Texas Quarterly Commercial ReportTexas Quarterly Commercial ReportJames P. Gaines, Luis B. Torres, Harold D. Hunt, Kristina Richter, Garret Newman, and Caleb Smoot2020-12-21T06:00:00Ztechnical-report

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Third Q​​uarter 2020

Economic activity rebounded during third quarter 2020 after contracting sharply during the previous quarter due to COVID-19 shelter-in-place restrictions. Putting the health crisis in a historical context, neither the Great Depression nor the Great Recession nor any other recession over the past two centuries caused such a steep economic decline, especially in such a short period. However, the recovery's strength and pace slowed by the end of the third quarter due to the incomplete reopening of the economy, fiscal stimulus dissipating, and future uncertainty regarding the pandemic.

The Texas Nonresidential Construction Cycle (Coincident) Index, which measures current construction levels, ticked up due to the improvements in industry wages and employment. The statewide Nonresidential Construction Leading Index declined during 3Q2020 after rebounding the previous quarter amid decreasing construction value starts, indicating lower future construction. However, the major metros registered growth in their leading indexes as construction value starts and employment numbers rebounded from the 2Q2020 shutdown. In contrast, Houston's leading index for warehouse construction indicates slowing activity in the coming months due to a decrease in construction value starts. See Figures 1-5 for the Nonresidential Coincident Index and Leading Indicator for Texas and the four major metros.

The Texas economy lost 1.4 million jobs between March and April but recovered 661,000 of those jobs from May through September. Texas nonfarm employment gained 40,700 jobs during September, although hiring was slower than previous months. Jobs remained 5.1 percent below 2019 year-end levels. Employment by sector in the major metros recovered in September at varying paces, but the leisure/hospitality sector made up the lion's share of gains.

Although Austin gained only 1,300 jobs in September, the metro registered the smallest decline of 3.6 percent below year-end 2019 employment. The leisure/hospitality sector accounted for the majority of year-to-date (YTD) losses in Austin and Dallas, where monthly hiring added 10,100 workers, pulling YTD contraction down to 3.9 percent. Employment was 5.8 and 5.6 percent below year-end 2019 levels in Houston and Fort Worth, respectively, amid widespread losses across both goods-producing and service-providing industries. This is despite the monthly addition of 20,300 positions in the former and 2,600 in the latter. Decreases in San Antonio's government sector offset hiring in leisure/hospitality, resulting in 1,600 jobs shed overall in September and a 5.1 percent YTD decline.

Upsurges in COVID-19 cases may hinder Texas' economic recovery going forward. Further waves of infections could reverse increased mobility and spending, affecting future recovery. The good news for the coming year is the announcement of two COVID-19 vaccines reporting between 90 percent and 95 percent effectiveness. While the initial news of a successful vaccine helps reduce some uncertainty surrounding the pandemic, there are still headwinds facing the economy. These include monumental job loss, stagnate private investment, and a decline in business activity.  Additionally, it will take many months before a vaccine can be administered to enough people to allow the economy to operate at pre-pandemic levels. For additional commentary and statistics, see the Real Estate Center's Outlook for the Texas Economy​.

Texas' goods-producing payrolls expanded by 7,700 workers in September. However, the industry still reduced employment by 7.0 percent YTD. Energy-related employment contracted YOY for the seventh straight quarter, although 1,300 monthly jobs were added in September. The manufacturing sector also posted gains for the month, adding 1,100 and 1,600 employees in durable-goods and non-durable goods, respectively. The latter recorded positive quarterly growth but remained below year-end levels. In addition, the construction industry eked out positive quarterly growth as payrolls gained 3,700 jobs in September.

The service-providing industries added 33,000 positions monthly, bringing the three-month recovery to 179,900 total employees. Still, jobs were down 5 percent YTD with leisure/hospitality losses numbering 239,100. Federal government, however, increased 14.8 percent YTD amid mid-year Census-related recruitment, while professional/scientific/technical services and finance/insurance were up modestly above year-end levels. Texas' retailers decreased slightly in September, falling 3.4 percent below year-end employment. Although general merchandisers decreased by 8,900 workers on the month, the subsector registered only a 1.2 percent YTD decrease. Electronic/appliance stores and miscellaneous store retailers posted the steepest YTD declines, dropping 21.6 and 11.5 percent, respectively. In contrast, building material/garden equipment/supplies dealers increased 7.9 percent compared with December 2019 levels.

The state's overall unemployment rate reversed a four-month decline, jumping one-and-a-half percentage points to 8.3 percent due to an increase in the labor force, whereas the national metric continued to decrease to 7.9 percent. Joblessness rose across Texas' major metros, especially in Houston, where the rate climbed to 9.7 percent. The metric in San Antonio increased to 7.8 percent, while posting 7.7 and 7.5 percent in Fort Worth and Dallas, respectively. Austin maintained the lowest unemployment rate at 6.4 percent. The increase in unemployment 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 3Q2020 pushed up vacancy rates in the major metros (Figures 6-9).

Continued uncertainty stemming from the ongoing spread of the coronavirus kept interest rates at historically low levels as expectations for future inflation and growth are currently dim. The spread between commercial capitalization rates and the ten-year Treasury yield began increasing by the end of 2019 and has continued through 3Q2020. This increased spread indicates increased risk and profitability in commercial real estate and is projected to continue through the remainder of 2020.

Office cap rates (Figure 10) increased in 3Q2020 in Texas' major MSAs. San Antonio and Houston remained the highest, with both cap rates increasing during the first nine months of 2020. Austin and DFW cap rates have also increased through 3Q2020. Even with the increase in cap rates, the spread with the ten-year Treasury actually declined due to an increase in Treasury yield during 3Q2020. During the first half of 2020, Austin was the least risky market for office real estate based on the spread with the ten-year Treasury bill.

Retail cap rates (Figure 11) began to decreas​e in 2019 in the major MSAs, except for Houston. Austin and DFW decreased the most during the first nine months of 2020, followed by San Antonio. Houston's 3Q2020 cap rate decreased from the previous quarter. The spread between the ten-year Treasury bill increased during the first six months of 2020 and then decreased during 3Q2020, due to an increase in the ten-year Treasury bill. 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 first nine months of 2020. All major MSAs registered an increase in 3Q2020, with the exception of Austin. Similar to the other two commercial markets, the spread between the ten-year Treasury decreased 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.

Office Class A Tenan​​ts by Industry

To better understand how economic expansions and recessions will affect demand for commercial space in a particular location, it is important to know who the tenants are and what industry they belong to. This allows one to estimate the industry mix and the market's diversity from a downturn in a particular industry.

Houston's concentration of tenants in the oil industry stands out. Around one-third of the occupied space is from tenants in this industry (Graphs 1 and 4). The oil industry has been especially hit during the pandemic as world demand has fallen off, making the future prospects for Class A office in Houston dreary. To a lesser degree, San Antonio's tenant concentration in the oil industry is also worrisome, as one-fifth of the occupied space is for tenants in the oil sector.​

​Dallas-Fort Worth (DFW) is the most diversified market, followed by Austin (Graphs 2 and 3). Financial industry tenants play an important demand role in all markets. This industry has been able to socially distance and has done a good job of managing the transition of working from home. This has implications for future office space demand.


A significant share of the tenants in DFW belong to the retail and wholesale sector (Graph 3). The brick-and-mortar retail sector has been one of the hardest hit by the pandemic while e-commerce retail has done particularly well. Demand for office space will increase as the retail sector adapts and e-commerce becomes more prevalent.

The importance of the technological industry in Austin is observed in the high percentage of tenants that belong to the computer and processing sector (Graph 2). This industry has performed relatively well during the pandemic. Working from home will have consequences on future office space demand. (Look at the outlook box for further comments on the outlook for the office market).​

​​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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