Texas Quarterly Commercial ReportTexas Quarterly Commercial ReportJames P. Gaines, Luis B. Torres, Harold D. Hunt, Clare Losey, Caleb Smoot, and Samuel Woolsey2020-08-18T05:00:00Ztechnical-report

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Second Q​​uarter 2020

Economic activity contracted sharply in second quarter 2020 due to COVID-19 shelter-in-place restrictions, but then rebounded as the economy re-opened during May and June. 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. The strength and pace of the recovery are unknown because they depend on health outcomes that allow or impede the complete re-opening of the economy. 

The Texas Nonresidential Construction Coincident Index, which measures current construction activity, rebounded in June due to an increase in nonresidential employment and real construction values. Construction activity is expected to improve in the coming months after reaching a trough in May, as indicated by the Texas Nonresidential Construction Leading Indicator. However, the nonresidential construction leading indexes by MSA for the commercial sector indicate a slowdown in construction activity going forward. This is due to declines in construction value starts and employment by each sector during 2Q2020.

In contrast, San Antonio's leading index for warehouse construction indicates increasing construction activity in the coming months due to increases in construction value starts and warehouse employment. It is the only MSA and sector to register an increase during 2Q2020.  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 475,000 of those jobs between May and June. In June, when Texas nonfarm employment gained 225,200 jobs, hiring slowed after broad improvements the prior month. Jobs remained 6.7 percent below year-end levels. Employment by sector in the major metros recovered in June at varying paces, but the leisure/hospitality sector made up the lion's share of gains across the board.

Fort Worth and Austin ranked highest in percentage terms, adding around 30,000 positions each, but the count remained negative 6.0 and 6.9 percent YTD, respectively.

Job growth accelerated in Dallas where the workforce gained 63,300 employees. San Antonio payrolls were down 5.6 percent YTD despite expanding by 28,500 jobs. Houston recouped 46,900 positions, but the rate of increase slowed by June, leaving employment 6.8 percent below year-end levels.

The upsurge in COVID-19 cases hindered Texas' economic recovery in June. Further waves of infections could reverse increased mobility and spending, affecting future recovery. For additional commentary and statistics, see Outlook for the Texas Economy.

Texas' goods-producing sector shed 3,400 positions in June, although data revisions revealed 7,200 rather than 4,100 jobs were added the previous month. The mining/logging industry decreased by 6,400 workers, but the decline continued to slow. Market expectation for the oil industry for 2020 continues to be weak, with production expected to continue falling. Oil prices could range between $40 and $45 per barrel through much of 2021. Hiring in nondurable goods manufacturing stalled, while the durable-goods sector laid off 500 employees. Only the construction industry expanded goods-producing payrolls, albeit modestly, hiring 3,500 workers.

Service-providing employment decelerated, adding 228,600 jobs but falling 14,000 short of the prior month. Most of the slowdown is attributed to ambulatory health care services and food services/drinking places. On the other hand, arts/entertainment/recreation payrolls expanded by 28,500 after three monthly decreases followed by a standstill in May. On the bright side, 42,000 retail employees were called back to work, an improvement over the previous month. Recovery was widespread with only miscellaneous store retailers and nonstore retailers taking a step back after modest increases in May.

Even with the recovery slowing in June, the unemployment rate fell to 8.6 percent after reaching a high of 13.5 percent in April. Joblessness in each major metro fell by more than 4 percentage points. Austin's metric was the lowest at 7.3 percent, while unemployment sank to 8.2 and 8.4 percent in Dallas and Fort Worth, respectively. San Antonio's jobless rate was 8.3 percent. Only Houston exceeded the state average with 9.6 percent unemployment. The fall in unemployment is important for commercial real estate given the relationship between unemployment rates and vacancy rates. The longer unemployment lasts, 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).

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. Even before the pandemic, the spread between commercial capitalization rates and the ten-year yield increased at the end of 2019, indicating increased risk and profitability in commercial real estate. The increase in the spread is projected to continue in 2020 as commercial real estate risk continues to be impacted by the pandemic.

Office cap rates (Figure 10) increased in 2Q2020 in Texas' major MSAs, with the exception of Austin. San Antonio and Houston remained the highest, with both cap rates increasing during the first six months of 2020. DFW increased during the second quarter. 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) started to decrease in 2019 in the major MSAs, except for Houston. Austin and DFW had the largest decreases during the first half of 2020, followed by San Antonio. The spread in the ten-year Treasury bill increased during the first six months of 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 continued to be the highest during first half 2020. All major MSAs registered an increase in 2Q2020. 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. 

​​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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