The pandemic brought new opportunities to the Texas real estate market as businesses and individuals seeking a business-friendly environment and a relatively low cost of living relocated to the Lone Star state. North Texas, in particular, held the number one spot in population growth during the 2020 pandemic. A distinctive culture, booming economy and affordable real estate are a few of the state’s unique attributes, and cities like Dallas, Houston and Austin are feeling the impact of their allure, for better or worse.
These company relocations and expansions have led to the creation of thousands of jobs, but it has also come with infrastructure-related challenges and a shortage of housing inventory and human capital.
The question remains: Can Texas hold ’em?
THE DOUBLE-EDGE SWORD OF RAPID GROWTH
The Texas real estate market began to see stronger interest after the 2008 economic recession, and the pandemic has only accelerated this trend. The state’s large metropolitan areas, surrounded by wide swaths of land, are appealing to many. Individuals looking for more elbow room in their homes and businesses looking for more affordable real estate to site warehouses or expand their brick-and-mortar footprint are finding a new place to call home.
There is the added perk of no individual state income tax and a nominal business franchise tax.
As with any major change in population, however, there are growing pains. As more people and businesses migrate to Texas, the availability of homes and apartments shrinks, increasing housing prices and leaving those seeking affordable options fewer places to turn. Providing affordable housing will continue to be an ongoing challenge in these areas for the foreseeable future. Dallas is forecast to add more apartment units this year than any market in the nation, but the amount of available affordable housing is continuing to struggle to meet demand.
Many Texas cities have been deemed “Zoomtowns” for how they appeal to remote workers looking for more affordable real estate and more space. These cities are at the center of a debate as to whether the state’s current infrastructure requires improvements to manage the influx of companies and individuals moving to Texas.
So, what makes the United States’ second-biggest state so desirable and why has the real estate market taken off?
Houston, Austin and Dallas are the largest Texas cities and are managing an influx of in-migration. The Houston housing market in July reported its thirteenth consecutive month of positive sales. Year-over-year, single-family home sales, property sales and total dollar volume all increased. The single-family home market is especially gaining traction, as sales increased 13.6 percent in June compared with June 2020, according to Norada Real Estate Investments. In fact, the Houston real estate market experienced a record-breaking year in 2020, with $35.3 billion worth of properties sold, prompting experts to predict this momentum may continue through 2021.
The 2020 median home prices in Austin hit a record $465,000. Prior to July 2020, the monthly median home sales price in the Austin metropolitan area had never reached $350,000, according to the Austin Board of Realtors. Inventory is extremely low and very competitive, with houses on the market for an average of just 15 days. During the same period in Austin, roughly 20,000 new homes were constructed, ranking the city fifth in the country for new construction — and construction companies are struggling to keep up with the pace of new arrivals. Austin construction companies are outsourcing workers from other areas of the country. The Austin area alone spent more than $7 billion on new residential construction in 2020, with only 44,520 construction workers to complete the high volume of work, according to a report from ConstructionCoverage.com.
In 2020, Dallas was the country’s top construction market and had the second-highest property investment total in the nation. There were more than 347 new construction projects in Dallas alone, with a focus on apartment projects and industrial spaces valued at nearly $17.7 billion, according to Norada. While the Dallas real estate market didn’t perform as well as Austin’s and Houston’s at the beginning of the pandemic, demand for housing has risen over the past few months: The average sale price increased about 28 percent percent year-over-year, from $353,032 to $450,922.
Rising sales prices are further exacerbating the ability to build and offer affordable housing in Dallas. The city in its 2018 comprehensive housing policy acknowledged a shortage of 20,000 units, which it attributed to land and development costs, construction costs, rent growth, the effects of federal to local regulation and the single-family rental market. But Dallas’ attempts to remediate the shortage have fallen, well, short. The availability of affordable land within the city’s boundaries is limited, making the economics of buying land and building a single-family home, for example, unworkable and therefore deterring new construction. Affordable housing faces other challenges as well, including neighborhood opposition and a lengthy process for obtaining permits and engineering approvals. Increasing pressure on the situation, in 2020, more than 75,000 people moved to North Texas.
POTENTIAL TO BE THE NEXT SILICON VALLEY
Austin has become known as a hot spot for commercial real estate investments and corporate relocations, specifically in the tech space. According to CRBE Group, Austin has become the number one destination in the United States for potential commercial real estate investment, followed by the Dallas-Fort Worth area.
A record number of 22,114 new jobs were introduced to Austin since the pandemic, largely credited to business expansion, according to the city’s chamber of commerce. Austin has become a kind of tech hub, home to offices for companies including Apple, Dell, Facebook, IBM and Samsung. Austin has earned the nickname “Silicon Hills,” a reference to its location in the Texas hill country. The Silicon Valley area has lost some of its appeal recently in part due to rising housing costs. Texas’ other major cities may soon have industry monikers of their own. The Dallas-Fort Worth area is projected to add 816,000 new jobs from December 2020 to December 2021, according to the Federal Reserve Bank of Dallas. Similarly, in the first five months of 2021, the Houston metro region gained about 53,000 jobs on an adjusted basis — this is the fifth most jobs added year-to-date out of any market in the nation, according to data from the Texas Workforce Commission.
WHAT’S TO COME
The momentum of the Texas real estate market has grown since the start of the pandemic. With a favorable taxing environment, a strong housing market, large metropolitan areas and ample job opportunities, Texas will remain attractive for the next several years. While the state is proving it can still hold ’em in the near term, it remains to be seen if it can crack the affordable housing nut that comes with rapid growth and the rising cost of housing.
Kristi Gibson is the real estate and construction practice co-leader in the Dallas office of BDO.