2023 Houston Economic Outlook
Key Takeaways
- Jobs over-recovered from pandemic
- Unemployment low
- Energy sector jobs increase
- WTI crude prices expected to remain between $80-$90/b in 2023
- Port Houston sets records
Houston Highlights
The Houston MSA population grew by 112,000, or 1.73%, between 2021 and 2022 and is projected to grow by 1.5% annually over the next five years. Houston’s racial diversity is nearly twice as high as the national average, with more than 90 different nations represented. Houston has 94 consulates, the third-largest consular corps in the nation after New York and Los Angeles.
Houston’s unemployment rate and job growth continue to make huge improvements, with employment surpassing pre-pandemic highs in April of 2022 and continuing to decrease by 3.9 percent by year-end 2022.
The U.S. and North American rig count has improved but is about half of the historical counts. Due to recent recession fears and the accompanying “Demand Destruction” narrative, West Texas Intermediary (WTI) crude prices have retracted from recent highs set in the first quarter of the year. Nonetheless, as the war in Ukraine prolongs and drawdowns in the U.S. Special Petroleum Reserve (SPR) continue, supply-side constraints remain. Inversely, the recent reopening of China has fostered demand-side concerns. Due to these existing supply and demand imbalances, along with the uncertainty surrounding overall production capacity, long-term energy prices are expected to remain elevated. WTI crude is forecast to remain in the $80-$90/b range during 2023.
Natural gas prices surged to $9.30 during August 2022, according to the U.S. Energy Information Administration (EIA), prices not seen since hitting a historical high of $13.67 in October 2005. As of December 2022, the price has dropped to $5.53. The EIA projects natural gas prices will fall 25% in 2023 and then remain flat in 2024.
Airport traffic in Houston rose meaningfully year-over-year, with total passengers and total air cargo increasing by 31.7% and 8.6%, respectively.
In 2021, easing state-wide COVID-19 restrictions spurred a steady recovery in Houston’s GDP. Subsequently, strong oil price performance and continued positive net migration (Texas ranked #1 on the U-Haul Growth Index for the second straight year) are expected to further increase Houston’s GDP in 2023. Houston’s real GDP grew by 3.93% in 2022, up from 3.48% in 2021 and 1.91% in 2020.
Executive Summary
Commentary by Patrick Duffy | President, Houston
“Give me a one-handed Economist. All my economists say, ‘on the hand,’ then ‘but on the other” – Harry Truman.
“The stock market has predicted 9 of the past five recessions” – Paul Samuelson, Keynesian economist.
The current environment would have Mr. Truman thinking he had an octopus for his chief economist and Samuelson raising his number to 14 of the last five recessions.
We made a couple of predictions last year, with the core of our position being that Houston was on track to recover all the jobs lost during the COVID lockdowns entirely. Further, the commercial real estate market, primarily industrial and retail assets, and even the badly wounded office sector would continue to improve. The most recent data from the Greater Houston Partnership and the Texas Workforce Commission shows that at the end of 2022, Houston had record employment of over 3.3 million jobs, with a projection that the growth would continue through the first half of 2023.
The results for all three of the major commercial real estate sectors in 2022 were very positive, with even the office sector showing some new signs of life in absorption, occupancy, and rent growth. However, in late 2022, the rapidly rising interest rate environment dampened investment sales as buyer yield requirements and debt costs increased. In addition, interest rate increases also affected the single-family development market, with many national subdivision developers and homebuilders dropping contracts on bulk land in fear of a major slowdown of single-family home sales, which has occurred. As a result, the latest data on existing home sales was down to just over 4 MM in December versus over 6 MM in December 2021.
While there seems to be a great deal of disagreement about the severity of a downturn in 2023, there is a strong consensus that the global economy will slow considerably. Many regions will experience a hard landing recession, some will be less difficult, and some pockets may avoid a recession entirely. The octopus would agree. Rather than joining the cacophony of opinions on a global or national scale, we will focus on our backyard economics here in Southeast Texas.
The Houston economic outlook, as we experienced in the “Great Recession,” is decidedly more positive than most cities in the U.S. We have many growth engines running smoothly and should continue to show strength in 2023.
Oil and Gas / Energy Sector: Energy companies are doing very well with relatively high oil and gas prices, and the most recent survey by the Dallas Fed indicated that over 85% of oil and gas companies expected to hold or increase their capital spending in 2023, with over 64% showing increased capital spending planned. This sector significantly impacts the Houston economic outlook as the Energy Capital of the world.
Population Growth: Texas is the number one state for relocations based on the U-Haul destination report, with Florida in a close second. The Greater Houston area has experienced solid and steady growth of approximately 70k new residents (net) for the past three years with no signs of slowing down. Population growth drives many other sectors of the local economy.
Healthcare: The healthcare sector nationally has been strong throughout the past couple of years, and the industry is solid in Houston. There are no signs of this trend abating in 2023.
Port of Houston: The port system in SE Texas, including the Port of Houston, has seen solid increases in traffic, especially container traffic, up nearly 20% from 2021 to 2022. The long-term shift in logistics strategy from the West Coast ports to the Gulf of Mexico ports that we have referenced over the past two years has gained momentum and is expected to continue for the next decade.
Construction: New construction awards in 2022 were up 25% in 2022 vs 2021, with contractors reporting solid pipelines in place for 2023. High interest rates, tighter lending standards by banks, and higher yield requirements for investors have made speculative development extremely difficult, and we expect that to cool substantially in the near term. Still, the construction economic engine is in good shape for most of the coming year due to existing commitments.
Retail: The retail economy, including restaurants and bars, continues to expand as our local population grows and the job market remains strong. Most operators still report a very tight labor market in the service sector, but expansion and the introduction of new and exciting concepts will continue in 2023. We have seen only an acceleration in the national brands that Colliers represents in Houston.
So, what does our octopus tell us? While Houston may slow like the rest of the country, we have a strong case for no local recession or, at worst, a shallow and quick recession. Specifically, in the commercial real estate space, we expect a slowdown in absorption in most sectors. Companies are dealing with increased costs of capital, a broader slowdown nationally and globally, and adjusting their planning (or at least delaying their execution) until the direction of the national and global economy, inflation, and interest rates become clearer. Investment sales will be sluggish until we have some degree of confidence that the interest rate and yield requirement increases have stopped and probably ticked down a bit before that sector sees robust volumes again.
We are cautiously optimistic for Houston and Southeast Texas. But on the other hand…
Market Employment
Houston’s employment sector gained 176,000 jobs annually in 2022, an increase of 5.6%. According to the Texas Workforce Commission, the unemployment rate decreased from 4.8% in December 2021 to 3.9% in December 2022. Houston’s industry sectors that posted the largest annual gains include Leisure and Hospitality (15.8%), Mining and Logging (12.4%), and Wholesale Trade (8.7%). Looking ahead, Houston’s job growth is expected to increase by 4.5% between 2021 and 2026.
Houston is home to 24 Fortune 500 companies, with another 17 on the Fortune 1000 list. A partial list of Houston’s largest employers is listed below.
Click here to download the full report as a PDF.
