Texas Quarterly Commercial ReportTexas Quarterly Commercial ReportLuis B. Torres, Harold D. Hunt, Clare Losey, Garret Newman, and Brynn Martin2021-03-16T05:00:00Ztechnical-report

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Fourth Q​​uarter 2020

The COVID-19 pandemic didn't just end the longest economic expansion in Texas' history, it also pervaded every facet of the state's economy. Global shutdowns in the spring weighed heavily on the manufacturing, energy, and trade sectors as industrial output plummeted, and the West Texas Intermediate (WTI) crude oil spot price averaged $39 per barrel.

Conditions improved as factories reopened with social distancing and mask-wearing mandates. Cautious public and consumer sentiment had a greater impact on oil demand and the leisure/hospitality sector via extremely reduced business and pleasure travel, dining at restaurants, and trips to museums and other contact-intensive recreational businesses. Many of the direct stimulus checks Americans received went to paying off debt, building up savings, or paying rent/mortgage rather than being spent on consumer goods and services.

Labor-market conditions deteriorated compared with strong 2019 levels. Layoffs could have been worse if not for federal loans to small businesses that incentivized employee retention. One of the few bright spots, Texas' housing market boomed with record sales amid historically low interest rates, although depleted inventory is a significant headwind in 2021. The nature of the pandemic-induced recession this year, however, suggests a silver lining. If the virus is contained through vaccinations, immunity, and continued measures to prevent the spread of the disease (e.g., social distancing, mask wearing), economic activity and mobility may recover to pre-pandemic levels in the short-term. For additional commentary and statistics, see the Texas Real Estate Research Center's Outlook for the Texas Economy​.

The Texas Nonresidential Construction Cycle (Coincident) Index, which measures current construction levels, ticked down due to declining construction put in place, industry wages and employment. The statewide Nonresidential Construc​​tion Leading Index points toward further future declines in nonresidential construction activity, amid falling construction value starts. Similarly, Houston's leading indexes are pointing toward declines in commercial construction activity in the near future. In contrast, Austin recorded growth in all of its leading indexes as construction value starts and employment numbers rebounded from the 2Q2020 shutdown. DFW leading indexes point toward increased activity in office and warehouse, while future retail construction should decline. San Antonio leading indexes, except for warehouse, are indicating less activity going forward, while warehouse construction should record strong growth in the near future. See Figures 1-5 for the Nonresidential Coincident Index and Leading Indicator for Texas and the four major metros.

Texas shed a record-breaking 431,150 nonfarm jobs in 2020, amounting to 3.4 percent of payrolls, the greatest annual percentage decline since 1945 but less than the national loss of 5.8 percent. Moreover, Texas' labor force participation rate ticked down to an all-time low of 62.7 percent as more than 81,500 Texans exited the labor force amid pandemic-related disruptions and uncertainty. Women in the 25-34 year age group were more likely than men to leave the labor force to take care of children amid in-person school closures. The total contribution to the labor-force contraction, however, was double for men than for women in percentage terms.

Houston shed 122,700 nonfarm jobs, a steeper decline than the state average in percentage terms (3.9 percent). Leisure/hospitality accounted for more than a third of the decrease, followed by the goods-producing sector. The other major MSAs registered the largest drops in leisure/hospitality and education/health services employment. Although Fort Worth regained all the retail layoffs from the previous year plus some, total payrolls still shrank by 35,500 employees (3.3 percent). Transportation/utilities was the bright spot in San Antonio with double-digit annual growth, but the metro still cut 33,400 positions altogether (3.1 percent). In Austin and Dallas, hiring in the financial activities sector offset some of the overall contractions to cap losses at 23,000 (2.1 percent) and 49,250 jobs (1.8 percent), respectively.

Texas' goods-producing sector decreased by 87,000 workers with 45,000 of the discharges energy-related. Due to still-diminished employment levels from the 2015-16 oil bust, however, 2020 mining/logging losses were less than half compared with the mid-decade industry downturn, with hiring resuming, albeit modestly, in the fourth quarter. More than 24,300 manufacturers were laid off, mostly in Houston and Fort Worth's durable-goods industry. Meanwhile, the construction industry laid off more than 17,700 employees with most losses in Houston.

Service-providing employment marked its worst year on record (series starting in 1990), falling by 344,100 positions annually. Coinciding with the economic shutdown, almost 1.3 million jobs were lost in March and April alone. On the subsector level, only transportation/utilities and financial activities eked out modest gains, increasing 1.3 and 1.2 percent, respectively. Leisure/hospitality payrolls declined by 13.9 percent, or 194,000 jobs. Education/health services shed 46,800 positions. Other service-providing services, including personal/laundry services, posted the second-largest percentage decrease of 5 percent.

Almost 4.2 million initial unemployment insurance claims were filed during 2020 (with more than 40 percent submitted in March and April), about three-and-a-half times the number in 2009 compared with just two-and-a-half times nationally. Although the data around the holidays are more volatile, Texas claims climbed in December as COVID-19 cases surged, a divergence from the U.S. eight-month downtrend. Meanwhile, the statewide unemployment rate rose more than 4 percentage points annually to average 7.7 percent. Among the major MSAs, joblessness was highest in Houston, where the rate shot up to 8.6 percent due to a higher proportion of energy-related jobs in the metro. The metric in San Antonio and DFW was lower than the state average at 7.3 and 7.1 percent, respectively, but Austin maintained the lowest rate of 6.2 percent, although unemployment still increased considerably. 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 (see Figures 6-9).

Economic uncertainty surrounding the COVID-19 pandemic prompted investors to purchase safe-haven assets at an accelerated rate during the first half of the year, pulling interest rates to historically low levels. Expansionary monetary measures by the Federal Reserve and development on the vaccine front generated both higher inflation and growth expectations, pushing interest rates up in the fourth quarter, but the ten-year U.S. Treasury bond yield still fell 125 basis points in 2020, averaging a record-low 0.9 percent. Even before the pandemic, the spread between commercial capitalization rates and the ten-year Treasury yield had begun to increase by the end of 2019 and has continued through 4Q2020. This increased spread indicates increased risk and profitability in commercial real estate. Inflation and growth expectation are expected to increase in 2021 pushing up interest rates, thus the spread between commercial cap rates and the ten-year Treasury bill should decline somewhat in the coming year.

Office cap rates (Figure 10) increased during 2020 in Texas' major MSAs. It was the only market that registered consecutive increases through the four quarters, possible due to the uncertainty surrounding the office markets future once the pandemic ends. San Antonio and Houston continued to register the highest cap rates. During 2020, the spread between the ten-year Treasury bill increased. Austin was the least risky market for office real estate in 2020 based on the spread with the ten-year Treasury bill.

Retail cap rates (Figure 11) decreased during 2020 in Texas' major MSAs. Even with the fall in cap rates, the spread between the ten-year Treasury bill increased during 2020. 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 Austin were the highest during 2020. All major MSAs registered an increase in cap rates during 2020. Like the other two markets, the spread between the ten-year Treasury increased during 2020 in all four MSAs. 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. 

​​Previous reports available: ​

Digital and Print2211https://www.recenter.tamu.edu/articles/technical-report/Texas-Quarterly-Commercial-Report https://assets.recenter.tamu.edu/Documents/Articles/2211.pdf



Texas Quarterly Commercial ReportTexas Quarterly Commercial ReportCommercial
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