For our latest expert interview, we discussed the Texas economy and commercial real estate market with Dr. Luis Torres, associate research economist at the Real Estate Center at Texas A&M University (TAMU).
Dr. Torres received his PhD from the University of Colorado at Boulder, where he specialized in international economics and econometrics. Previously, he worked at Banco de Mexico, the Mexican central bank, as an economist and liaison officer. He joined the Real Estate Center at TAMU in 2012.
Recognizing the need for more timely and accurate information during the COVID-19 health crisis, Dr. Torres developed the Texas weekly leading index as an alternative way to measure the pandemic’s effect on the economy.
Read on for details about this indicator — including what it is and how it has evolved in the last few weeks — as well as for Dr. Torres’ insights on the future of the Texas commercial real estate (CRE) market.
Q: What initially interested you in the economy and real estate?
Growing up at the border between the U.S. and Mexico created in me a curiosity as to why the U.S. was so different from Mexico; why we bought some goods and services in the U.S. and others in Mexico; why we would exchange dollars for pesos or vice versa.
My interest for real estate started when I was an undergraduate student when my macroeconomics professor would discuss single-family housing permits as a leading indicator for the U.S. economy. My interest flourished while working at the Real Estate Center, as it’s a great place to study and learn about real estate markets.
Q: Tell us about your work at the Real Estate Center.
I study the Texas economy and real estate market, as well as research the U.S. and world economies. I’ve developed regional indicators that measure economic activity in the real estate industry and forecast housing and commercial markets. I’ve also overseen the following Center publications: Texas Housing Insight, Outlook for the Texas Economy, Texas Border Economy and Texas Quarterly Commercial Report.
Q: How would you describe the state of the Texas economy and CRE market at the moment?
The Texas economy is currently in recession due to the COVD-19 pandemic. We expect higher vacancy rates because of the higher unemployment rates, [which are] also putting downward pressure on rents.
Q: What is the Texas weekly leading index and what does it show?
The index is a composite of the following weekly data: Texas business applications, Texas unemployment insurance claims, West Texas Intermediate real oil price and the real 10-year Treasury bill. It measures economic activity on a weekly basis that estimates the timing and length of upswings and downturns. In other words, it can tell you if economic activity is increasing (expansion) or decreasing (contraction), if you have reached a peak or a trough.
Q: How did this index evolve in recent weeks, and what does this mean for the Texas CRE market?
The index currently signals economic improvement going forward and that the initial shock from the COVID-19 pandemic is over, although the road to recovery remains uncertain — not forgetting that further waves of infections can reverse increased mobility and spending, affecting the path to recovery.
During the second week of June, the Texas weekly leading index continued its rebound from the sharp fall registered in mid-March. This was due to an increase in business applications and a lower real rate for the 10-year Treasury bill. An increase in the number of people filing for unemployment and a decline in the real price of oil offset those gains.
Q: Given your findings, how do you think the market will evolve in the future?
The shutdown will accelerate trends that were occurring before the health crisis and shutdown, such as retail restructuring and development of industrial space. Retail will be hit the hardest — accelerating the shift to e-commerce — but brick-and-mortar stores will still exist.
Industrial will be less affected, benefiting from the shift to e-commerce and the need for distributive and warehousing centers. More warehouse space will be closer to the consumer. Companies will want to spread their risk geographically, as well, to minimize the impact of a local problem, such as another pandemic outbreak.
In regard to office, not everyone can work from home. The amenities that some offices provide cannot be duplicated at home. Relationships and networking are difficult to accomplish while working from home. The process of some high-tech employees working from home and of doing business online will accelerate. Expect more satellite offices in the suburbs or in other cities with less density to put fewer employees in central downtowns or in high-density areas. This pattern was observed before the pandemic, due to housing affordability issues.
Q: Is there anything else you would like to tell our readers?
There is still a great deal of uncertainty facing the economy going forward. This was an unprecedented health crisis and the road to recovery will also be like no other. We are not out of the woods. Further waves of infections can reverse increased mobility and spending, affecting the path to recovery. Commercial real estate will be affected negatively the longer that high unemployment continues.