Second Quarter 2021
Economic activity in Texas improved during second quarter 2021 and is expected to continue its strong growth for the remainder of the year. Improved hiring in June resulted in solid second-quarter payroll growth, although joblessness in the Lone Star State was still higher than the national average. Moreover, inflation-adjusted headline wage numbers flattened due to supply bottlenecks, generating price pressures and driving up inflation. On the bright side, oil industry activity grew as oil prices increased, and the global economic recovery continues. 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.
The economic recovery continues due to increasing COVID-19 vaccination rates that have allowed the reopening of the economy. Based on the most current data from the Texas Department of State Health Services, 54.5 percent of the state's population is fully vaccinated. Unfortunately, after months of decline in COVID-19 cases, the number of new cases has increased because of the number of people not yet vaccinated and the emergence of the Delta variant, which has shown to be more contagious. This has increased uncertainty surrounding the end of the pandemic. Until the virus is beaten, a full recovery cannot be secured. 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 up during June due to increasing construction put in place values. The statewide Nonresidential Construction Leading Index overall trend points toward further declines in nonresidential construction activity amid falling construction value starts. In contrast, Austin's office, retail, and warehouse leading indexes are pointing toward increases in commercial construction activity in the near future as the value of construction starts increase. DFW leading indexes point toward increased activity in retail and warehouse, while future office construction should slow as a result of falling construction start values. Houston's leading indexes, with the exception of warehouse, are signaling higher construction activity going forward due to increasing construction start values. San Antonio leading indexes, with the exception of office, indicate less 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 55,800 jobs in June, rising 4.4 percent on a seasonally adjusted annual rate (SAAR). Based on the state's solid employment performance, the Federal Reserve Bank of Dallas forecasts annual employment will increase 5.6 percent in 2021, reaching 13 million workers in December. Hiring in Houston slowed during the second quarter, recovering 19,600 jobs compared with the first quarter's gain of 33,700. Houston payrolls are still 5.4 percent off from pre-pandemic levels, a larger gap than the other major metros. Dallas added 33,400 employees in the second quarter, registering the highest number of job gains of the four major MSAs. San Antonio and Austin registered net quarterly increases of 9,800 and 9,400 workers, respectively. Payroll expansions were largely concentrated in the leisure/hospitality, professional/business services, wholesale trade, government, and education/health services industries across the major metros. Employment declined only in Fort Worth, which shed 1,000 positions during the second quarter as global supply chains negatively affected the manufacturing industry. Goods-producing employment in Fort Worth decreased due to falling construction jobs.
Texas' goods-producing sector gained 2,600 positions in June. Even after registering two straight months of increases, the sector still lost 15,600 jobs during 2Q2021. Amid increasing oil prices, energy-related employment rose by 2,300 jobs in the second quarter but remained around a fifth fewer than year-ago levels. Recovering global economic conditions supported the state's manufacturing industry, which added 4,900 employees. Durable-goods payrolls recorded a 4,100-job gain during the second quarter. Construction payrolls fell last quarter, shedding 22,900 jobs.
Texas' service-providing sector, which was hit hardest by the pandemic, continues to recover jobs. It is 2 percent below pre-pandemic levels after adding 128,500 jobs in the second quarter. Leisure/hospitality recouped 58,000 jobs in 2Q2021, but arts/entertainment/ recreation payrolls remained almost a fifth below pre-pandemic levels. On the other hand, the transportation/warehousing/utilities industry added 11,300 positions, surpassing pre-pandemic employment by 1.2 percent.
Texas' unemployment rate decreased to 6.5 percent in June, still greater than the national rate of 5.9 percent. The state's labor force expanded, but that didn't increase the labor force participation rate, which remained at 62.2 percent below pre-pandemic levels. Joblessness in Houston also fell, albeit at a higher rate of 7.1 percent. The local labor force expanded from the previous month. On the other hand, unemployment inched down to 6.2 percent in Fort Worth and 6.0 and 5.9 percent in San Antonio and Dallas, respectively. The metric remained lowest in Austin, where the jobless rate slid to 4.9 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 would be expected, the increase in the unemployment rate back in 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).
Rising oil prices, accelerating vaccination rates, and optimistic national economic data during the second quarter resulted in higher growth and inflation expectations for 2021. However, the liquidity in the financial markets is a consequence of large-scale asset purchases by the Fed that include mortgage-backed securities and U.S. Treasuries, which have pushed down interest rates. The ten-year U.S. Treasury bond yield decreased to 1.52 percent in June after reaching a pandemic high of 1.64 in April. The spread between commercial capitalization rates and the ten-year Treasury yield decreased from 1Q2021 to 2Q2021. Rising inflation expectations and the Federal Reserve's tapering of assets purchases should push up interest rates at the end of 2021. As a result, the spread between commercial cap rates and the ten-year Treasury bill should continue to decline somewhat the rest of the year.
Office cap rates (Figure 10) decreased during the first half of 2021 in Texas' major MSAs after increasing during 2020. The increasing vaccination rates among the population has reduced the uncertainty surrounding the end of the pandemic, allowing for the full reopening of the economy and the slow return of white-collar workers to the office helping to lower the risk in the office cap rate. San Antonio and Houston continued to register the highest cap rates. With the exception of Austin, the office cap rate spread with the ten-year Treasury bill has decreased since 2Q2020 in the rest of Texas' major MSAs. Austin was the least risky market for office real estate during the first half of 2021 based on the spread with the ten-year Treasury bill.
Retail cap rates (Figure 11) have decreased since 2Q2020 in Texas' major MSAs. The same decreasing trend has been observed in the spread between retail cap rates and the ten-year Treasury. The drop in the spread reflects the change in sentiment regarding future expectations for the retail sector from devastating to a relatively more positive one. Austin and San Antonio are the least risky and lowest return markets for retail real estate.
Industrial cap rates (Figure 12) decreased during 2Q2021 in Texas' major MSAs and have decreased for two consecutive quarters. San Antonio and Houston recorded the highest cap rates. Similar to the other two markets, the spread between the ten-year Treasury decreased during the first quarter of 2021 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.
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