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EMERGING TRENDS TEXAS REAL ESTATE TRENDS: 2021

Texas is the new belle of the ball for migrating tech companies — but that doesn’t mean the next few years will all be smooth sailing for real estate development in the state.

The shift to Texas will bring in new residents and jobs, but the move to Work From Home could impact the commercial space. Hotels have been slow to recover and will impact real estate for some time to come.

That’s not to say it’s all bad news: we just want to give a fair look at real estate trends around Austin and Houston.

In this round up of the biggest trends impacting Texas real estate, we dig into:

  • How the “work from home” movement will impact the commercial real estate market.

  • How Hotels Have Been (and Will Be) the Slowest to Recover.

  • What the population (and tech) shift to Texas means for residential real estate development.

AT THE OFFICE, OR WORK FROM HOME?

At this point, ‘Work From Home’ is more of a cliche than a talking point. While most coverage details the impact on individual employees and companies, the shift to WFH this year affects office real estate in an entirely new way.

The move to WFH isn’t likely to completely wind down after the pandemic ends, either.

According to a recent report from PwC and the Urban Land Institute, nearly 95% of respondents said they expect that companies will increasingly allow employees to work from home, at least part time.

Even companies that bring operations back under one roof may have a long time horizon on their hands. “Companies that plan to go back to a pre-COVID office setup may face short- or medium-term complications when they start to reopen,” the report states. Many younger employees and some families have left for less dense and less expensive locations and may need time to relocate back to the place of employment.”

So how does this all affect commercial real estate in Texas?

Impact of WFH on Austin Commercial Real Estate

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Source: CoStar

The move to WFH will affect nearly every major city — although the impact will vary by each area. Here’s the detailed breakdown for Austin MSA:

  • The Austin MSA has 116 million square feet of office space.

  • It currently has 14.38 million open square feet (or a 12.4% vacancy rate).

  • The vast majority (12.2M, or 10.5% of the total) is attributed to direct vacancy.

  • A lesser amount (2.18M square feet, or 1.9% of the total) is sublet space. Sublet space has doubled in a year.

The forecast doesn’t look great, either. CoStar forecasts overall vacancy to peak at 14.6% by the 4th Quarter 2021 before stabilizing back at 14.3%. If you take the current projects under construction into consideration, CoStar is predicting 2.56 MSF of office space will become vacant over the next year.

Looking at the chart below, vacancy rates haven’t been so high since 2011 (when they sat at around 12%).

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Source: CoStar

Impact of WFH on Houston Commercial Real Estate

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Source: CoStar

Houston has a much bigger office real estate market, with 338 million square feet of office space in the metro area.

The city is also experiencing a higher vacancy rate: it currently has 61 million square feet of vacant office space, or an 18% vacancy rate. More than that, 17.2% of vacancies (or more than 58 million square feet) is attributed to direct vacancy, with just less than a percent attributed to sublet space.

CoStar forecasts overall vacancy peak at 18.4% by the 4th Quarter 2021 before recovering in the 17% range from 2022 to 2024.

Vacancy rates have hit new highs in the 2000s. One of the major differences in Houston is that vacancy rates have been steadily increasing since 2015. After 2021, CoStar projects that the vacancy rate will steadily decline.

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Source: CoStar

The Shift to Texas Means More Residential Development

There is a flipside of increased vacancy rates in Texas office space: the state is experiencing significant population growth. This means there is (and will continue to be) a higher demand for residential development.

According to Business Insider, Austin saw more than 20% growth between 2010 and 2019, adding almost 356,000 residents and topping 2M in total population. Houston welcomed more than 600,000 new residents between 2010 and 2019, adding 10.2% of its 2010 population over the course of the decade.

PwC and Urban Land Institute recognize four Texas cities as in-migration markets: Dallas/Fort Worth, Austin, San Antonio and Houston. “There is no better evidence of the Great American Move than the booming single-family housing markets—especially in the more attainable priced areas of the United States,” the report states. “Large events, like a pandemic, do not create new trends but rather accelerate existing ones.”

That seems to be the case with the growth in and around Austin and Houston. According to the WalletHub list, Austin and Houston have both dropped their rankings in terms of the fastest growing cities across the US. More suburban areas in the MSAs — like Sugar Land and Round Rock — increased their rankings, showing the shift to suburbia that we touched on in the WFH section above.

These areas will likely continue to serve Texas’ major cities in the coming years. This graph from Cushman & Wakefield show Austin and Houston as leaders in high productivity cities in the US:

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Source: Cushman & Wakefield

Logistics: Just-in-Time Delivery for eCommerce

Just like nearly anywhere else in the world, the expansion of eCommerce (read: the expansion of Amazon) is impacting both an increase in demand for industrial space and a decrease in demand for retail space in Texas.

CBRE projects that eCommerce will absorb nearly 250 million square feet (as warehouse space) from retail in 2021. “There is strong demand for infill warehouse space in urban cores, but land constraints and high costs have limited new development,” according to the report. “Adaptive reuse of retail buildings for industrial occupiers is expected to accelerate in 2021.”

Texas may very well be the center of this shift: the state “will provide the most opportunities for investors and occupiers with forecast population growth of 9% over the next five years, largely benefitting the Dallas-Fort Worth, Houston and San Antonio industrial markets.”

More than 8 out of 10 respondents (in the PwC/Urban Land Institute report) agreed that COVID-19 will hasten the need for increased focus on supply chain resilience. Texas’ urban centers will likely be central to this shift.

Hotels Have Been (and Will Continue to Be) the Slowest to Recover

It’s no surprise that travel and entertainment industries have been hit the heaviest by COVID-19. This graphic from Visual Capitalist shows just how stark the situation is:

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While Texas doesn’t have casinos, Austin has plenty of live venues and Houston depends in part on cruises coming in from Galveston. More than that, Houston is a major travel hub for airlines and both metro areas are big on entertainment bookings and hotels. According to the Texas Hotel Performance Factbook:

  • As of Q3 2020, Austin MSA has 48,182 hotel rooms (or roughly 9.2% of all hotel rooms in Texas).

  • Austin hotels experienced a 39.3% decline in revenues to just over $1 billion

  • Hotels in the area also experienced a 13% decline of Average Daily Revenue (ADR) to $118.18/night and 19.7% decline in Occupancy Rates (now at 52.7%).

  • For the same time period, Houston MSA has 113,842 hotel rooms (or roughly 20% of all hotel rooms in Texas).

  • Houston hotels experienced a 28.8% decline in revenues to $1.756 billion.

  • Hotels in the area also experienced a 12.8% decline of Average Daily Revenue (ADR) to $91.23/night and 12.3% decline in Occupancy Rates at 48.9%.

Texas as a whole experienced:

  • A 30.7% decline in revenues to $8.46B

  • A 12% decline in ADR to $92.96/night

  • A 14% decline in occupancy to 50.5%

Will revenue and occupancy rates stay down? It’s looking likely, for the time being. Because Texas generates 6% of its tax revenue from hotels, the state will see nearly a quarter billion dollars less in taxes for 2020. The taxes typically go back into tourism promotion, so Texas cities may see a cyclical effect for the foreseeable future.

The good news is that all of this is temporary. Although it may be at least four years before revenue is back to normal and real estate has adjusted, we do expect normalcy to return.

And we’re here to support real estate professionals throughout the process.

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