Texas continues to outpace the US in job growth, driving Texas real estate
The Texas economy continues to grow at a rate higher than the national average. The state gained 261,000 nonagricultural jobs from August 2011 to August 2012, an annual growth rate of 2.5 percent compared with 1.4 percent for the United States. The state’s private sector added 270,900 jobs, an annual growth rate of 3.1 percent compared with 1.8 percent for the nation’s nongovernment sector. Or as we have said many times before, one out or four jobs in the nation have been created in Texas since the recession
The Texas growth narrative is well-known by now. Texas’s population grew by 11 million people (79 percent) between 1980 and 2011, more than double the rate of growth of the nation as a whole. With that population growth came job growth. Since the 1990s, the rate of Texas job growth has been a full percentage point or more above the national average most years.
Texas’s rapid population growth has been a major driver of the state’s economic growth over the last several decades. The vast majority of the state’s growth is the result of two factors specific to Texas: The state’s relatively high level of “natural growth,” i.e. births minus deaths; and international immigration, much of it from neighboring Mexico.
Specifically, Texas has the nation’s second-highest birth rate (after Utah), which researchers attribute to a variety of demographic, socio-economic, and cultural factors. Texas is also a major entrance point for immigration from Mexico and Central America to the United States. International immigration provides Texas a steady base of population growth. Between 2000 and 2009, more than half of the net migration to Texas was from Mexico and other countries (according to the Office of the State Demographer “Texas Demographic Characteristics and Trends” presentation February 3, 2012; and U.S. Census Bureau, Components of Population Change).
Most recently, about 72% of Texas’s net population growth last year resulted from international migration and natural growth, according to the Census Bureau; the remaining 28% percent resulted from net domestic migration according to CBPP calculations of Census data. This population growth in turn has caused job growth. Population growth has fueled demand for housing, goods, and services such as education. This increased demand has spurred expansion of businesses, schools, and so on, creating jobs in both the private and public sectors.
Commercial and residential real estate in Texas and other regional states, which never rose too high or fell too far, is now benefiting from the region’s hot economy.
In some of the states, you could even say real estate is a well-oiled machine — energy production in the central U.S. has helped bolster the region, as seen in the states’ low unemployment. People in the region, simply, are working.
In Texas, here’s how that translates into housing and real estate prices. Each of the state’s major metro areas — Houston, Dallas/Fort Worth, Austin and San Antonio — saw minimal declines in the bust and are essentially fully recovered.
Each metro area has its own economic strengths that diversify the state’s economy beyond the energy sector, like high-tech and government in Austin or tourism and the military in San Antonio. The diversity of the Texas economy has helped drive job growth and demand for real estate in all metros, with thee out of the four metros, Austin, San Antonio and Houston recovered to pre-recession employment and better. DFW is at 97% of pre recession numbers.
Low cost of living and low housing prices
Another major contributor to Texas growth is that the cost of living is considerably lower than the national average. Housing, which represents roughly one-third of a typical household’s spending, is particularly inexpensive.
Texas has the second-biggest land area in the country, much of it quite flat and thus available for development. The supply of land keeps prices low and makes it considerably less expensive to start a business or build housing than in many other parts of the country. Texas has by far the most open land among the nation’s most populous states. The population density of Texas is less than half of that of California, less than one-fourth of New York’s or Florida’s. These four states account for over 30% of the nation’s population.
There is some debate about why housing prices did not soar in Texas along with the rest of the country. Texas had the lowest appreciation in 2005/2006 in the country according to OHFEO. Whether it was because Texas was the last state to allow homeowners to borrow against their homes through equity loans and placed strict controls on the amount they could borrow, or whether it was the plentiful land or some other reason, there is no doubt that Texas did not face the boom and bust in housing that preceded the 2007-2009 real estate recession in many states.
In addition to keeping real estate prices low (particularly housing), the absence of a housing price speculation bubble (and subsequent implosion) benefitted the Texas economy in other ways. The mortgage foreclosure rate soared in other states but has been much lower in Texas. The Texas foreclosure rate was one in every 1,203 mortgages in August 2012, just 60 percent of the national rate and less that one-third the rates in Nevada, California, Arizona and Florida. As people in other states were losing there homes and equity, Texans were largely spared from the economic fallout.
Employment drives the local real estate economy, and commercial real estate is a good indicator of employment trends. Let’s look at commercial real estate in the major Texas metros.
Austin is an economic success story in the face of nationwide uncertainty, with employment growth at 3.6% annual growth and the addition of 29,000+/- jobs annually.
Austin’s apartment inventory will grow by 8+% / 11,738 units, the majority within a couple miles of CBD. Last year, completions dropped to the lowest level since the early 1990’s. Vacancy will remain tight with less than 3,500 units available in the five county area presently. This may be the tightest market since the early 2000’s. Asking rents will rise 5% or more, which means the housing affordability gap has closed for class ‘A’ renters with upward pressure on ‘B’ and ‘C’ renters. Actual numbers per Austin Investor Interests: 7,700 units delivered in next 12 month with a current 4.8% vacancy rate.
The above average economic growth and pro-business climate have been welcomed in Austin’s office market. Although office leasing is off over 20+% nationally, Austin has seen a net increase of 180,000 sq feet. These absorption numbers would have been larger if and Cirrus Logic and Intel had not vacated large chunks of space as they moved into their own buildings. Rents are projected to increase 2+% this year (source: Marcus Millichap).
Retail continues to be challenged nationally as evidenced by the downsizing of most retailers, except grocery and medical. That said, local retail is doing ok with over 930,000 sq feet brought on this year, and retailers are projected to absorb over 1.1 million sq. ft., the largest amount since 2007. Rents should continue to rise with some concessions in retail.
San Antonio grew employment this year by 20,500 jobs, or a 2.4% increase. San Antonio’s future continues to look bright, thanks in part to the strength of oil and gas production in the Eagle Ford Shale, which continues to strengthen renter demand in south SA and counties south of the city. In the northwest and west, Nationwide’s new campus along with expansion in the growing bioscience sector will continue to drive the market.
The stronger job market bodes well for the local apartment market with an increase of 7,979 units under construction and 3,826 units delivered in next twelve months. Rising construction costs, particularly framing and lumber may slow down development with lower paying industries adding jobs primarily. There is some chance of higher vacancies with the amount of units coming on this year.
Corporate relocations to owner occupied and build-to-suit have caused office vacancies to increase over last year. However, the strength of the Eagle Ford Shale play and stronger housing market conditions are working to revive previously stalled developments.
Eagle Ford drilling and continued military spending has had a dramatic effect on boosting retail in San Antonio. Retail continues to improve with modest increases this year, as continued job growth in most sectors has allowed San Antonio families an increase in spending in San Antonio. Most tenants are concentrating in areas with high home sales and job growth, causing retail space demand to exceed supply this year, gearing the market toward healthy vacancy improvements and modest rent growth. Retail developers will bring 625,000 square feet of space online in 2012, adding to the 674,000 square feet of space that came online last year.
Houston’s economy continues to remain well positioned with over 95,000 jobs created this year. A 3.65% increase in employment will continue to feed housing, office and retail absorption
Metrowide, over 10,500 apartment units are under construction with another 18,000+/- planned. While new apartment supply doubles from 2011, demand outstrips development putting pressure to raise rents and fewer concessions from land lords, particularly in class A complexes. With the potential of overbuilding, and with average Class A vacancies below 7% and rents spiking, developers have been hustling to be first in line to bring new multifamily product out of the ground and to the Houston inner loop market.
After 1.6 million square feet of office space was completed last year, developers will have a slower year in 2012, delivering around 450,000 square feet. With the strength of the energy sector and all its support industries, CBD and the energy corridor have put pressure on raising rents. That has been offset by slower interest in non-core areas such as Greenspoint where office leasing continues to be a challenge. Because of the strength of employment, many institutional investors continue to show high interest in core office space with continued optimism.
With over two times the national employment growth, retail continues to buck the national trend with 1.2 million square feet of new space and 826,000 last year. There has been a flight to quality on the loops and areas of high housing growth and should continue into 2013.
The Dallas/Fort Worth economy has turned the corner with over 89,000 jobs created last year, a 2.8% increase. Of all four major metros, D/FW has lagged behind the others in returning to prerecession employment. However it is doing better than most of the country at 97% recovery. The economic slowdown and hesitancy to build is apparent in the tightness of the market.
With apartment occupancy at 95%, and a limited number of new apartment communities coming on line (8100+/-), rents should continue to rise and lease negotiation should remain firmly on the sides of the landlords. The biggest competition for rentals continues to come from the large amount of foreclosures in D/FW. Dallas is closer to the statewide foreclosure rate, with 1 out of 1100 units in potential foreclosure. Fort Worth continues to be challenged with 1 in 750 in potential foreclosure. Because of this, apartment developers have focused primarily on the Dallas metro of new development.
The Dallas/Fort Worth office market will continue to post modest gains in occupancy as new supply continues to lag behind demand. Just 350,000 sq. ft. will come online this year, more than doubling last years output of 161,000 square feet. D/FW vacancy is still challenged at 80 to 85% occupancy and over 40 million square feet available. However, with lack of new construction, it is allowing rents to improve for lessors. Dallas offices include the homes of 24 Fortune 500 companies. Projections indicate that the year 2013 may well see a gross area domestic product of $389 billion for this area.
Demand for retail continues to tighten the market. Over 2.1 million square feet of new retail space is planned to be finished by the end of 2012, a 100% increase over last year. Occupancy is good at 90% and should continue to improve with the uptick in housing demand in the outlying suburbs.
Commercial real estate in rural Texas towns has also improved from demand in the energy sector as evidenced by the strength of rents south of San Antonio and in the energy counties around Midland/Odessa. Barring a catastrophic event in the Texas economy, we should continue to see strength in most portions of the commercial market in our state.