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The Potential Benefits of Real Estate Investing in Texas

Commercial Real Estate

They say that everything is bigger in Texas. With a population of nearly 29 million and 267,000 square miles of land, Texas is one of the three states contributing to 48% of the U.S. population growth and is bigger than California and the entire country of France.¹

Investment real estate is also big in Texas. In this article we’ll look at the benefits of real estate investing in Texas, an economy that CNBC named in 2019 as #2 of “America’s Top States for Business in 2019”.²

Texas at a glance

While petroleum products remain the state’s largest export, many business sectors not usually associated with the Lone Star State are helping the economy in Texas to rapidly expand. A recent article from Business Insider entitled, “11 Mind-Blowing Facts About Texas’ Economy”, notes that:³

  • Texas produces almost 40% of America’s oil and 24% of the country’s natural gas
  • At $1.7 trillion, Texas has the 10th largest GDP on earth, ahead of Canada and just behind Brazil
  • Texas accounts for 10% of the total manufacturing in the U.S., topping $226 billion in 2017
  • The largest transportation network in the U.S. is in Texas, with over 313,000 miles of public highways, 16 seaports, and 380 airports
  • Texas is home to almost 1 million women-owned businesses, and with a nearly 150% growth rate over the past 20 years ranks third in the U.S. for female-owned establishments

In its July 23, 2019 publication of “Texas Economic Indicators”, the Federal Reserve Bank of Dallas reports that employment in Texas is expanding at a healthy pace while unemployment hits a record low. With an annualized rate of 3.9% in June, job growth is widespread across all major metro areas in Texas, as is the decrease in unemployment.

In fact, the Dallas Fed reports that, for the second month in a row, the Texas unemployment rate is the lowest it has been since 1976. Employment growth in the goods sector rose to 6% in H1 2019, supported by job growth in the construction sector.

Texas commercial real estate overview

The commercial real estate industry in Texas supports nearly 380,000 jobs and contributes about $59 billion to the state’s GDP. This ranks the state’s economy, when measured by commercial real estate development, ahead of California.

As Texas enters its ninth year of the business-cycle expansion, with payroll employment growing and unemployment remaining low, the Real Estate Center at Texas A&M University reports that forecast continued expansion through 2019 translates into a positive outlook for the commercial real estate sector in all major Texas Metropolitan Statistical Areas (MSAs). On the negative side, a declining trade environment remains the greatest headwind to the Texas economy, challenging some of the state's most productive industries. The trade war with China looms as a major potential headwind going forward. However, the Texas Nonresidential Leading Indicator, which measures potential future construction activity, indicates growth may slow going forward.

The Real Estate Center sees rising oil prices, declining interest rates, and the new trade agreements between the U.S., Canada, and Mexico as a boon for Texas. The state exports over $92 billion in goods annually to Mexico and about $25 billion each year to Canada. Texas has no individual or corporate income tax rate and ranks 13th in the collection of state and local property tax per capita.

There are also potential challenges to future economic growth in Texas, including reduced commodity exports from trade wars and a slowing world economy. Although the Texas Consumer Confidence Index increased by 5.5 points in June 2019, concern about trade uncertainty is keeping future sentiment subdued, according to Texas A&M University Real Estate Center.

Largest commercial real estate markets in Texas

The large and growing population of Texas, thriving cities with diverse economies, and world-renowned higher education and research facilities such as Texas A&M and the University of Houston help create demand for real estate and investment in Texas.¹⁰

The three largest cities in Texas are Dallas-Fort Worth, Houston, and San Antonio. Collectively, these three MSAs are home to over 17 million residents and generate over $1.3 trillion in combined GDP.¹¹

Dallas-Fort Worth

With a population of about 7.4 million residents, the Dallas-Forth Worth Metroplex (DFW) is home to two of the fastest-growing cities in the U.S. Both PwC and the Urban Land Institute have recently named the Dallas-Fort Worth metro area as the top real estate market in the U.S. for both commercial and residential investment, according to the Q2 2019 report by Avison Young. All but one of the top 10 business sectors reported positive employment growth year-over-year, with the biggest gains coming from the professional and business services, and transportation and utilities sectors.¹²

The following market data highlights are from the Q2 2019 Dallas-Fort Worth MarketView reports from CBRE:¹³, ¹⁴, ¹⁵

Multifamily

  • Rents grew 3% year-over-year as absorption exceeded supply
  • Net absorption in Q2 2019 is the highest the market has seen in 30years
  • Annual delivery of multifamily product is exceeding annual starts, while simultaneously single-family development is declining

Office

  • Full service, gross asking rents increased overall from $25.01 per sq. ft. to $25.26 per sq. ft. between Q1 and Q2 2019, while Class A asking rents rose to $31.37 per sq. ft. from $30.95 per sq. ft.
  • Net absorption of office space declined slightly between Q1 and Q2 2019
  • Vacancy remained flat over the most recent quarter
  • There is 4.3 million sq. ft. of office construction in the pipeline, 46% of which has been pre-leased

Retail

  • Occupancy reached a record high of 94.7% in Q2 2019
  • During Q2 2019 retail construction and absorption both increased, indicating mid-year strength
  • The Collin Creek $1 billion redevelopment project has been approved by the planning and zoning commission in the DFW suburb of Plano, a mixed-use project including a hotel, 500 homes, 2,300 apartments, 300 senior living units, and 300,000 sq. ft. of retail space

Houston

The metropolitan population of Houston has grown 2.2% year-over-year, and now stands at over 7 million people. The healthcare, technology, and import/export business sectors continue to expand. In fact, Houston is currently ranked as the #1 port by foreign tonnage.¹⁶

The following market data highlights are from the Q2 2019 Houston Multifamily and Office MarketView reports from CBRE, and the Q2 2019 Houston Retail Quarterly Market Report from NAI Partners:¹⁷, ¹⁸, ¹⁹

Multifamily

  • Occupancy reached 90.2% and rents rose in Q2 2019, with both metrics significantly increasing year-over-year
  • Absorption year-to-date 2019 reached 10,094 units, which is more units than were absorbed in all of 2018
  • New deliveries to the market and units in the pipeline have both increased compared to one year ago

Office

  • Asking rents increased from $29.28 per sq. ft. to $29.47 per sq. ft. between Q1 and Q2 2019
  • Net absorption was negative in Q2 2019, caused mainly by the West Loop / Galleria submarket, while all other office submarkets in Houston showed strong results
  • Vacancy increased 0.4% between Q1 and Q2, with scheduled move-ins later in 2019 suggesting an annual decline in office vacancy levels

Retail

  • Asking rents rose by $0.40 per sq. ft. in Q2 2019 and now average $18.07 per sq. ft. triple net
  • Vacancy declined to 5.5%, a decrease of 0.1% compared to Q1 2019
  • Absorption in Q2 2019 of about 1.1 million sq. ft. is nearly double compared to Q1 2019
  • New product in the pipeline is over 4 million sq. ft., with over 66% pre-leased

San Antonio

San Antonio lies between the south and central regions of Texas and anchors one corner of the Texas Triangle urban megaregion. Home to over 2.5 million people, San Antonio is committed to growing its core industries in the military, financial services, energy, healthcare research, and manufacturing business sectors.²⁰

The following market data highlights are from the Summer 2019 Multifamily Report from Multi-Housing News and Yardi Matrix, and the Q2 2019 San Antonio Office MarketView report from CBRE, and the Q2 2019 Retail Market Report from NAI Partners:²¹, ²², ²³

Multifamily

  • Rents increased by 2.5% year-over-year
  • Occupancy rose to 92.9%, an increase of 0.20% year-over-year
  • 6,200 units came to market in 2018, with 9,019 units under construction and 22,309 in the planning and permitting stages

Office

  • Class A rents increased by $0.66 per sq. ft. in the Central Business District and $1.35 per sq. ft. in the Far North Central submarket, with average rents ranging from $28.68 per sq. ft. to $30.44 per sq. ft. in the CBD
  • Net absorption was positive in Q2 2019, with about 50% of the over 895,000 sq. ft. of new inventory brought to market pre-leased
  • Vacancy rates increased by 0.4% in Q2 2019, placing the market-wide vacancy rate at 14.4%

Retail²⁴

  • Asking rents rose $0.38 per sq. ft. between Q1 and Q2 2019, reaching an all-time high of $16.17 per sq. ft. on a triple-net basis
  • Overall vacancy rate rose 0.5% to 5.5%, a slight increase compared to Q1 2019
  • Net absorption was negative at 135,000 sq. ft. compared to Q1 2019 while occupancy rates have held at or above 94.5% since Q2 2015

Why RealtyMogul Invests in Texas

There’s a saying that goes “I wasn’t born in Texas, but I got there as fast as I could!”.

With nine years of solid business expansion and unemployment the lowest it’s been in over 40 years, it’s easy to understand how real estate investing in Texas can offer attractive opportunities. There’s no state income tax, and Texas promotes a business-friendly environment, recently being ranked as the second top state for business in the U.S.²⁵

For investors with a long-term, buy-and-hold investment strategy, markets with stable growth rates over the long run may offer better opportunities than those that rise quickly over a short period of time. The top three commercial real estate markets in Texas – Dallas-Fort Worth, Houston, and San Antonio – benefit from large and growing populations, thriving diverse economies, and world-class research universities:

  • Economy in Texas continues to grow
  • Population in Texas keeps growing, with unemployment at a +40-year low
  • International exports are a significant part of the Texas GDP
  • Tax burden for residents and business is less in Texas
  • Real estate investors in Texas currently benefit from rising rents, declining vacancies, and positive net absorption

Out of the 7 properties within our MogulREIT II portfolio, 5 are located in Texas. These 5 multifamily investments are structured as joint venture equity and comprise 64% of the portfolio.²⁶ RealtyMogul has a bullish outlook on Texas real estate investments and we continue to seek value-add multifamily acquisitions in the Lone Star State. Consider adding Texas to your portfolio by investing in MogulREIT II.

Investing in MogulREIT II’s common shares is speculative and involves substantial risks. The “Risk Factors” section of the offering circular contains a detailed discussion of risks that should be considered before you invest. These risks include but are not limited to illiquidity, complete loss of capital, limited operating history, conflicts of interest and blind pool risk. MogulREIT II’s multifamily investments can be subject to specific risks including changes in demographic or real estate market conditions, resident defaults, and competition from other multifamily properties. MogulREIT II’s multifamily investments can be subject to specific risks including changes in demographic or real estate market conditions, resident defaults, and competition from other multifamily properties.

References

  1. https://www.prb.org/us-3-states-account/
  2. https://www.cnbc.com/2019/07/10/americas-top-states-for-business-2019.html and https://www.cnbc.com/2018/06/29/texas-rebounds-to-become-americas-top-state-for-business-in-2018.html
  3. https://markets.businessinsider.com/commodities/news/texas-economy-facts-2019-4-1028127171#texas-produces-almost-40-of-america-s-oil1
  4. https://www.dallasfed.org/research/indicators/tei/2019/tei1907.aspx
  5. https://www.bisnow.com/houston/news/economy/texas-tops-nation-in-cre-development-85610
  6. https://www.recenter.tamu.edu/articles/technical-report/Texas-Quarterly-Commercial-Report
  7. https://texas.think.global/teg2017/teg17/index.html#6
  8. https://taxfoundation.org/state/texas/
  9. https://assets.recenter.tamu.edu/Documents/Articles/2046.pdf
  10. https://www.recenter.tamu.edu/articles/technical-report/outlook-for-the-texas-economy
  11. https://www.statista.com/statistics/183600/population-of-metropolitan-areas-in-the-us/ and https://www.statista.com/statistics/183808/gmp-of-the-20-biggest-metro-areas/
  12. https://comptroller.texas.gov/economy/economic-data/regions/metroplex.php and https://www.avisonyoung.us/documents/91680/14721302/Q2+2019+Dallas+Market+Report/d80dcaf6-fb98-40d4-9d99-4d0baea7d249?t=-59001573.
  13. https://www.cbre.us/research-and-reports/DallasFort-Worth-Multifamily-MarketView-Q2-2019
  14. https://www.cbre.us/research-and-reports/DallasFort-Worth-Office-MarketView-Q2-2019
  15. https://www.cbre.us/research-and-reports/DallasFort-Worth-Retail-MarketView-Q2-2019
  16. https://www2.colliers.com/en/Research/Houston/2019-Houston-Economic-Outlook
  17. https://www.cbre.us/research-and-reports/Houston-Multifamily-MarketView-Q2-2019
  18. https://www.cbre.us/research-and-reports/Houston-Office-MarketView-Q2-2019
  19. https://www.naipartners.com/research/houston-retail-q2-2019-quarterly-market-report/
  20. https://www.sanantonio.gov/IID/Industry-Clusters
  21.  https://www.multihousingnews.com/post/san-antonio-multifamily-report-summer-2019/
  22. https://www.cbre.us/research-and-reports/San-Antonio-Office-MarketView-Q2-2019
  23. https://www.naipartners.com/research/san-antonio-retail-q2-2019-quarterly-market-report/
  24. https://www.realtymogul.com/sites/knowledge-center/files/2019-08/Houston-retail-market-report.pdf
  25. https://www.cnbc.com/2019/07/10/americas-top-states-for-business-2019.html
  26. As of August 2019

Disclaimer: All information provided herein is for informational purposes only and should not be relied upon to make an investment decision and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. We suggest that you consult with a financial advisor, attorney, accountant, and any other professional that can help you understand and assess the risks associated with any investment opportunity.

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