Factors driving the Texas economy

Texas cities are clearly the place to be in terms of job creation, wealth formation, and overall growth. All the major Lone Star cities continue to show economic strength while the rest of the nation struggles.

I thought we would look at each of the metros and see what is driving the growth in each metro, rather than focusing on just real estate.

San Antonio

San Antonio’s economy is standing out once again as one of the four strongest metropolitan areas in Texas and eleventh overall in America according to a recent Brookings survey of the 100 largest metros in the United States. The Brookings MetroMonitor survey evaluated unemployment rates, housing prices, economic output, and employment in each city.

The unemployment rate in San Antonio is expected to decline at a slower rate as the oil and gas drilling continues to moderate. Texas is losing 90,000 military-related jobs due to the sequester and budget reductions last year. Even with the reduction in force, San Antonio is fortunate to have added 8,000+/- jobs to their economy, most of them coming from the services and construction industries. San Antonio continues to see improvement in the unemployment rate as it declined to 5.9% compared to 6.0% at the end of 2012. Employment growth is expected with residential construction picking up at the end of 2013 compared to the rest of the year. San Antonio’s residential demand continues to improve moderately, consistent with job and income growth in the area.

The Alamo City’s focus on strong growth sectors like bioscience, healthcare, aerospace, and cyber security will continue to contribute to improved employment opportunities.

San Antonio also appears in the 2012 Cost of Living Index, developed by The Council for Community and Economic Research (C2ER), as the No.1 least expensive city for food costs (as measured by the grocery item index), making for more disposable income for its residents. With the lowest cost of living in the state and one of the strongest economies in the country, San Antonio continues to attract industry and consumer alike.

Keith Phillips, senior economic policy adviser for the Federal Reserve Bank of Dallas, expects the area to add about 22,400 jobs this year, expanding the job base by 2.5 percent. That would be a significant improvement over the 1.1 percent job-growth rate in 2013 that produced about 13,200 new jobs. That was down from 2012’s 2.6 percent growth rate. The San Antonio MSA has benefitted greatly from the Eagle Ford shale opportunity. The area will continue to benefit, although at a slower pace.

All these factors have led San Antonio to a 17 percent increase in home resales in 2013 when compared with 2012. With so many people moving into the city, more jobs have been created which has translated into economic growth and a rise in home sales and home prices.”

Houston

The Houston metro area should create just under 70,000 jobs in 2014. Employment will grow in all sectors, with professional and business services, education and health services, trade, transportation and utilities and construction turning in the strongest performances. Energy and manufac¬turing will grow but at a slower pace. The year should end with 2.9 million payroll jobs, a net increase of more than 500,000 jobs since January ’05. Only two other metros – New York and Dallas-Fort Worth – are able to make a similar claim.

For the 12 months ending October ’13, the metro area created 79,600 jobs, a 2.9 percent annual growth rate. This is a slower pace than earlier in the year. Growth peaked at a 4.5 percent annual rate, or 119,300 jobs, during the 12 months ending February 2013. That was the fastest pace since June 2007, when the region added jobs at a 4.6 percent annual rate.

Houston has enjoyed almost four years of phenomenal growth. Since January ’10, the region has added 337,300 jobs, or more than two for every one lost in the reces¬sion. In that time, the region has built 100,000 single-fam¬ily homes, and exported $434.6 billion in manufactured goods and commodities.

All channels of real estate are doing well. In the 12 quarters ending Q3 2013, Hous¬ton absorbed 10.5 million square feet of office space, 12.9 million square feet of industrial space, and 3.8 million square feet of retail space. Since January ’10, residential brokers have sold more than 274,000 homes, or one home every 7.2 minutes.

The phenomenal pace of job growth that Houston experienced over the past few years couldn’t be sustained indefinitely. Some easing of the employment throttle was inevitable. That easing began mid-year 2013 and should continue through 2014 as the region moves toward a more normal and sustainable pace of job growth. Since 1993, excluding the recession years, Houston has averaged 61,900 net new jobs per year. Payroll growth has almost doubled the rest of the nation at 3.0% compared to 1.7% nationally.
Strong energy markets and a broadening economic base will continue to drive the Houston economy through 2014. Oil prices by the barrel remains healthy. West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing and continues to hover around $100 a barrel in February.

The extreme weather hammering the rest of the country has increased natural gas demand, supporting price gains and helping Houston’s and the other Texas metros’ economies. Natural gas producers have been thankful that the rest of the nation has pushed demand up to $4.60 per MmBtu (million BTU) in February, about 30% higher than last Novembers lows.

Also creating optimism is the potential of repealing crude oil exports, an export law that was put in place in the 70’s when the US was not the chief oil producer in the world. A significant portion of the gasoline produced by the regional coast refineries is exported, helping supporting the nation’s balance of oil exports. In addition Occidental Petroleum is moving its head quarters to Houston in 2015. As Mexico opens up its energy sector to international investment, Houston is poised to benefit.

DFW

The Dallas-Fort Worth economy has shown good growth through 2013, supported by three pillars: energy, organic growth, and links to the broader U.S. and global economies. Even with the flattening of the metro economy at the end of the year due to reduced Federal spending, most local labor markets continued to show strong expansion. Year-over-year payroll job growth of 3.2 percent for the Dallas-Fort Worth metropolitan statistical area was nearly double of the national average of 1.7 percent in October. Likewise, the metro area unemployment rate of 5.4% in January 2014 was well below the national average of 6.5% for the month. Payroll employment now stands at 3.15 million jobs, which is 5.4 percent above the pre-recession peak of 2.99 million jobs from May of 2006.

The Dallas-Fort Worth area also will see strong steady growth through 2014, but it will be down slightly from the fast pace of the last two years. Dallas-Fort Worth’s economy is expected to expand by 3.3 percent this year, compared with 3.4 percent last year and 4.3 percent in 2012. Dallas-Fort Worth’s job growth is projected to be 3.1 percent, compared with 3.4 percent last year. Dallas-Fort Worth’s unemployment rate is expected to decline to 5.2 percent by the end of this year from 5.6 percent in November.

In an example of strong local corporate (organic) growth, North Texas healthcare-related construction is booming. Beyond the monumental $1.3 billion Parkland Memorial Hospital in Dallas, other projects are spread throughout the region. According to the Dallas-Fort Worth Hospital Council, hospitals in North Texas account for 265,000 jobs and generate $14.4 billion in income for healthcare workers. Global links to North Texas are strengthened by the American Airlines/US Airways merger, finalized on December 9, as American emerged from bankruptcy protection. Several speculative warehouse / distribution facilities are under construction in the area. Dallas-based Southwest Airlines also benefitted from the merger, picking up 22 slots at New York’s LaGuardia Airport.

Austin

Austin continues to be one of the strongest job creating metro areas in the US with 23,600 jobs created in 2013, most of them coming from services producing sector, professional jobs. The capital city is home for many high tech companies, and wages in the tech sector are some of the highest in the area. 2014 should see Austin add thousands of additional jobs in 2014, mostly in the high tech and services sectors. High tech giants such as Google, AT&T, and Time Warner cable are competing to provide superfast internet service in the area and networking to start around mid 2014. The new service has the opportunity to attract so much business that needs the 100+% increase in internet speed.

Austin’s unemployment rate declined to 4.9% in December matching the August 1989 rate. The unemployment rate is expected to fall continuously as the year progresses, powered by the continued strong job growth. Year over year growth of personal income climbed to 4.7% in the latter half of 2013, which is second only to Houston in the state.

After a strong 2013 in all real estate channels, home starts will continue to improve, only slowed by the lack of developed lot inventory. Lack of inventory will be the biggest challenge to the local industry as the area continues to attract more residents drawn by strong job growth, cheaper cost of living, friendly business atmosphere and Austin favorable and creative investment climate. Currently Austin home prices are at a record high. Continued appreciation should continue through 2014 in most if not all Austin submarkets.

Last year saw the return of a thriving office investment market, so much so that several regional markets saw significant chunks of their overall stock of buildings change hands in 2013. Five Southern markets saw more 10% or more of their total office market inventory change hands last year: Austin, Dallas-Fort Worth, Atlanta, Houston and Denver. Austin was especially popular with office investors as 13% of its office space was acquired by new owners in 2013.

Austin has also been on the radar of institutional investors for quite some time. The metro had a huge inventory turnover in 2013 (13.1% of inventory), although a sizable portion of that (40%) was due to portfolio sales. The biggest portfolio to trade hands last year in Austin was the sale of the Thomas Properties Group portfolio of five class ‘A’ CBD towers as part of the firm’s acquisition by Parkway Properties. With a large chunk of the CBD inventory having already traded in this market the last couple of years, expect sales to remain strong, but turnover rates to moderate in the near term.

Several factors have helped Texas retain its national lead. Among them:
• Strong job growth. 40+% of all jobs created in the US last 3 years were in Texas.

• The cost of living is low. Beer? Cheap. Food? Reasonably priced. Apartments? Affordable. No state income tax gives former residents of CA or NYC an automatic raise. Texas has the second lowest cost of living of any state in the country. The same paycheck you receive in California, Florida, etc. goes a lot farther in Texas.
• Low unemployment. Only one other major market has jobless rates below 4.9 percent. Austin is at 4.9 percent. Our assumption is that strong local economies attract the most people and create the best conditions for family formation, which in turn generates new demand. Strong productive industries drive demand for such things as heath care, business services, and retail, as well as single-family houses, a critical component of local growth, and owning a home is still the aspirational goal of the vast majority of Americans.

• Retail strength. Employment in the Texas retail sector has grown by since the recession. As the retail industry will tell you, no other state has had the retail growth that Texas has shown the last five years.

• Appreciating home values. Nationally the typical home has declined in value since 2008 in 92 of the 102 markets. Among the exceptions are Texas metros, cities, and towns, with most appreciating the last 5+ years.

• People are friendly and genuinely want to help. I do not blame you if you think this sounds hopelessly naïve. Many don’t believe this statement, but time after time I hear this from newly transplants and relocating business owners. I’ve had this confirmed by multiple outside visitors: if you come from either of the coasts, you’re going to find the middle of the country almost disarmingly welcoming. People you don’t know wave to you. You can strike up a conversation with essentially anyone. Accidentally making eye contact with a stranger isn’t an awful stare-down that leaves you feeling dried out and steely; they’ll probably just smile at you. It’s the sort of thing you notice right away, in all sorts of subtle ways –- the people are just friendlier. It’s contagious, as well.

• There’s weather! If you don’t like it wait a day. Most of Texas has two seasons — summer and spring, although this year has been an exception with several winter storms. It doesn’t have the maddening consistency of California or the weather disasters of Florida. It snows occasionally and doesn’t stick. It’ll rain once in a while, it’ll get down to 30 for a week or two in February, it’ll spike up to 100+ in the summer, there are clouds and such — but most of the time, the word I would use is ‘nice, warm, with occasional swelter in August’.

• There’s stuff to do. The rest of the country tends to look at Texas as devoid of culturally fun events that you see in so many metros on the East Cost. However that is wrong. All four major metros have something happening almost every weekend. Austin leads this category. SXSW, Austin City Limits, film festivals, F1 racing and more.

The bottom line is that a lot of people are and will continue moving here, causing more demand than product. If you are moving here, don’t dawdle. If you are looking for shelter, make a decision quickly. The home / apartment you look at today will not be there tomorrow.

If you are reading this from another state / country you may be snickering as you read this. But reserve judgment till you have been here. You will see the statements above are backed by the facts.

If you live in Texas, count your blessings and know that the Texas economy has room to run.

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