Texas-Based Housing, Office, Retail Face Challenges Next Year

Texas is facing what most of the country is experiencing in home sales, construction and rents, according to a recent report from The Texas Real Estate Research Center.

“Existing single-family rent and price growth will moderate with the potential to turn negative on a year-over-year basis,” according to its lead housing data analyst, Joshua Roberson.

“The rapid pace of rent and purchase price appreciation over the last two years was never sustainable and would have been forecast to slow even in the absence of other headwinds.”

However, investors in single-family rental properties are increasingly eyeing a handful of US metros, including Texas, according to an analysis by Trepp’s Jack FaForge, GlobeSt.com reported.

Single-family rental developments are most prevalent in the South Atlantic region of the US, led by Florida, Texas and North Carolina, with nearly 45% of all properties securitized in CMBS in the Southeast region.

Roberson points out that for-sale-home price growth was largely supported by the fall in interest rates from 2019 through 2021 and the increase in the 30-year mortgage interest rate to 7 percent from the January 2021 low of 2.65 percent decreases the purchasing power.

Weighing principal and interest payments, affordability has fallen by 40 percent and purchasing power has declined by 30 percent.

A Backlog of Under-Construction Homes

Facing similar supply constraints as the rest of the economy over the past few years, Texas builders and developers are facing a backlog of under-construction homes that will continue to come to market.

Roberson said to expect existing-home sales to be lower in 2023 than in 2022 and “elevated mortgage rates combined with elevated asking prices will slow sales even as price growth moderates.”

Industrial Property Deliveries to Slow

In commercial real estate, its research economist, Dr. Daniel Oney, said in the report that industrial deliveries will recede from 2022’s record highs while vacancies remain low.

“Tighter credit and slower consumer demand will shelve plans for many speculative distribution buildings on the drawing board, however, reshoring, foreign direct investment moves to establish footprints in the U.S., and regional population growth will drive continued manufacturing projects in Texas.

As is the case in much of the country, the office market will further segment as newer buildings maintain occupancy and older buildings lower rent to attract tenants, Oney said, and those that would have been considered Class A before the pandemic will suffer rising vacancy rates.

However, “the newest Class A buildings and properties built in the last decade will enjoy high occupation rates even as firms stick with hybrid work policies,” he said.

Abruptly, Class B buildings could see a freefall in occupancy as many older properties will drop in value as a result of market forces. Or, as many second-tier buildings face major rental rate drops, they could be in line to attract some tenant interest and generate at least some cash flow as refinancing deadlines lead creditors and debtors to renegotiate deals.

Restaurants and Experience Malls to Thrive

In retail, occupancy and rents will stabilize some in brick-and-mortar retail while the booming online sales growth rates of the pandemic will fall back to the merely fast double-digit growth seen before.

If households pull back in the face of actual or expected income losses, brick-and-mortar’s recovery could be retarded.

Meanwhile, restaurants and “experience” submarkets with walkable synergies will continue to do better than some big-box mega centers.

Nonetheless, the best traditional indoor “experience” malls could become enlivened “as people restore long-neglected social habits.”