This study analyzes the resiliency of the real estate sector in the context of economic growth.
Three aspects of research:
As can be seen in the research results the natural disasters of this magnitude can harm the vast majority of real properties. This can impact negatively the regionwide overall value of the real estate. Especially that most of the debt is collateralized by real estate via mortgage market or corporate debt. Finally, most financial-economic growth or decline in SETX is often triggered by real estate and construction.
Lamar University College of Business research team believes that the crisis generated by COVID-19 has already and will continue to dramatically impact this region for various reasons. The economy of Southeast Texas relies on two major drivers of growth: oil and gas, and construction and real estate.
The oil and gas sector, directly and indirectly, employs more than 50,000 workers in the Beaumont - Port Arthur MSA. These 50,000 skilled employees represent over 30% of the employed population of the region. The sector showed GDP annual compound growth of between 9.3% (2018/2017) and 21% (2017/2016) (U.S. Department of Commerce Bureau of Economic Analysis, 2019). Major employers in this sector are: refineries - Exxon Mobil, Motiva, Valero, Total, and petrochemical plants - Dupont, BASF, Chevron, and Goodyear. These companies have billions of dollars of assets and revenues invested in Southeast Texas. The oil and gas sector is important for the stability and growth of the local economy of this region.
Texas Workforce Commission data shows that employment in the construction and real estate sector as a percentage of total employment in Hardin, Jefferson, and Orange counties was 12.46%, 13.91%, and 12.41%, respectively (Texas Labor Market Highlights, 2019). The COVID-19 pandemic creates significant risks to the financial health of businesses and the wellbeing of people of SETX.
This global crisis is a major test of the resiliency of all small, medium, and large enterprises of Southeast Texas for various reasons:
(1) Indebtedness. Businesses in our region are incurring debt and they will spend years paying it off before undertaking additional investment. According to the U.S. Department of the Treasury, over 52,150 businesses in Texas received the Paycheck Protection Program (PPP) loans. Nearly 6,300 of these businesses received loans in excess of $1 million. The three categories of businesses that received the most loans are restaurants, physician offices, and oilfield service companies, all of which represent important segments of the Southeast Texas economy. In Beaumont, eighteen businesses received loans in excess of $1 million and two businesses received loans of over $5 million, potentially retaining 3,586 jobs. In Orange, nine businesses received loans in excess of $1 million, potentially retaining 1,379 jobs. In Port Arthur, eleven businesses received loans in excess of $1 million, potentially retaining 1,978 jobs. Businesses that fail to meet certain criteria, will have to repay these PPP loans, which will further strain their cash flows and their ability to invest in new projects.
(2) Inflation and unemployment. Production cuts and labor force cuts will lead to higher unemployment rates, but inflation is expected to remain stable. As previously discussed, the Federal Reserve expects unemployment rates of 9.3 percent in 2020, 6.5 percent in 2021, and 5.5 percent in 2022. In Southeast Texas, the U.S. Bureau of Labor Statistics has reported much higher unemployment figures at 8.2 percent in March 2020, 18.1 percent in April 2020, and 17.8 percent in May 2020. Meanwhile, lower demand due to the sharp decline in economic activity and lower oil prices are expected to hold down consumer price inflation. The Federal Reserve estimates that inflation will remain at .80 percent in 2020, 1.6 percent in 2021, and 1.7 percent in 2022.
(3) Less consumer spending. During economic crises and uncertainties, people save more and spend less.A June 2020 survey by McKinsey and Company on U.S. sentiment during the coronavirus crisis concluded that consumers believe that the impact of COVID-19 on their finances will last for months. As a result, consumers are shifting their spending habits toward essentials. Consumers report a negative purchasing intent with respect to most product categories with the exception of groceries, household supplies, and entertainment. Significantly, 73 percent of consumers are not comfortable going back to ordinary out-of-home activities, which has led to significant growth of 15 percent to 30 percent in online channel user growth. The survey also pointed out significant decreases in consumers’ household income, household spending, and household savings.
(4) The economy will not recover quickly. Experts originally thought that once the economy opened it would bounce right back. But this scenario is less likely to happen at this time because even if the economy is open, not everyone will go out until feeling that it is safe to do so.
In addition to the above-mentioned threats and consequences Southeast Texas, Regional Planning Commission (SETRPC) in its strategies and implementation plan identifies that “natural disasters, cyclical depressions, and workforce issues contribute to the problems”.
Project Goals, Tasks, and Outcomes
The three goals of the proposed project are:
Goal 1. Describe and enumerate the vulnerabilities of this region’s economy caused by COVID-19.
Goal 2. Determine future growth strategies, business models, and financial solutions that will aid in recovery from economic distress and disruptions resulting from COVID-19.
Goal 3. Establish a virtual SETX Economic Development and Analysis Resource Center (EDARC) at Lamar University that will house strategies, information, and the results of this study.
Project’s General Outcomes
The outcomes of this research project will help to accelerate the recovery of Southeast Texas negatively impacted by COVID 19 pandemic. The ultimate goal is to find solutions to help to bring business activity back to pre-pandemic levels.