. Torres, Harold D. Hunt, Clare Losey, Trenton Forbes, Caleb Smoot, and Samuel Woolsey||2020-06-26T05:00:00Z||research-article||Residential|
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Texas Economic Overview
First quarter 2020 started strong until the COVID-19 pandemic shut down the economy in the last weeks of March. The shutdown caused a significant decrease in economic activity, reflected in a steep decline in hiring and a related surge in unemployment. Initial unemployment insurance claims ballooned to unprecedented levels, signaling even higher joblessness in the second quarter. The manufacturing and service sectors had huge slowdowns in business activity according to survey data. Export values fell nearly 10 percent due to supply-chain disruptions and falling consumer demand. Home sales contracted 4 percent amid reduced buyer and seller confidence, the negative employment shock, and growing wariness of visiting and showing homes for sale. The shelter-in-place order effectively stopped tenant relocations and movement.
Texas' energy sector struggled with decades-low oil prices due to diminished global demand during the pandemic, a sharp contrast to its role during the Great Recession. While preliminary coronavirus effects were visible in the March economic data, even more severe impacts are expected in the second quarter. The severity of the economic shock will likely result in losses greater than those from the 2008-09 financial crisis, at least in the short run. For additional commentary and statistics, see Outlook for the Texas Economy.
Contemporaneous and anticipated construction levels fell in March after reaching post-recessionary highs the prior month, signaling a coronavirus-induced downturn. The Texas Residential Construction Cycle (Coincident) Index, which measures current construction levels, declined due to industry wage and employment cuts (Figure 1). Decreased building permits and housing starts offset falling interest rates, pulling the Residential Construction Leading Index down. The Austin and DFW leading indexes point toward lesser activity in the future, and San Antonio's leading index reaching a peak means it is likely to follow that trend (Figure 2). Meanwhile, Houston's leading index exhibited a positive trend, indicating a possible uptick in activity in the future before feeling the complete impact of COVID-19. Overall market trends changed in March, as some Metropolitan Statistical Areas (MSAs) started to register year-over-year negative changes in occupancy rates like Houston and Fort Worth. Due to the difficulties facing the oil industry, the apartment markets in Midland and Odessa continued to struggle during March, registering negative rent growth. Additionally, Victoria recorded negative numbers.
In March, Texas' initial unemployment insurance claims soared in a two-week span to 567,500, with a significant number of people expected to file for unemployment in coming months. Using data from the Department of Labor (DOL) and the Employment and Training Administration, the Real Estate Center estimates that from March 21 to March 28 nearly 123,900 seasonally adjusted claims were filed in Dallas-Fort Worth. That is the highest of Texas' major metros. In Houston, Austin, and San Antonio, an estimated 107,900, 44,500, and 41,200 claims were filed during that time, respectively.
The fall in the ten-year yield at the end of 2019 continued during 1Q2020 (Figure 3), causing the spread in multifamily capitalization rates to increase and indicating increased risk and profitability in apartment real estate (Figure 3). The increase in the spread is projected to continue in 2020 as commercial real estate risks increase further due to the pandemic.
Overall apartment cap rates for Houston and San Antonio remain the highest, followed by Austin and DFW. The spread with the ten-year Treasury bill has increased during 1Q2020. Austin has become the least risky and lowest return market for multifamily real estate based on its spread with the ten-year Treasury bill (Figure 3). ALN Apartment Data provides a snapshot of all Texas MSAs (Figure 4).
Due to the domestic coronavirus outbreak, the Federal Reserve cut interest rates a total of 150 basis points in March, taking the targeted federal funds rate to 0-0.25 percent. It also cut the discount window rate by 150 basis points and promised unlimited, open-ended asset purchases (quantitative easing). The liquidity injection by the Federal Reserve to financial markets, in conjunction with gloomy future growth expectations and low inflation expectations, caused interest rates to fall dramatically. In addition, capital flows seeking positive returns and low risk have flooded the Treasury market, pushing the ten-year Treasury bill further down to 0.9 percent in March. Even with the presence of COVID-19, multifamily loans registered positive growth during 1Q2020 due to positive expectations of both population and economic growth prior to the pandemic (Figure 5). The Real Estate Center expects a decline in the loan volume in 2Q2020, ending the strong positive growth observed in 2019.
The initial coronavirus-induced layoffs resulted in Texas' nonfarm employment shedding 50,900 jobs in March, the steepest decline since the Great Recession. Meanwhile, the unemployment rate increased to 4.7 percent, a three-year high. State and metropolitan joblessness rose more than 1 percentage point with Texas and every major locale except Fort Worth reporting an unprecedented jump in unemployment. Hit particularly hard by critically low oil prices, Houston's metric climbed to 5.2 percent. Dallas and Fort Worth unemployment increased to 4.3 and 4.4 percent, respectively, while San Antonio posted 4.2 percent. Austin fared relatively better with joblessness of 3.6 percent. The unemployment rate is important because of the strong relationship it has with multifamily real estate vacancy rates. As the unemployment rate rises (decreases) generally, so will overall apartment vacancy rates (Figures 6-9). Unemployment rates are expected to increase in second quarter 2020, pushing up vacancy rates in the major metros.
Every major metro reported net layoffs in March, but Fort Worth shed a record-breaking 19,900 jobs for a percentage loss of 1.8 percent. Nearly all the subsectors had cutbacks except for manufacturing and government, which posted negligible increases. The Central Texas MSAs registered their worst month in series history, contracting by 8,400 jobs in Austin and 5,500 in San Antonio, marking the metro areas' second consecutive month of negative growth. Similar to Dallas employment, which decreased by 11,100 positions, leisure/hospitality accounted for most of the total reductions, especially in San Antonio.
In Houston, the leisure/hospitality, construction, and manufacturing industries were mainly responsible for the overall 18,200 jobs contraction. Counterintuitive to plummeting oil prices, mining/logging expanded by 1,400 jobs. However, this may be a slight correction to a ten-month decline. Houston's energy-related employment is expected to fall if oil prices remain in the $20-$30 per barrel range, because Houston has only partially recovered from the 2015-16 oil bust. There simply is not an abundance of excess positions employers can eliminate with sweeping, extended layoffs.
The ability of a metro's labor force to work remotely is a factor in job losses during this recession; the more remote-compatible an occupation is, the greater chance workers will continue to work during the shelter-in-place. The Dallas Fed estimates Texas' Urban Triangle has a greater proportion of workers who can work remotely than other areas in the state (28 percent). Austin leads the major metros with 48 percent of its workers who can work remotely, followed by DFW and Houston with 42 and 40 percent, respectively. San Antonio lags with 37 percent. Of individuals whose income is less than $60,000, only 27 percent can work from home. The vast majority of individuals with these characteristics are renters, and this will likely have negative implications on the apartment sector.
Future Impact of COVID-19 on Multifamily
- With the strong relationship between multifamily vacancies and unemployment, higher unemployment rates mean higher vacancy rates. The duration of high unemployment rates will translate into higher vacancy rates and a decrease in effective rents.
- Low-skill/less educated and low-wage/income earners were hit hardest by the pandemic.
- Service industries including arts, entertainment, and recreation, accommodation and food services, and administrative and waste management were hit particularly hard.
- The majority are renters, resulting in a negative impact on multifamily during 2020.
- The number of tenants who will be able to pay rent going forward is unknown since it depends on them being employed and earning wages.
- There is no government forbearance for renters; in some cases, some landlords have offered temporary rent reductions and repayment plans.
- Some renters have used unemployment benefits and credit cards to help with rent payments.
- Federal Pandemic Unemployment Compensation (FPUC), which adds an additional $600 per week for unemployment, is expected to end in July 2020.
- Pandemic Unemployment Assistance (PUA), which extends length of unemployment benefits by 13 weeks and provides benefits to workers who are not traditionally eligible, ends in December 2020.
- Outstanding rent payments have not been forgiven and will have to be paid. This is another negative element affecting multifamily during 2020 and possibly 2021.
- When local eviction moratoriums end for renters, a wave of evictions could lead to higher vacancy rates in 2020.
- If tenants don't pay rent and landlords don't pay mortgage payments, apartment development becomes costlier and riskier, potentially deteriorating future supply of available rental units.
- The second half of 2020 could see people moving from Class A apartments to Class B and C as they adjust to lower incomes, a higher debt burden, or both.
- People still need a place to live, and income constraints play an important role. A drop in first-time homebuyers and single-family home renters due to the pandemic will benefit the multifamily market going forward.
- The supply could be negatively affected in the short-run, but a massive migration out of apartments is not likely (e.g., after 9/11, some expected a massive movement out of the city and apartment life, which did not happen.)
- Residual fear about COVID-19 and/or future viruses and the close, clustering effect of living in an apartment complex could hamper future apartment demand.
- In the long-run, expect a movement to more amenities and less density (e.g., better communal spaces, storage units, fewer than 40 apartments per development).
- The trend toward mixed-use commercial developments that include office, retail, and multifamily should continue as they offer quality amenities and less density, and are often in the suburbs or the urban fringe.
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:
2019: 1Q2019, 2Q2019, 3Q2019, 4Q2019
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