Texas is home to four of the traditionally most dynamic multifamily markets in the country—Dallas/Fort Worth, Houston, Austin and San Antonio.

These markets attracted $25 billion of investment in 2019 or 13.3% of the total U.S. By unit count, their importance is even higher; 197,100 Texas apartments were acquired last year, 16.6% of the country’s total. In other words, one in every six U.S. apartment units bought last year was in Texas.

COVID-19 and measures to corral the virus, however, have negatively impacted the Texas markets along with nearly all other markets in the U.S. While the multifamily sector is resilient compared to other property sectors, and multifamily revenue declines have led few properties into default so far, the major Texas markets are experiencing challenging conditions and have several months before true recovery begins.

April Employment Declines 10% in Texas Metros

Unemployment in Texas rose to 12.8% in April, up from 3.6% in February. Texas lost 1.3 million jobs in April, a 10% decline. The energy sector lost 24,000 jobs (-10%), but that paled in comparison to the 530,000 jobs lost in leisure and hospitality (-39%).

April job losses in the major Texas metros were also severe, but also better than the nation’s -12.0% loss. Dallas/Ft. Worth had a 9.8% decline based on seasonally adjusted figures (Dallas -9.2%, Ft. Worth -10.9%). Both Houston and San Antonio experienced a 9.9% drop. Austin’s employment fell by 11.0%.

All four metros had very high unemployment rates in April, up from historically low levels only two months prior. Austin’s unemployment was slightly better than other markets at 12.2%. Houston had the highest at 14.2%. Dallas/Ft. Worth was at 12.8% and San Antonio at 13.2%.

Vacancy Rises 50 Basis Points in Texas Multifamily Markets, Rents Fall 1.5% in Two Months

This economic contraction has impacted the Texas multifamily markets in a variety of ways. The first impact was a rapid decline of leasing activity. Leasing of vacant units was very slow for the first month of the COVID-19 crisis but improved from late May through the present. The silver lining was that turnover rates fell; retention of existing residents high. Turnover is typically high in Texas in the spring, but residents, due to the difficult logistics of moving and/or their uncertainty about near-term employment, also stayed in place.

Vacancy rates have risen in the Texas markets. From March to May, vacancy for the four major Texas metros rose 50 basis points (bps) to 6.4%, on average, according to Axiometrics. Nationally, vacancy rose 30 bps in the same period.

Effective rental rates (which include concessions) have moved down since mid-March. On average, rents for the Texas markets fell 1.5% from March to May, slightly better than the 1.7% drop for all U.S. markets. Dallas and Ft. Worth experienced the least downward movement while Austin had the most. Houston was right at the U.S. average.

Nationally, Class A assets are achieving better rent collections and Class C worse. However, effective rents for Class A assets are experiencing more downward movement than for Class B and C. Comparable class data for Texas markets is not readily available, but anecdotal evidence points to the same trends in Texas.

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DFW is Top Performer Among Texas Markets

Dallas/Ft. Worth is performing the best among the major Texas markets. Austin has been the most impacted so far based on employment and market statistics.

Houston’s multifamily market is performing about average for both the Texas markets and the U.S., but better than most had anticipated. This is some good news for the metro hit not only by the broad economic downturn, but also by energy’s contraction and reduced global trade. Houston still bears watching closely.

V-Shaped Recovery Projected for U.S. Economy

To understand the near-term outlook for the Texas multifamily markets, it is necessary to examine the U.S. economy’s likely trajectory over the next few quarters.

After a very difficult Q2 2020 where the GDP is projected to decline by 36% (quarter-over-quarter annualized), both Q3 and Q4 should have positive double-digit gains (29% and 10.5%, respectively.) Full-year GDP will likely come in at -4.9%, but 2021 is projected to reach a positive 6.1%. It will take until 2022, however, for full recovery.

Essentially, the V-shaped recovery will be propelled by the trillions of dollars of fiscal stimulus pumped into the economy in recent months (and more to come) combined with pent-up demand for a very wide range of goods and services.

Employment will be slower to come back, but improvement is projected through the second half of the year. Unemployment is expected to fall from 18.1% at the end of Q2 to 12.5% at the end of Q4. (Note that these forecasts were made before the surprising May employment statistics were released.)

The big downside risk to the V recovery—for both the U.S. and Texas—are serious new waves of COVID-19 leading to new lockdown mandates. Also, a big uncertainty behind the forecasts is how long it will take until the U.S. receives an effective vaccine that will allow society to return to fairly normal activity.

Texas Should Outperform the U.S. Economy in Recovery Period

Texas economy—and consequently that of the major metros—is expected to improve at a slightly faster pace than the nation. The outlook is based on three principal factors: the economic strengths Texas and its major metros had prior to COVID-19, the early re-opening of the state in the COVID-19 period and the state’s strong economic recovery in past recessions (earlier than the U.S. and stronger than the U.S.).

CBRE Econometric Advisors forecasts that between Q2 2020 and Q2 2021, the Texas metros combined will add back 1.2 million jobs. Dallas/Ft. Worth is expected to lead the recovery with a 16.8% growth rate followed by Austin at 16.3% and San Antonio at 15.7%. Only Houston (14.3%) is expected to lag behind the national employment growth forecast of 15.3%.

Multifamily Markets to Stabilize by Q4

The Texas multifamily markets still have a few challenging months ahead in terms of market performance, but the light at the end of the tunnel is getting clearer. Q2 and quite likely Q3 will be the toughest quarters in terms of loss of revenues—from rent declines, vacancy increases and credit loss. Q4 is projected to experience more weakening in market fundamentals, but at a much more modest pace. (Of course, some stronger submarkets and product types within the Texas markets could stabilize before Q4.)

Rent collections have been better than expected nationally and in Texas, helped greatly by individual fiscal stimulus checks and enhanced unemployment benefits. There is concern about what happens after July if these measures are not continued to aide renters still impacted by job losses. It is likely that some additional help will be available.

Recovery is projected to continue steady through 2021. By early 2022, the Texas markets are expected to be back to their prior peak levels set in Q3 2019.

From the recent cyclical peak in Q3 2019 to the cycle trough expected in Q4 2020, average effective rent for each of the Texas metros is expected to decline between 9% and 10%, just slightly higher than the nation’s 8.8% change. However, vacancy in the Texas markets is expected to rise more than the U.S. The average vacancy gain for the major Texas markets is about five percentage points compared to 3.6 points nationally.

High Levels of In-Migration Shaping Market Performance

Texas has two key characteristics which are shaping its near-term and long-term multifamily market performance. They are challenges today and advantages longer term.

The first is in-migration. High levels of steady in-migration have fueled multifamily demand for years. Since 2010, the population of the four major metros has grown by 3.8 million residents to 19 million. Dallas/Ft. Worth and Houston are routinely at the top of the population rankings for largest numeric increases. Austin is routinely at the top for growth rate, with the other three metros not far behind. A good portion of the population growth is derived from people moving to Texas for job opportunities.

In the short term, with greatly reduced employment opportunities, migration into Texas will slow, hindering creation of new multifamily demand. Longer term, as the economy begins to get back on its feet, the major Texas metros should again attract large numbers of new residents, thereby creating high levels of market demand over the following years.

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Multifamily Construction Represents Short-term Challenge but Long-Term Advantage

Multifamily development also significantly shapes the Texas markets’ character and performance. The business and regulatory environment allow for more construction activity than in many other parts of the country, and multifamily construction is very active today.

CBRE Econometric Advisors forecasts that 51,300 units will be delivered in 2020 in the four major Texas metros (2.9% increase on the 1.8-million-unit combined inventory). The total reflects a 30% gain over the 39,400 units completed in 2019. Given the decline in demand in 2020, the high level of development is clearly a problem in the short term.

The 51,300-unit forecast takes into consideration COVID-19 related construction delays. Similarly, the projected 44,100 units expected in 2021 considers the expectation that some proposed developments are being cancelled or postponed, thereby pushing out delivery dates. But even at that, the 2021 forecast is only 14.2% under 2020.

While a short-term problem, high levels of multifamily development in the major Texas markets is a significant long-term advantage. Large supplies of new rental housing help provide the necessary housing infrastructure for growth and helps to keep housing costs at fairly moderate levels especially compared to gateway metros. These market traits have played a huge role in attracting labor talent and business to Texas in the past; they will assist the Texas metros to get back on their feet economically and prosper in the post-COVID-19 environment.

The Texas multifamily markets have many challenges over the months ahead. The markets may not totally stabilize until Q4. Yet, 2021 should experience steady recovery, and Texas’s pre-COVID-19 strengths should play a big role in helping apartment demand return rapidly through 2021.

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