Houston and DFW midyear review

Last week we started our midyear review of Texas markets with a look at San Antonio and Austin. This week we will be looking at DFW and Houston. As stated last week, the majority of our state has enjoyed tremendous job growth and all the benefits it brings.

Over the last twenty-three years, the number of jobs has increased almost twice as fast in Texas as it has in the rest of the country. Many people might imagine that most of those new jobs pay low wages, but that turns out not to be true. To be sure, Texas has more minimum-wage jobs than any other state, and only Mississippi exceeds it with the most minimum-wage workers per capita. According to the Dallas Fed, only 28 percent of the jobs created in or relocated to Texas since 2001 pay in the lowest quarter of the nation’s wage distribution. By comparison, jobs paying in the top half account for about 45 percent of the new jobs in Texas.

Texas has been creating or attracting middle- and high-wage jobs at a far faster pace than the rest of the country taken as whole. For example, between 2001 and 2012, the number of Texas jobs in the upper-middle quarter of the nation’s wage distribution increased by 25.6 percent. This compares with a 4.1 percent decline in the number of such jobs outside of Texas. Though coming off a comparatively small base, Texas has also outperformed the rest of the country in its growth of high-paying jobs.

That’s a big deal. From 2000 through 2010, the country as a whole experienced zero net job creation, and the continuing decline in middle-class jobs is arguably the largest single threat to the economy’s viability. The first and most obvious question to ask about the Texas boom in jobs is how much it simply reflects the boom in Texas oil and gas production. Texas boosters say the answer is very little, and play up how much the Texas economy has diversified since the 1970s. And indeed, Texas has more high-tech, knowledge-economy jobs than it did forty years ago. But so does the rest of America, and the stubborn truth is that, despite there being more computer programmers and medical specialists in Texas than a generation ago, oil and gas account for a rapidly rising, not declining, share of the Texas economy.

Thanks to fracking and other new drilling techniques, plus historically high world oil prices, Texas oil production increased by 126 percent just between 2010 and 2013. Only a few years ago, Texas’s oil production had dwindled to just 15 percent of U.S. output; by May of 2013 production had jumped to 34.5 percent, as new drilling methods opened up vast new plays in once-forgotten corners of south and west Texas with names like Eagle Ford, Spraberry Trend, and Wolfcamp. Thanks to the increase in drilling, Texas already produces more oil than major oil producing countries such as Venezuela, and is headed to become the ninth-largest producer of oil in the world, ahead of Kuwait, Mexico, and Iraq.

The economic effect of the energy play on cities and metros is apparent in traditional oil towns such as Midland/Odessa, Houston, and Fort Worth, which have unemployment rates lower than Texas’s and the rest of the country in April 2014. In addition non-oil Texas cities and metros such as Lubbock, San Antonio-New Braunfels, San Angelo, and Longview have seen their unemployment numbers bolstered by the strength of the energy play.


To say growth in Houston has been fueled by the strength in oil and gas exploration and the supporting technologies would be an understatement. The shale gas exploration in particular is creating jobs in multiple areas. It’s led to 10,500 jobs in professional and scientific services, while administrative, machinery, and manufacturing industries have also seen job gains. Job growth is the seventh strongest in the country over the last five years, largely because Houston’s energy infrastructure is only getting more developed. Multiple companies are building export terminals, fractionaters, and ethane crackers. Because of this growth Houston has seen a huge increase in engineering and construction jobs as a result.

Houston saw little to no slowing during the recession compared to the rest of the US. More than 100,000 new jobs will be created in 2014 for the Houston MSA, drawing thousands of new residents. Despite an increase in multifamily completions this year and last, housing supply and demand will remain well aligned. Since hiring resumed four years ago, more than 12 jobs were created for every apartment brought online over the same period. The ratio of jobs to completions will decrease in 2014, but should remain highly favorable, supporting a little decline in vacancy of residential rental.

Bayou City home sales saw sales volume fall for the first time since May 2011. The lack of housing inventory resulted in the market’s first home sales decline in three years in May. Thirty-four consecutive months of positive sales ended in April with flat year-over-year sales. However, sales activity for homes over $500,000 outpaced last May 2013, and coupled with low inventory levels, drove the average sales price to a new record

Houston’s office channel continues to improve as booming energy markets support expansion of top industry players and their campuses. The second half of 2013 and the first half of 2014 was characterized by several major leases, with Bechtel, ConocoPhillips, Statoil, and ExxonMobil each committing to more than 400,000 square feet. This year, ExxonMobil will also complete its 3 million-square foot campus in The Woodlands/Spring area, where Southwestern Energy’s 515,000-square foot headquarters is slated for delivery. Numerous other build-to-suit projects have broken ground in the metro, including BHP’s office tower in Uptown, Phillips 66’s campus in Westchase, and Noble Energy’s headquarters in the Northwest submarket. Downtown, Chevron’s plans to expand its presence with a 1.7 million-square foot tower were recently delayed. The project, which was initially slated to break ground in 2014, could bring 1,700 jobs to the area. In the Class B sector, construction is limited, which will support occupancy gains among existing properties.

Houston remains on many equity and investors ‘needs’ lists this year as local job growth reaches well beyond the national rate. The metro’s surging economy recaptured the attention of REITs and institutions, which accounted for nearly 70 percent of dollar volume in 2013, up dramatically from the previous year. This influx of capital has heightened competition for best-of-class deals, driving cap rates for high-credit assets in strong locations into the mid 6 to 7 percent range. Activity in the metro’s Class B sector has also picked up, thanks in part to the return of private out-of-state buyers who have focused almost exclusively on core submarkets.

Houston retail has benefitted also, with retail vacancy slipping to its lowest level in years and should continue to improve in 2014 amid the strong economic growth and resurgent homebuilding. The Woodlands, Katy and Energy Corridor submarkets, in particular, stand to benefit tremendously from healthcare-sector growth and expanding energy firms.

We have talked a lot about the resurgence of the energy industry and its effect on the metro. Remember that Houston is also home to one the largest medical centers in the world. The innovation and leadership generated from Houston leads most of the country and world in the industry. This area will continue to be one of the major employers and leaders for the Texas economy. As the Dallas Federal Reserve has pointed out, 40+% of jobs created the last 15 years were in the health and education channels.

As in the other real estate channels, above-average economic expansion and growth prospects in the Houston area continue to attract retail investors to the area, supporting property values escalating and encouraging more owners to sell. Because of that demand in closer-in submarkets, land constraints and rising costs have relegated much of the new retail space to mixed-use projects.

The opening of Mexico to oil exploration for the first time in 25+ years, and the value of lower priced, yet high occupancy real estate should continue to help Houston be one of the healthiest economic metros not only in the state and region, but the nation also.


In Dallas/Fort Worth the housing market has not been as robust as the rest of Texas. 2013 showed a burst of activity that slowed with the start of 2014. Gains in home values and sales early last year have slowed. A year ago, sales of pre-owned homes were up 23 percent and prices were rising at double-digit rates from the previous year. However this last month, home sales in the area fell 1 percent from a year earlier. Prices rose, but by 6 percent from May 2013. The slowdown in the pre-owned home market growth is likely to continue in the months ahead because of a tight supply and consumer push-back against huge price increases.

The feeling among builders and realtors is that consumers in the D/FW market are waiting for better economic signs before taking a leap to buy in many cases, which continues to keep the market sluggish and adds to the time it will take the market to heal. Adding to the sluggishness is the delays in completing homes during the quarter due to a shortage with many trades. The extended construction timeline negatively impacted the number of closings for the quarter, leading to only a 14% increase in closings compared to a year earlier. The tight supply is extending the construction cycle and driving up construction costs, lot costs, and ultimately home prices.

The DFW metro area continues to have one of the most diverse economies in the US, with strong establishments in tech, aerospace, telecom, and financial services. Employers will create 113,900 jobs in 2014, more than any other metro in Texas, raising payrolls 3.6 percent. In 2013, 112,700 positions were added. Population growth is strong, housing sales are, and employment at corporate headquarters increased by more than 4,000 works over the last five years.

Toyota Motor Corp.’s relocation of its U.S. headquarters to Plano has been a welcome addition and may bring $7.2 billion of economic activity over 10 years. The figure includes $4.2 billion from payroll, along with direct and indirect spending, and sales and property tax revenue, according to the analysis by Grant Thornton LLP, a Chicago-based audit, tax and advisory company. The report was released May 12 when the city, a Dallas suburb, approved incentives for the company.

The central location of DFW and the abundance of large contiguous space will continue to attract corporations as they look to expand.

The push back from home buyer bodes well for DFW landlords. These buyers who are waiting for values to change, combined with rising interest rates and tight underwriting, will preclude them from purchasing a home, a positive trend that will further support apartment operations this year and next. Almost all submarkets will post gains in occupancy and rents during 2014, and construction will reach the highest level since 2000, lifting competition and encouraging greater concessions in some areas

The DFW office market continues to be healthy with major office leases being shopped. The lack of aggressive concessions from landlords is a testament to the strengthening of the market. Another year of strong economic growth in the Metroplex will reinforce investor optimism through 2014. REITs and institutional investors, which accounted for more than half of last year’s dollar volume, will again dominate the market for high-credit Class A deals. Landlords continue to see small rent improvements strengthened by corporate inquiries.

Texas is extremely business-friendly with a low tax, low regulation environment that makes it attractive to out-of-state firms. All of the tech hustle and bustle has led to an influx of young professionals, which has led to a boom in construction in all metros. To consider that the state has put its focus on too few industries for a strong future is a weak argument, when looking at the facts. Again realize that we are lucky, blessed to be living in Texas, at one of the best times in history. Austin, San Antonio, Houston, and DFW will be the recipients of over 25 million new Texans over the next 20 years. To put that in perspective, few if any states will see that type of growth over the next 20 years. That type of growth has been likened to what happened to California in the 60s by some economists.

As in all Texas markets, the number of jobs and lack of inventory has gotten most buyers off the fence and helped new and resales through the first of the year. Developers are scrambling to put lots on the ground to address the lack of inventory. Comparatively all real estate channels have stayed healthy also. Not as robust as previous years, but good. Values have remained stable with a little appreciation. Developed lots are just above equilibrium, with expansion in the pipeline for the first time in all metros, however most markets will continue to be tight through the end of 20114.

Austin and San Antonio midyear review

It’s time for a midyear review of our real estate markets in Texas. This week we will start with what is happening in Central Texas and San Antonio. The underlying theme is the continued job growth in Texas and all the benefits it brings.

Not only does Texas have a rapidly growing job market, it also has an exceptionally large GDP of $1.5 trillion in 2013. It was second highest nationwide last year and greater than the combined GDP of the following nine states combined. GDP growth exceeded the national growth rate by a large margin in each of the last three years.

By most measures, including employment and economic output, Texas recovered from the recession a couple of years ago. Booming oil production is named as one of the largest factors contributing to the economy’s strong growth. The mining industry, which includes oil production, accounted for 13.5% — well over $200 billion — of Texas economic output, five times the sector’s contribution to the national output. But over the last 15 years over 40% of all jobs have been created in the health and education industry. Texas total nonfarm employment increased by 64,100 jobs during April 2014. Between April 2013 and April 2014, Texas total nonfarm employment increased by 348,000 jobs or 3.1 percent.

The Texas unemployment rate was 5.2 percent for April 2014, down from 6.4 percent a year earlier in March 2013. The Texas unemployment rate has been at or below the national rate for 88 consecutive months / 7+ years. The second part of that story is the lack of inventory in most real estate channels and the continued buildup of demand.

San Antonio

Home to one of the largest medical facilities in the nation, San Antonio has seen strong job growth from military medical operations. This is welcome news as the national defense budget has been cut dramatically. Ambulatory health-care services combined with new technology has created more than 12,000 jobs over the last five years and looks to continue for a while. Medical isn’t the only thing driving development. San Antonio is also home to the largest oil and gas development in the region in the Eagle Ford Shale. Record drilling levels and high-yield wells are pumping new jobs into energy and related sectors. In San Antonio the real estate downturn wasn’t as severe as in the rest of the nation. Government presence (three large military installations) has somewhat protected the market. However the lack of job growth (a net positive of 1,000 jobs over the last 12 months) in 2013 put a drag on optimism and the local economy.

The local housing market continues to improve with home resales increasing in value but with volume nearly identical to last year. Resale inventory is at 4.5 months (6 months is considered equilibrium) making it a seller’s market. New home starts followed a similar path with a slight increase in volume, but values improved dramatically. New home sale has seen an improvement in the upper end with luxury housing priced $300,000-500,000 dramatically improving 33%, and homes over $500,000 are 28% over last year.

In most markets developed lot inventory has been the biggest challenge. San Antonio lot inventory has increased each of the last three quarters thereby increasing the overall lot supply from 17,002 lots in 2Q13 to 18,384 lots as the end of the first quarter of 2014. This has helped to stabilize values and lot inventory and provide relief to high demand areas that saw their lot supplies diminish over the last three years. After 7+ years of little appreciation, land, labor and material are driving up the cost of lot development. This ‘catch up’ value increase has pushed the San Antonio affordability ratio where it is now virtually impossible to reproduce lots for new housing priced under $175,000.

Renter-household formation continues to be strong as broad-based employment growth continues to boost the San Antonio economy. The Alamo City is particularly benefiting from jobs generated by the nearby Eagle Ford Shale. Oil-field service companies have created thousands of jobs, bolstering hiring in a broad array of sectors including professional, health, education, and government. These jobs will support the addition of a projected 65,000 new households between 2012 and 2017, boding well for apartment operators. Wanting to capitalize on surging demand, developers are bringing 4,700 units to the market this year, concentrating on the Broadway corridor, northwest and north central San Antonio. In addition to the boom of the oil industry, the northern region is home to major employers such as the University of Texas at San Antonio, USAA and the Medical Center District. Although construction market wide is significant, strong demand will put downward pressure on vacancy, resulting in continued moderate rent growth.

The San Antonio apartment market is strong for a San Antonio market. While a 91.5% occupancy rate may seem low in other cities, San Antonio’s stability at this rate continues to attract investors. In the past four years, there has been over 13,250 new units added to the local inventory, yet occupancy has fluctuated minimally, showing less than a 4% difference between the highest and lowest occupancy rates during that time. In addition, rental rates have continued to creep up, increasing almost 20% over the four-year period, to reach a current record high of $0.99 per square foot. With this stability developers are enthusiastically building in this market and investors are eager to buy. There are currently 10,846 units under construction in San Antonio. In addition, the next 12 months are expected to see approximately 7,900 more units break ground. Much of this construction remains concentrated in the northern and western outskirts of the city where demand is strong. While this area was previously undeveloped, and thus, under-served by the multi-family market, there is a concern that these areas may become overbuilt. Occupancy rates have remained relatively flat, increasing only .26% during the quarter. If this was indeed the case, expect occupancy levels to increase a bit more dramatically during the second quarter, as new unit additions should be less than the 1,520 units added this quarter.

Expect to see apartment construction continue at a brisk pace, while occupancy rates should increase during both the second and third quarters. Rents will continue to creep along, while investor interest will remain high, fueling additional sales.

Office construction will remain below the five-year average in 2014, due to continued office surplus in the CBD. Northern San Antonio receiving most of the new inventory as employers seek locations near the growing employment base. Class A office vacancy in Northwest San Antonio has fallen since peaking in late 2011, and a number of speculative developments are underway. In far West San Antonio, the presence of major corporate data centers including Microsoft, Chevron, and Valero motivated Stream Data Centers to build a second facility in the region. Through all this the improving office and greater space demand has put upward pressure on rents this year.

Local and out-of-state buyers will target traditional office properties in the North San Antonio, Northwest, Far North and Far West submarkets. Proximity to the large employers such as the medical district and universities will keep these submarkets desirable to investors. On average, first-year yields in San Antonio start in the low-7 percent range for Class A assets, while Class B properties typically trade in the low-8 to low-9 percent range.

Positive momentum will increase investor competition, placing upward pressure on prices and encouraging sellers to bring assets to market. Last year, listings were limited and almost exclusively Class B properties. Though available inventory is tight, it will expand as merchant builders and impending loan maturities boost listings of Class A and Class C assets. Generally, Class A units change hands at cap rates in the high-5 to 6 percent range, while Class C properties start trading in the high-7 percent range. Investors with a high risk tolerance will target outlier markets such as New Braunfels and Boerne where cap rates trend higher. Acquisition financing is more available as regional banks, flush with cash flow from Eagle Ford Shale, are playing a more active role in smaller unit lending.

The technology strength is obvious to those that live in San Antonio, with the explosive growth of Rackspace and Geekdom. The city was ninth in job growth over the last five years. A nationwide restructuring of military bases could lead to many new jobs. So on many fronts those looking to find opportunity have a lot of options in the Alamo city.


The Austin metro area continues to get plenty of positive economic press. Nationally, Austin has come in the top five major metros for job growth over the last five years, due in large part to a more diversified economic base. Homegrown tech companies like Dell, National Instruments, as well as foreign investment such as Samsung (with the largest foreign investment in the US in Austin) and others complement incoming companies like Apple and IBM (which both now have large bases in Austin), as well as startups coming out of the University of Texas. When you look at the explosive growth of new tech companies such as Homeaway, Bazzarvoice, Invoto and many others, the economic future is obvious.

Austin is one of the strongest residential markets not only in the state, but the nation. Austin-area homes continued to sell at an accelerated rate, decreasing the average days on market by five days year-over-year, down to 45 days in April 2014. At the same time, monthly housing inventory decreased 0.4 months year-over-year to 2.3 months. (Six months is equilibrium – above six months it is a buyer’s market, below a seller’s market). The market also featured two percent fewer new listings, three percent fewer active listings, and six percent fewer pending sales in April 2014 compared to the same month of the prior year.

More than 11,000 apartments are scheduled for delivery in the next 12 -15 months, which will put upward pressure on market wide vacancy during lease-up. Normally, more units increases vacancy rates, but due to Austin’s 95+/-% occupancy, rent values continue to improve, although not as rapidly as the last 4 years. The local rental market remains tight with rent values increasing. The balance between buyers and sellers in the market will begin to align this year, though multiple bids per listing will remain commonplace in the early part of 2014. A number of factors will materialize that encourage apartment owners to divest in the coming months. Rising interest rates will place upward pressure on cap rates, signaling to some investors that the market has peaked. As the year commences, cap rates are generally in the low-5 percent area for core listings and move up to the low-6 percent range for 1980s class ‘B’ assets.

Austin’s decision to back a new medical school that will open in the fall of 2016 will help attract many more in the medical field – research, as well as support industries and practitioners. Partnering with the university and the strength of the other medical centers in Texas will allow the state to become much more attractive on a global scale to many. Couple that with the nation’s aging population, you can see the strength of the economic argument.

Austin business leaders plan is to maintain its high-flying output over the next number of years as it focuses on clean technology, data centers, digital media, biosciences, and other industries.

In addition, other real estate channels such as office are benefiting from the strength of the market. Several recent corporate relocations and expansions in the thriving high-tech economy will push down vacancy in Austin this year. Google Fiber will also make its debut in the market, providing resources and opportunities for further development of high-tech industries. Builders are increasingly optimistic, capitalizing on strong demand by proceeding with several build-to-suit and speculative developments in the CBD and northwest Austin. The CBD will be home to the new IBC Bank Plaza and Colorado Tower, which will collectively add more than 565,000 square feet of office space.

Construction of the Dell Medical School at the University of Texas will attract and spur the development of healthcare and ancillary services in the CBD and university area and has already affected values east of I-35. Additional expansions will result in the highest net absorption in five years, allowing operators leverage to raise rents. Close to 2 million square feet of additional office space has been announced for development. With current employment growth, current office projections and absorptions seem to keep ahead of demand.

Substantial employment growth and improving operations will draw additional investors to the Austin market this year. Local buyers will target value-add opportunities in suburban submarkets, including Northwest and Southwest Austin to capitalize on upside potential. These assets generally trade at cap rates near 7.5 percent. Properties with less than 50,000 square feet will account for the majority of these transactions

In future weeks we will review the other major Texas metros and cities and see where they stack up in comparison.

Texas is a state that is seeing great job creation and a better-than-national real estate market, and both metros reviewed are truly blessed with good absorption, lack of supply, strong rentals, etc. Sales and appreciation have increased, but if you look over the last 5 years, it has been stable and comfortable growth current projections show that trend continuing.