It seemed like the Texas growth miracle would never end. Texas has led the nation in job creation and home price appreciation since the end of the Recession. 2013 was a tremendous year, with home price appreciation at 15% or greater in all Texas metros. 2014 saw continued strength but a slowing of demand. At the start of 2015, the Texas region was coming off a good year, yet there was concern about declining oil values, (WTI per barrel high of ~$105 in June 2014, now at ~$38) and the effect on our region’s economy.
While Texas is still experiencing growth, the effect of lower oil prices and a stronger U.S. dollar has weighed on the region’s economy. 203,900 jobs were added in Texas this year, and employment in December 2015 will be at 11.9 million jobs, just under a 2% increase for the year. But for the first time in five years, the state lost jobs on a monthly basis – 25,200 jobs in March and 13,700 jobs in August, after four months of job gains. As stated before, the state still added jobs overall, even with the job losses from the energy sector. However the job losses signal a slowing of the market in some channels. The state gained 204,800 nonagricultural jobs from October 2014 to October 2015, an annual growth rate of 1.7 percent, lower than the nation’s growth rate of 1.9 percent. This is the first time since the Recession that Texas has added jobs slower than the rest of the nation.
Existing home sales dipped in October, while third quarter exports fell. The employment forecast ticked up, and the estimated value of the Texas Leading Index rose in October following four consecutive months of decline. All metros continued to see great low unemployment numbers, with jobs being created in services, trade, and utilities industries. Looking at employment data through November, it now seems certain that Texas will get through the 2015 oil bust with net positive job growth for the year and continue into 2016.
While the forecasted 1.3 percent job growth is much weaker than the 3.6 percent growth in 2014, it is stronger than that of other energy states and much better than what occurred in the 1980s following similar oil price declines, according to Dallas Federal Reserve analysts. The difference is that Texas is much more diversified today than it was in the 1980s, and its real estate markets were in much better shape heading into this energy downturn. If oil prices remain near recent levels, 2016 job growth will likely remain close to this year’s pace.
Last year, the state gained a net total 103,465 new residents, the second most of any state in the country. Americans relocated with good reason. Between 2012 and 2014, employment in the Lone Star State grew 6.2%, 2.5 percentage points ahead of the national growth rate of 3.7%.
With this growth, housing demand in all metros is strong but with some signs of slowing. Statewide housing sales increased year over year by 9.2 percent this year. All Texas metros, with the exception of Houston, are driving this increase in residential and commercial real estate sales while the border cities record moderate growth. To no one’s surprise, Houston’s housing sales have remained flat in following declines in energy prices.
Houston is the one metro nationally that seemed impervious to the recession with incredible growth in all channels. Although the annual employment is off 30%, growth is still there. Apartment demand continues strong in the Houston area in the wake of dipping oil and gas prices. The employment picture upside exists as the oil and gas operations consolidate in the Houston area and the continued growth in the area’s medical community. Though the employment growth remained slower this year, these two sectors lead the charge in fueling demand for rental housing. In the eastern portion of the metro and along the Gulf Coast, several petrochemical plants are underway or proposed, stirring demand for Class B and C apartments nearby and driving property interest and values in the area.
West Houston is coming off a several year building boom that has brought thousands of new units online. Softening has begun to occur and developers are ramping up efforts to lure tenants to recently constructed properties. Developers attitudes about the market are shifting and new developments coming out of the ground are already beginning to slow (if adding 20,000+/- units to the market is slowing). Rent values have slowed but continue in a positive trend with some concessions, except in the class A channel. Occupancy continues to be in the mid 90% range and projected to remain steady in 2016. With a 110,000 jobs continued to be created, Houston’s so-called “slowing” is envied by many.
Home sales slowed but values remained strong. Home sales in the Bayou City saw a 12% drop from the previous year and increase in resale inventory rise from 2.8 months of supply last October to 3.5 months of supply. Inventory has held at a 3.5 months of supply for the past four months, but remains below the current national housing supply of 4.8 months of inventory. Nonetheless, home prices achieved the highest levels ever for an October in Houston. The single-family average price rose 3.7 percent from last year to $271,648, while the median price jumped 6.6 percent year over year to $205,000, and average days on market ticked up slightly from 51 days to 53.
Office space is feeling the brunt of the energy slowdown with over eleven million square feet coming on line this year, surpassing the 9 million that came on line last in 2014. All this office development has pushed vacancy up near 18%, with rents beginning to stabilize after years of increasing values. Hopefully developers will begin to pull back in 2016. Houston industrial and retail have slowed but maintain above national occupancy in the mid 90% range.
Strong job formation (130,000+ jobs 2014, 90,000 in 2015) continues to be the driving force behind the Dallas/Fort Worth metro’s growth, and these factors will play a large role in propelling the market. Many companies are expanding, moving headquarters to the area, and employment additions remain broad in nearly every employment channel. Rising employment in the market is stirring demand for housing, and despite developers bringing nearly 75,000 apartments online since 2009, vacancy has continued to tighten with no concessions and rising occupancy (95+%). Tight conditions combined with healthy rent growth have prompted developers to resume building activity, and developers will deliver 22,000 units this year. Nearly 40,000 apartments are underway throughout the region, and multifamily permitting remains strong in almost all North Texas cities, signaling builders’ continued confidence in the market. Though some softening should occur in 2016 as newly constructed units come online, vacancy should remain well below the last 10 years average. Because of this, rent growth and sales growth should remain strong through 2016 into 2017.
With all the new people and tight rental inventory, home values have continued to improve over 7% to 12% depending on what county you are in North Texas. Home sales are brisk with less than 2.5 months of inventory. In the northern suburbs where business is brisk there is concern of overdevelopment by some due to the number of communities coming online by the end of 2016.
With all the corporations moving to the area, office development is strong with over 7.5 million square feet new in the market in 2015, featuring headquarters space for State Farm, Raytheon, and FedEx, etc. In 2016, roughly 3.6 million square feet was finished. Even with all the office space demand, vacancies will continue to move up to around 20% in the market. Lease concessions continue to be available to larger tenants through 2016 and rent values should continue upward.
Job growth remains steady with the lowest employment of the last 20+ years at 3.5%. This employment growth should remain through 2016, supporting household formation and property values, keeping rents and occupancy strong. Several sectors of the metro’s employment base added a sizable number of jobs during the last 12 months, further diversifying the economy.
The trade, transportation and utilities industry makes up the largest share of metro wide employment, driving demand for B and C class apartment properties throughout the area. The continued healthy pace of hiring in the leisure and hospitality and construction sectors is strengthening demand for these older communities. The number of rental communities built in the 1970s and 1980s offering concessions remains well above the metro average.
Through 2016 the continued growth in the metro’s blue-collar / entry level workforce will bode well for landlords and operators of these properties and will contribute to the strength of the market through 2015. The continued expansion of the local medical community and technology industry is creating thousands of well-paying jobs. Young professionals moving into the market underpin the strong performance of recently built properties. Vacancy at apartment communities built since 2000 has tightened below 5 percent, and the number of these properties offering concessions has dwindled to 3 percent from 14 percent one year ago.
Construction added 5,500+ apartment units in 2015, an increase of 3.2 percent from last year. However because of the demand for lower priced units, multifamily permitting activity is down 70+% from a year ago as builders begin to scale back new developments watching absorption of new inventory. With 94+% occupancy, rents will continue to rise about 5% through 2016.
San Antonio retail and office continue to be moderate in construction and sales with 90+% occupancy. A potential game changer for San Antonio is Microsoft. The tech giant has bought 158 acres of Texas Research Park real estate controlled by the Texas Research and Technology Foundation. TRTF officials said the company plans to develop one of the largest data centers in the country at the far west San Antonio site. This type of catalyst could change the dynamics of the San Antonio economy. Do not be surprised by other announcements in the same vein for San Antonio.
San Antonio and Austin are interesting due to their limited bandwidth of where they can expand development to. San Antonio prefers to stay north of I-10 and west of I 35, but moving west is an issue with the government owning so much land. Two years ago we suggested to our Alamo Heights group that the King William area was prime for redevelopment and have seen an explosion as developers look at ‘underutilized properties’ for denser development. We feel that San Antonio has tremendous opportunity with their underutilized properties inside the loop and along it.
The average price of a home in the San Antonio metro improved 10% from a year ago to $231,116 (10% increase), with median values to $187,200 (6% increase). Sales increased by 5% and the market remained a seller’s market with 3.9 months of supply.
Austin is the last major Texas metro that we will address. Austin cannot continue to grow West due to geography, road infrastructure, and environmental concerns. Do we move east, north or south? Recruitment of new business and organic local growth will be the driver of our city’s economy for the foreseeable future.
Google and Apple have not even begun to hit stride in expansion. Other companies that are moving to or expanding in Austin are Dell /EMC, GMC, Hewlett Packard, the University of Texas medical school, and Emerson Process Management. The potential for continued growth is much greater in Central Texas than the rest of the nation.
The strength of this market is shown by the number of units being brought to the market and absorbed. It is not a secret that Austin has the most expensive housing costs in the state of Texas, and this trend will continue in a slower fashion, even as more supply comes online. While the median household income can still buy a median-priced home in areas surrounding Austin, home values in the core are well out of range for many would-be homeowners. As a result, demand for apartments in these areas has risen significantly as residents seeking to locate near popular employment and cultural districts choose to rent in lieu of homeownership. This is apparent as we see 10,800+/- units brought to the market, following 12,100 in 2014. That type of growth and development has not been seen since the late 80’s in the Austin area. Yet concessions are few, and rents continue to rise, although slower.
The Liberty Hill, Cedar Park, and Leander areas are experiencing rapid growth because they have some of the last affordable, developable land available. Home sales in the $400K to $700K will be the most difficult to move for sellers. Values will continue to improve, just not as aggressively. As a smaller builder, I would stay focused on value for the dollar and keeping labor happy as competition continues to battle for their services. The ability to build entry level homes will present opportunity for large market share for those builders who can do so.
The demand for office space is apparent with the number of construction cranes dotting the landscape. In 2015 3.5 million square feet will be completed, which is the largest amount of space delivered since 2007. Last year, office inventory rose by 1.1 million square feet. The strong demand has kept occupancy in the low 90% range, and rents continue to escalate.
We started this conversation concerned with the cooling of the regional market. Yet, if we look at the numbers, the continued pace of sales and values should continue. All this positive news actually scares me a little, since in my lifetime I have never seen Austin or Texas with this level of potential and few clouds on the local horizon. Time will tell.