Much like the broader U.S. economy, the commercial real estate markets of Texas continue to display strong fundamentals that should fuel another year of robust demand for space, elevated valuations of commercial properties and disciplined, yet confident lending for new development.
So say the majority of commercial brokers, developers and owners who responded to Texas Real Estate Business’ ninth annual forecast survey. These professionals did acknowledge that uncertainty during presidential election years — particularly when the current president is facing impeachment proceedings — can undoubtedly rattle markets.
Ultimately, however, industry professionals believe that the dual drivers of job and population growth, coupled with record levels of capital seeking placement in Texas markets, are strong enough to overcome geopolitical concerns such as the United States-China trade dispute and a stark partisan divide in Washington, D.C.
“Job and population growth are both indicators and driving forces for resiliency, and behind the job and population growth are systemic organizational re-allocations of capital, mission-critical operations and human resources into the Texas markets,” says Aaron Johnson, director of capital markets in JLL’s Dallas office.
Johnson adds that in Dallas, the arrivals of corporate giants like Toyota, Liberty Mutual and McKesson Corp. illustrate these companies’ belief the Texas backdrop provides a good buffer against uncontrollable factors.
“The relocations and expansions of these companies inherently provides a defense to a slowing economy,” he says. “These operations aren’t easy to uproot in tough economic times, and they keep the wheels turning within the state and local economies, even when the movement of money slows in other parts of the country.”
Aaron Morris, market manager at Oldham Goodwin’s Houston office, echoes this sentiment.
“A change in the broader market will catalyze change for many employers who can achieve savings by relocating operations. This benefits the economy in Texas, which mitigates some or all of the impact of a market correction, depending on severity,“ he says.
According to the Texas Workforce Commission, the Lone Star State added 30,100 nonfarm jobs in October 2019, ending the month with a 3.4 percent unemployment rate, the latest data available at the time of this writing. The number of added jobs comprises about 20 percent of the total October job growth in the country, which clocked in at approximately 156,000 after November revisions.
In addition, World Population Review, which tracks demographic trends based on data from the U.S. Census Bureau, puts the current population of Texas at just over 29 million people. The state has added approximately 4 million new residents since 2010, when the last census was administered.
Key Findings
At the heart of the belief that the wave has yet to crest for commercial real estate in Texas is faith that the U.S. economy will continue its record-setting streak of 124 months of positive job growth. The economy smashed expectations by adding 266,000 nonfarm jobs in November while maintaining a healthy unemployment rate of 3.6 percent, the latest data available at the time of this writing.
About 84 percent of brokers polled by Texas Real Estate Business expressed confidence in the fact that positive job growth would continue throughout 2020, with nearly half of this group espousing the position that the streak would run through the next 12 months. Developers and owners posited similar levels of confidence, with 92 percent of respondents believing that positive job growth would continue until the November presidential election, if not beyond that. 
Some 72 percent of brokers who responded to the survey stated that they expected their firms’ volume of business in 2020 to be either approximately the same or higher than that of 2019. Optimism is clear among those who anticipate closing a similar or greater volume of deals in 2020, with 93 percent of those respondents indicating that they expect their firms’ total transaction volume to grow by at least 5 percent.
In our past two surveys, brokers favored industrial and multifamily as the two asset classes that would see the greatest increases in deal velocity and valuations in the new year.
But brokers see more balanced growth in 2020 among commercial asset classes. Industrial is still the pack leader in terms of expected valuation increases, but mixed-use leapfrogged multifamily in this category for the first time in the survey’s history.
Brokers also rated mixed-use properties above multifamily assets in terms of asset classes likely to experience a high velocity of sales in 2020, suggesting that buyer demand and asking prices for this property type are both on the rise. Retail and hospitality were considered the property types most likely to experience a low velocity of trades.
Lending Climate
An overwhelming majority of developers and owners (78 percent) indicated that they expected to be net buyers in 2020. By way of comparison, last year’s survey showed 42 percent of respondents as net buyers and 32 percent as net sellers.
This trend speaks to the availability of cheap capital; the federal funds rate currently has a target range of 1.5 to 1.75 percent. In addition, the Federal Reserve’s move to cut short-term interest rates in 2019 appears to have done its job and fueled renewed investor confidence in real estate, judging by rising yields in the 10-year Treasury rate to close 2019. The benchmark security stood at 1.88 percent at press time, up more than 20 basis points in the last three months.
Survey participants mostly believe that the borrowing climate, which has vacillated over the last two years, will display more consistency in 2020 with the Fed adopting a “wait and see” approach to monetary policy.
Additionally, about 80 percent of respondents to the survey for developers and owners are moving forward with new projects in 2020. This finding, when paired with the fact that 83 percent of these respondents are “reasonably to very confident” that they will do more development in 2020 versus 2019, suggests that supply is not exceeding demand for most asset classes in Texas. Developers expect lending climates for both construction and acquisition loans, as well as for refinancings, to largely remain the same in 2020 relative to 2019.
This group also believes that its negotiating leverage with tenants will largely remain unchanged in the new year, another testament to a healthy supply-demand balance.
Potential Crashers
Brokers who were surveyed cited the country’s divided political landscape as the biggest deterrent to growth in 2020, noting that drastic forms of political volatility tend to curb capital investment, particularly in terms of foreign capital. Developers expressed similar concerns about the uncertain direction in which the country’s politics are headed as red flags to foreign companies looking to expand and invest in the United States.
“The divide and particularly the impeachment proceedings are a big distraction to the business of government,” wrote one anonymous broker. “While less government action and intervention is generally preferred to the opposite, it is affecting both corporate expansion and needed public infrastructure projects, and certainly foreign investment.”
In addition, some brokers see majorly divisive political issues like immigration, which is a key source of labor for a construction industry struggling to meet demand, as potential inhibitors in growth. The possibility of a lingering trade dispute with China that has led to tariffs on key construction materials also weighed heavily on some respondents’ minds.
Multiple participants also pointed to the usual suspects of housing affordability and struggles to fill retail space in the industry as potentially problematic trends to monitor. But although Texas is not immune to the challenges that these trends present, if economic and demographic patterns continue on their current trajectories, there’s little reason to think the state can’t weather a broader downturn in the U.S. economy.
“A broader downturn in the global or U.S. economy would probably spur more activity in Texas, as companies that have considered moving here may find it more necessary to make the move to reduce expenses,” says Mark O’Briant, managing director at Hudson Peters Commercial. “Texas is the 10th-largest economy in the world and thus creates its own stability via the sheer size of its market.”
— By Taylor Williams. This article first appeared in the January 2020 issue of Texas Real Estate Business magazine.