Is that light at the end of 2020′s very dark tunnel? Here’s the outlook for vital Dallas-Fort Worth industries
Let’s put 2020 in the rearview mirror and cast our eyes on the road ahead, praying we’re not still quarantined at the Hotel California.
The iconic rock ballad’s lyrics — you can check out any time you like, but you can never leave — sum up our year of fighting off an invisible virus.
We enter 2021 seeing glimmers of light at the end of the long, pitch-dark and deadly tunnel.
But if there’s one thing that 2020 taught us, it’s that the path ahead can be wrought with sinkholes big enough to swallow entire sectors of the economy.
Our worries entering the year were about a mild recession that we figured would bypass North Texas, a possible taming of the bull market and maybe a slowing on the red-hot housing front.
Our two major airlines were grappling with safety issues that grounded the Boeing 737 Max and threatened to slow the companies’ expansion plans.
We were licking our communal wounds after losing out on Amazon’s HQ2. What a First World problem that turned out to be.
Trade disagreements with China were percolating, the French were rioting in the streets and Brexit had the Brits all afroth. Who knew those would become such offstage concerns?
Instead, 2020 brought a global pandemic, divisive politics, skyrocketing unemployment, racial reckoning, civil unrest, record forest fires throughout the West, hurricane after hurricane, attacks on our election system and endless conspiracy theories.
When we asked “What else?” murder hornets invaded our shores.
Most recently, we’ve experienced a skyrocketing COVID-19 death toll just as vaccine rollouts created a sense that better days are ahead.
It’s all almost too much to absorb. We hope Annie’s innocent optimism is right and the sun will indeed come out tomorrow.
The question is how soon is tomorrow?
With the aforementioned caveats, here are our best-guess scenarios for Dallas-Fort Worth’s most vital industries, companies and economic development strategies.
How to get the great jobs machine cranking again?
That’s the question hanging over the 2021 economy for Dallas-Fort Worth and Texas, which have long been leaders in job growth.
From 2012 through 2019, D-FW gained an average of 101,000 jobs annually. In the first 11 months of the pandemic year, D-FW lost 105,000 jobs.
Statewide, payrolls were on pace to fall by almost 681,000 in 2020, according to a recent forecast by the Federal Reserve Bank of Dallas. That would be the biggest annual decline on record, topping job losses during the Great Recession.
The projected 5.3% drop in Texas employment would be historic, deeper than the 4.7% decline at the end of World War II.
There were promising rebounds in hiring over the past year. But COVID-19 cases would surge, driving up hospitalizations and deaths, and people would curtail activity — and job growth would slow again. The up-and-down pattern has continued for six months.
“It’s what COVID-19 does that determines so many outcomes,” said Harvey Rosenblum, a professor at Southern Methodist University’s Cox School of Business. “The whole nation has been sucking wind since March, and I’m not sure Texas has been treated any worse than the rest of the country.”
That changed recently. In November, Texas posted an unemployment rate of 8.1% — 1.4 percentage points higher than the U.S. rate.
When was the last time the Lone Star State had that large of a gap on unemployment? In 1989, after the Texas economy was battered by a real estate crash, scores of bank failures and an oil-and-gas bust.
Texas has long been a magnet for companies and workers, and the steady influx of newcomers has been crucial to strong job growth. Brandom Gengelbach, CEO of the Fort Worth Chamber of Commerce, said 115 prospects were in its economic development pipeline, including companies in Portland, Seattle and Chicago.
“They’re lining up and getting all their due diligence and doing what they need to do,” Gengelbach said last month.
If 2020 was the year of survival for the travel industry, airline leaders want 2021 to be the year of recovery. Thriving will have to wait.
U.S. airlines head into the new year still burning through cash, nine months after the pandemic decimated air travel worldwide. Both Fort Worth-based American Airlines and Dallas-based Southwest Airlines have reported slow holiday traffic with no sign of an uptick heading into the first months of 2021.
United Airlines CEO and former American Airlines president Scott Kirby described late 2020 as the “end of the beginning” of the coronavirus pandemic, paraphrasing Winston Churchill as carriers themselves make critical decisions about the future of world air travel.
“Of course, now we find ourselves in the modern-day equivalent of a war,” Southwest CEO Gary Kelly said in a message to workers in early December. “And we fight this dreadful coronavirus and will defeat it.”
Vaccine distribution has begun across the U.S. with hopes that a significant portion of the traveling public could be immunized by this summer.
“We still have a ways to go until we get to a full recovery,” said Peter McNally, an analyst with investment research firm Third Bridge Group. ” No one has a crystal ball as to when we will get back to 2019 levels.”
After adding four new destinations in the U.S., Southwest Airlines’ 2021 approach is to expand, adding service to eight more airports. It’s targeting leisure destinations and adding a second airport in cities where it already has a major presence, such as Houston and Chicago.
The hope, Kelly said, is to add more revenue opportunities and put underutilized planes and employees back to work.
Both American and Southwest should be bolstered by the $15 billion aid package for air carriers that was part of the latest economic stimulus package. That gives them a runway through March.
American Airlines is fighting for survival, too. It went through nearly $30 million a day in cash in the fourth quarter, and it will take much longer for the carrier to start breaking even. While the company has nearly enough cash on hand to get through more than a year at this rate, American will have to reckon with more than $50 billion in debt that will weigh on it for years, or decades, to come.
American is also bringing back 17,500 furloughed workers it parted with in October in hopes of cutting payroll and matching demand. The company has told flight attendants it intends to start bringing employees back in March, but that depends on how quickly passengers return.
And that, ultimately, rests on how quickly a COVID-19 vaccine gets to Americans.
Dallas-Fort Worth’s real estate business is headed into the new year with more uncertainty than in decades.
That’s a big change from the start of 2020 when the road ahead seemed endless for most North Texas property owners.
It took a pandemic to derail what was the best D-FW real estate market in generations.
Now that same pandemic makes the outlook for 2021 hard to measure.
Some sectors – notably the housing market – are breaking new ground in spite of COVID-19. Record low mortgage rates are expected to keep home sales booming in the early months of this year.
But portions of the commercial property business are struggling to find the bottom.
“Everything hinges on getting the virus under control,” said Dr. James Gaines, chief economist with the Texas Real Estate Research Center. “I don’t think it will go away. If we can get it down to the same level as the ordinary flu, then we will say we are more or less back to normal.”
Some parts of the D-FW commercial real estate market may not be back to “normal” for years.
The hotel market has been the hardest hit with a more than 50% decline in revenues. Likewise, entertainment and retail properties are seeing increased default rates with people staying home to avoid infection.
“In the new normal, people will start traveling again,” said Jeanette Rice, an economist with commercial property firm CBRE. “However, nationally, we’re not projecting hospitality performance to get back to pre-COVID levels until 2024, so it will be slow.”
The outlook for office buildings is brighter as employees start to leave working at home and head back to the office. Dallas-Fort Worth continues to lead the nation in Kastle Systems’ back-to-work barometer with just under 38% of employees returning to office jobs. That’s well above the 23% average in 10 major cities Kastle is tracking.
But most major employers aren’t expecting to see the majority of their people back until in the second half of 2021. And that’s a bitter pill for office owners and leasing agents.
“This is absolutely the worst economic downturn I’ve seen,” said Mike Wyatt, executive managing director with Cushman & Wakefield. “It’s just been devastating.”
The strongest commercial property sector is industrial buildings, which enjoyed a surge in demand as consumers ordered more items for home and the shift to e-commerce accelerated. Developers started construction on millions of square feet of additional warehouses in 2020 and the building binge will continue in 2021.
“Clearly, industrial is chugging ahead for obvious reasons,” said Walter Bialas, senior partner with Dallas-based Goodwin Advisors.
All those seismic shifts in consumer behavior caused by the COVID-19 pandemic aren’t going away.
There are some basic demographic reasons. Out of need, millions of people, including baby boomers, dove into online shopping and discovered they like it.
Stores had to accelerate digitally to a level of service demanded by the pandemic and many believe the coronavirus simply advanced inevitable trends in retailing. Retailers still standing after 2020 have regained confidence to be better.
It’s easy to predict more store closings from downsizings and more bankruptcies in 2021 on top of the almost 10,000 stores that permanently closed and the two dozen major retailers that filed in 2020.
The haves and have-nots of retail were already emerging before the threat of COVID-19 put them into essential and non-essential classifications. Amazon, Walmart, Target, Best Buy, Costco, Sam’s and grocery retailers were already doing better than department stores and fashion retailers.
Sales of office and party apparel won’t snap back until COVID-19 is tamed.
A new type of store closing is emerging.
Retailers are beginning to see the value of stores that are closed to the public but operate as distribution points, said Meyar Sheik, chief operating officer of Dallas-based Kibo, an e-commerce software firm.
Making a store work differently, one where customers pick up or try on clothing before making a purchase, will take pressure off central fulfillment centers, which have been an ongoing problem during the health crisis, he said.
That trend actually pre-dates the pandemic. Nordstrom opened satellite locations where shoppers can try on clothing in 2019, two in New York City and five around Los Angeles.
Best Buy recently redesigned and converted stores to accommodate delivery and pickup of online orders. Some started out as temporary closures to accommodate the increase in online shopping, but others may end up being permanent. Whole Foods reopened a New York City store that was used for fulfillment only for a few months.
Macy’s converted two mall stores in Delaware and Colorado. Customers can still come in to make returns, pay bills, pick up orders, but shopping is restricted to online or communicating with a sales associate.
Industry observers are closely watching the two largest mall owners, Simon and Brookfield, which together purchased J.C. Penney out of bankruptcy, to see what they’ll do with the department store space they now control.
The pandemic has prompted many changes in health care, from inspiring collaborations among providers to an explosion in virtual care. Might COVID-19 now push lawmakers to finally expand health coverage to the most needy Texans?
Texas remains one of just 12 states to reject Medicaid expansion, a key plank of the Affordable Care Act. The 2010 law envisioned Medicaid providing coverage to workers and families earning less than 138% of the federal poverty level — just over $36,000 for a family of four.
But Texas’ elected leaders have refused to expand Medicaid, even as the state leads the nation in the number of uninsured. Expanding Medicaid would extend coverage to nearly 1.58 million Texans, according to the Kaiser Family Foundation.
That sounds like a no-brainer, especially during a pandemic. But there’s more to the pitch than protecting fellow citizens. Expanding Medicaid would bring billions of federal dollars to Texas, which would help plug holes in the state budget. It also would increase spending on health services while reducing the costs of uncompensated care.
A cash outlay is required because Texas must cover 10% of Medicaid costs under the health law. But every dollar of state money would bring in $1.95 in tax revenue, Perryman said. Over the next two years, the state would reap $2.5 billion in fiscal benefits and local governments would get $2 billion, he said.
The financial upside has stoked optimism about expanding Medicaid in the looming legislative session in Austin.
“We’re hearing across the aisle that there’s an appetite for discussion,” said Chris Wallace, CEO of the North Texas Commission. “I think all the stars are perhaps aligned.”
The energy business was crushed as COVID-19 abruptly slashed demand that was already declining the past five years.
The lid on oil prices for the foreseeable future is all around us, said J. Frasher Murphy, partner in the restructuring practice of law firm Haynes and Boone. The stay-at-home economy doesn’t require as much gasoline, but the decline in sales of jet fuel has been the big hit to oil demand.
“It’s been a completely perfect storm,” he said. “We don’t think as much about jet fuel, but it’s had an unbelievable impact on the price of oil.”
The approval of COVID-19 vaccines was enough to lift oil prices to the $45- to $50-a-barrel range, he said. “The vaccines have created optimism about demand for oil, but it’s going to take months into 2021 for demand to bounce back.”
Until demand starts to catch up to supply, bankruptcies will remain common.
Texas lost 49,600, or 20.5%, of its oil and gas jobs in the past year. That’s almost as much as it lost in the five previous years, according to the Texas Workforce Commission. Up until this year, it was the only major industry in Texas that had contracted.
Almost 50 oil and gas exploration and production companies filed for bankruptcy in 2020, and more companies could seek court protection in the first half of 2021, Murphy said. Separate from demand, the complex capital structures that energy companies have often require a bankruptcy court-led restructuring of debt.
2021 “looks like another tough one,” said Bud Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University. “It doesn’t look like oil prices will get much higher even if the economy recovers. ——We’ve reached peak demand in the developing world.”
The global majors, such as Chevron and Irving-based Exxon Mobil, are reducing their exposure and are more focused on non-fossil fuels, Weinstein said.
But Texas shouldn’t worry that the energy run is over. He said the state, which is also a leader in renewable energy, can count on fossil fuel demand continuing for generations.