First Quarter 2021
Economic activity within Texas moderated during first quarter 2021 but remained on the path to recovery despite weather-related disruptions in February. Robust hiring in March resulted in solid first-quarter payroll growth, although joblessness in the Lone Star State was still higher than the national average. Moreover, inflation-adjusted headline wage numbers flattened compared with year-ago levels while initial unemployment claims surged unexpectedly. On the bright side, oil prices rebounded, contributing to increased export values. As Gov. Greg Abbott removed business restrictions amid downward-trending new COVID-19 cases, consumer confidence improved and supported an optimistic outlook on the service-providing sector. 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. Containment of the pandemic is vital as additional waves of infection, although becoming less likely as vaccination rates increase, can weigh on consumer behavior and spending and slow the return to pre-pandemic conditions.
The Texas Nonresidential Construction Cycle (Coincident) Index, which measures current construction levels, ticked down due to declining construction put in place values. The statewide Nonresidential Construction Leading Index points toward further future declines in nonresidential construction activity, amid falling construction value starts. Similarly, Austin's office and retail leading indexes are pointing toward declines in commercial construction activity in the near future as the value of construction starts fall. In contrast, Austin's warehouse construction leading index is signaling stronger future construction activity due to increasing construction value starts. DFW leading indexes point toward increased activity in office, while future retail and warehouse construction should slowdown as a result of falling construction start values. Houston leading indexes, with the exception of office, are signaling higher construction activity going forward due to increasing construction start values. San Antonio leading indexes, with the exception of retail, are indicating more activity going forward. See Figures 1-5 for the Nonresidential Coincident Index and Leading Indicator for Texas and the four major metros.
Texas nonfarm employment added 99,000 jobs in March, rising 4.3 percent SAAR despite shedding 2,400 jobs in February during Winter Storm Uri. The surprisingly strong gain pushed Dallas Fed's annual employment forecast up from a 6.0 to 6.6 percent increase to 13.2 million workers. Hiring in Houston remained robust in the first three months of the year, recovering 34,800 jobs and almost matching the previous quarterly gain. Total payrolls, however, were still 6 percent off from pre-pandemic levels, a greater gap than the other major metros. Austin added 16,700 employees in the first quarter, exceeding the state in terms of SAAR growth (5.5 percent). San Antonio and Dallas registered net quarterly increases of 10,600 and 10,100 workers, respectively. Payroll expansions were largely concentrated in the leisure/hospitality, retail trade, professional/business services, and education/health services industries across the major metros. Only in Fort Worth did employment decline, shedding 2,000 positions during the first quarter due to Winter Storm Uri. Goods-producing employment decreased, but the transportation/utilities sector was the main deterrent to growth. For additional commentary and statistics, see the Texas Real Estate Research Center's Outlook for the Texas Economy.
Texas' goods-producing sector regained a record-breaking 32,100 positions in March, pushing the first-quarter net total to 38,500 workers. Amid increasing oil prices, energy-related employment rose by 10,600 jobs in the first three months of the year but remained more than a fifth below year-ago levels. Recovering global economic conditions also supported the state's manufacturing industry, which added 9,200 employees, nearly half of which were hired in Dallas or San Antonio. Durable-goods payrolls expanded every month in the first quarter, resulting in a 7,900-job gain. Construction payrolls registered sluggish growth the first two months of the year but accelerated in March, adding 18,700 quarterly jobs.
Despite Texas' service-providing sector being the hardest-hit major industry last April, employment fell only 3.1 percent relative to the February 2020 peak (compared with the 3.6 percent nonfarm decline) after hiring 97,100 workers in the first quarter. Leisure/hospitality recouped 20,500 jobs in 1Q2021, but arts/entertainment/recreation payrolls remained a fifth below pre-pandemic levels. On the other hand, the transportation/warehousing/utilities industry added 10,700 positions, surpassing year-ago employment by 6.6 percent.
The number of Texans filing initial unemployment insurance claims shot up to 370,200, its highest level since May 2020, after increasing the last three weeks of March. The surge was unexpected amid downward-trending new COVID-19 cases and the termination of capacity restrictions for businesses on March 10. Initial claims ended the month higher within the major MSAs as well. Texas' average weekly continued unemployment insurance claims, however, declined for the eighth consecutive month, suggesting improved conditions for laid-off workers seeking new job opportunities. Nevertheless, the labor market still has a long road to recovery with total claims six-and-a-half times greater than pre-pandemic levels a year ago due to the rise in initial claims. Anecdotal evidence from the service sector points toward the lack of available applicants and generous unemployment benefits as major impediments in rehiring workers. To eliminate the incentive of remaining unemployed, Texas is opting out of further federal unemployment compensation related to the COVID-19 pandemic effective June 26, 2021. This will reduce minimum unemployment payments from $19,240 a year to $3,640 a year.
Despite the increase in hiring during March, Texas' unemployment rate was unchanged at 6.9 percent, still greater than the national rate of 6 percent, as the size of the state's labor force expanded, pushing the labor force participation rate to 62.3 percent. Joblessness in Houston flattened, albeit at a higher rate of 8.3 percent, while the size of the local labor force expanded for the second straight month. On the other hand, unemployment inched down to 7 percent in Fort Worth and 6.8 and 6.7 percent in San Antonio and Dallas, respectively. The metric remained lowest in Austin, where the jobless rate slid to 5.5 percent. The decrease in unemployment after 2Q2020 is important for commercial 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 increase in the unemployment rate during 2Q2020 pushed up vacancy rates in the major metros, and the declining unemployment rates have alleviated some of the pressures on rising vacancy rates (Figures 6-9).
Climbing oil prices, accelerating vaccination rates, and optimistic national economic data during the first quarter resulted in higher growth and inflation expectations for 2021. The ten-year U.S. Treasury bond yield increased to 1.2 percent in March, almost reaching pre-pandemic levels. The increase in the yield has caused the spread between commercial capitalization rates and the ten-year Treasury yield to fall. The decrease in the spread indicates falling risk and profitability in commercial real estate. Inflation and growth expectations will continue to push up interest rates during 2021. As a result, the spread between commercial cap rates and the ten-year Treasury bill should continue to decline somewhat in the rest of the year.
Office cap rates (Figure 10) decreased at the start of 2021 in Texas' major MSAs, after increasing during 2020. Increasing vaccination rates among the population have reduced uncertainty surrounding the end of pandemic, allowing for the full reopening of the economy and the return of white collar workers back to the office, helping to lower the risk in the office cap rate. San Antonio and Houston continued to register the highest cap rates. Since 2Q2020, the spread between the ten-year Treasury bill has decreased. Austin was the least risky market for office real estate at the start of 2021 based on the spread with the ten-year Treasury bill.
Retail cap rates (Figure 11) decreased during 1Q2021 in Austin and San Antonio MSAs,, while increasing in Houston and not changing in DFW. The spread between the ten-year Treasury bill decreased at the start of 2021 in Texas' major MSAs. Austin and San Antonio are the least risky and lowest-return markets for retail real estate.
Industrial cap rates (Figure 12) for San Antonio and Houston were the highest during 1Q2021. All major MSAs registered increases in cap rates at the start of the year, a trend observed since 2020. As with the office and retail markets, the spread between the ten-year Treasury decreased during 1Q2021 in all four MSAs. DFW is the least risky and lowest-return market for industrial real estate based on the spread with the 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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