The Texas economy grew at a solid pace in 2019 in the midst of one of the longest expansionary cycles in state history. Crude oil production, residential construction, housing sales, and commodity exports increased. The labor market remained strong with record-low unemployment, stable job growth, and improved labor force participation, although initial unemployment claims rose modestly. The manufacturing sector, however, struggled amid the slowing global industry and trade-related uncertainty. Overall favorable economic conditions attracted migrants from other states, boosting population growth, in spite of reduced international migration.
One of the headwinds to Texas' continued expansion in 2020 is the COVID-19's (coronavirus) negative shock to the economy and financial markets lowering growth expectations and increasing uncertainty. Even before the coronavirus, the state's economy was facing headwinds from the slowing national and global economies, downward pressures on oil prices, and ongoing political and trade-related uncertainty. For additional commentary and statistics, see Outlook for the Texas Economy.
The Texas Nonresidential Construction Coincident Index, which measures current construction activity, indicates further expansion. Strong construction activity should continue into 2020 as indicated by the Texas Nonresidential Construction Leading Indicator, which measures potential future construction activity. (See Figures 1-5 in the downloadable report for the Nonresidential Coincident Index and Leading Indicator for Texas and the four major metros.)
Texas' annual nonfarm employment before expected downward revisions from the Bureau of Labor Statistics (BLS) increased by nearly 309,700 jobs, exceeding national growth by a full percentage point at 2.5 percent. The Real Estate Center's 2020 Texas Housing Economic Outlook, however, projects hiring to decelerate due to slower economic growth at the national and state levels and a stagnant energy sector. The Dallas Fed's annual employment projection is 2.1 percent for 2020, based on the forecast that 274,000 jobs will be added. Overall labor market conditions, however, remained strong. Even though the statewide unemployment rate ticked up at year end, it had fallen to a new annual low of 3.5 percent. The U.S. economy slowed in 2019, from growing 2.9 percent in 2018 to 2.3 percent last year. The U.S. economy is expected to slow in 2020 but still maintain positive growth, achieving a growth rate of around 2.1 percent.
Dallas employment before revisions led the state in both absolute and percentage terms, adding 94,300 jobs for 3.6 percent growth in 2019. Houston's payrolls expanded by 82,700 positions, or 2.7 percent, with strong growth in the durable goods manufacturing and professional/business services. San Antonio's workforce added 24,400 employees, increasing 2.3 percent. On the other hand, hiring in Austin recorded its slowest pace since 2010 at 2.4 percent, still managing to add 25,700 jobs. The tightness in the state's labor market is greater in the major metros. Austin maintained the lowest unemployment rate at 2.7 percent, while DFW and San Antonio joblessness fell to 3.2 and 3.1 percent, respectively. Houston was the exception with an unemployment rate above the statewide average at 3.7 percent but still boasted a historical low. (For additional commentary and statistics, see Outlook for the Texas Economy.)
Both low inflation expectations and modest future growth prospects continue to weigh down nominal interest rates. Particularly, capital flows have flooded the Treasury market seeking positive returns and low risk, pushing the ten-year Treasury bill further down. The fall in the ten-year yield at the end of 2019 caused the spread in commercial capitalization rates to increase, indicating increased risk in commercial real estate as well as general profitability.
Office cap rates for San Antonio and Houston remained the highest in 2019, with both cap rates increasing in 2019. DFW also registered an increase last year, with Austin trailing the other major MSAs. Austin has become the least risky market for office real estate based on the spread with the ten-year Treasury bill.
Retail cap rates increased in 2019 in all four MSA markets. Houston and DFW depicted the highest, followed by San Antonio and Austin. The spread in the ten-year Treasury bill also increased in 2019. Austin is also the least risky and lowest return market for retail real estate.
Industrial cap rates for San Antonio and Austin were the highest in 2019. San Antonio cap rates increased last year, while in Austin they were unchanged. Houston and DFW cap rates increased in 2019. Similar to the other two commercial markets, the spread in the ten-year Treasury increased in all four markets. DFW is the least risky and lowest return market for industrial real estate based on the spread with ten-year Treasury bill.
For an analysis of Austin's, DFW's, Houston's, and San Antonio's commercial markets (including tables and figures), download the full report.
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