The case for cities

There’s been a lot of talk about the Texas job boom. In a time where most of the country is still struggling with unemployment, Texas has continued to add jobs. This has attracted thousands of people to our state who are looking for increased economic opportunity. Besides jobs, what other factors draw people to cities?

First, let’s realize how quickly the country and the world are undergoing urbanization. In 1900, just over 40 percent of the nation’s population lived in cities. That number is now around 79 percent according to the US census.

Nowhere is this more apparent than when you review the latest US Census maps and see the decline of rural America and Texas. This does not mean the population surge to this state is slowing. Conservatively this state is expected to double in population in the next twenty years, with nearly all of this growth going to four major Texas metros. This unprecedented growth is one of the biggest challenges facing every city and anyone responsible for managing city functions, from mayors and police chiefs, to economic planners and school administrators.

So what makes a city attractive to consumers? What factors might people consider, consciously or not, when they think moving from one city to another or from one neighborhood to another?

Economic stability, cultural environment, infrastructure, educational opportunities, and healthcare are the primary draw for cities. As people decide where they will call home, they are considering these basic questions:

• Can my family and I make a living there?
• Can I live here and raise kids? Is it safe?
• Are the schools good?
• Will my house hold value?
• Does the city have social and cultural appeal?

Attracting and keeping people in urban environments is less about projecting an image of what is “cool” and more about providing the basics that encourage and support a strong middle class: jobs, schools, churches, cultural environment, etc.

Consider the heavy industry based cities located in America’s ‘Rust Belt’, such as Detroit, Cleveland, or Pittsburg. Many were economic one-hit wonders following the post-war era. For a city to thrive and survive changing economic currents it must have a broad-based economy and diverse employment. Many of today’s deteriorating areas were built around one industry and thrived as long as that industry thrived. But when economic changes caused heavy industry to globalize and outsource, the local economy collapsed.

In real estate one of the first lessons taught is ‘location, location, location’. Following that is ‘schools, schools, schools’. One thing that can typically always be counted on as a “stabilizer” for an economy is a strong educational system. No matter what, most societies understand that an education for their children is necessary for societies to prosper. When we think of great cities in the US, we think of Chicago, Boston, New York, etc. Chicago has the University of Chicago, De Paul University, and additional 75 places of higher learning. Boston has over 60 areas of higher learning; MIT, Harvard, and Boston College to name a few. Cities with strong medical teaching centers also thrive for the same reason.

Also realize the importance of government employment, which is a major portion of our national and state GDP. Capital cities have state government and Federal government offices, which means stable jobs. Certain cities also benefit from nearby military bases. Federal jobs help provide an economic bottom floor to a city’s job market, the same way universities do and the same way state governments do.

Reurbanization and gentrification plays a part in this too. Show me a city where the middle and upper middle class have fled the central neighborhoods to the suburbs and I’ll show you a city that has the burden of paying for city services but with a declining revenue base. Result: economic erosion (not only with property values but employment). But show me a city which has seen gentrification and I’ll show you young professional people and retirees moving back to town and the prices of downtown property and improved neighborhoods going up, creating a situation where a city pays for its services with the spending of people with high disposable income and property taxes on higher value property. Then as a city you have the money to not only provide basic services, but the ability to enhance your river walk or construct new hike and bike trails, parks, convention and cultural centers, etc. to increase the quality of life amenities and attract even more people to spend money on the weekend, or to live during the week, or maybe to vacation or convention there and spend money while doing so, all of which creates jobs in construction, service, and retail.

The best way to make sure a city thrives, even through tough times, is to diversify the private industry job base, have a strong educational system, have a strong government jobs base, and gentrify your city core, adding residences and quality of life amenities where they are lacking. This analyst looks at the growth of the Texas metros and feels that part of the reason for growth fits these parameters. When you look at the growth of Houston, Austin, San Antonio it is the master planned communities that have had the explosive growth because of their multi-level offerings, including those basic needs – economic stability, cultural environment, infrastructure, and educational bases.

No state thrived in the wake of the recession. But compared to the rest of the country, Texas experienced something of an economic boom, accounting for one out of four jobs created in the US. Pick your category, and Texas dominates. According to the Brookings Institute, four of the top ten major metro areas for economic performance and employment are in Texas: Houston and Fort Worth in the first two spots, Austin at four, and Dallas at eighth according to the Bureau of Labor statistics. Texas cities claimed three of the top ten spots in the Milken Institute’s Best Performing Cities Index, four of the top ten of Forbes’ “Cities Where the Recession is Easing,” and another five spots in this year’s “Top Twenty Metros in Homebuilding” according to the US Census Bureau.

When you talk to folks in Texas about their state’s good fortune, they’ll also point out that the Lone Star State would be the 15th largest economy in the world if it were its own country, and that 64 Fortune 500 companies call Texas home, more than any other state. In addition, more Americans are moving into Texas than any other state, and CNBC recently named it the Top State for Business in 2012 for the third time since they began their ratings in 2007.

What’s going on? There are a number of reasons.

A Late Start

Texas fared better in this recession partly because it was last in and first out. Early in 2008 we saw a period of high energy prices and Texas was seeing a quiet energy boom. The strength of the high-tech industry also provided a bit of a buffer. When energy prices finally did fall as the recession picked up steam, Texas declined, although slower than the national average, and it bounced back faster. There were three factors for the quck rebound. First, energy started growing again – fracking helping propel the state near the top energy producing states again, and helped cut our reliance on foreign oil. Second, manufacturing is leading the recovery and Texas exports are strong. Third, the Lone Star consumer is in better shape to spend because home prices haven’t plunged. In 2004, 2005, and 2006 Texas was 50th in appreciation according to the OFHEO/FHFA home price index, so there wasn’t a bubble to burst in this state. We have since moved up to 42nd.

Stable Real Estate

Real estate executives, economists, and analysts struggled to find one reason why the Texas economy largely avoided the real estate boom and bust, and a few theories emerged. First, a reliance on property taxes in Texas (compared to tax heavy California) might have dulled real estate appreciation. Second, the banks that survived the Savings and Loan crisis in the 1980s have mostly held onto conservative and un-exotic lending practices. Consumers also cannot refinance 100% of the appraised value of their homes. Third, land and utilities are generally cheaper, sometimes dramatically, throughout Texas, which holds down the cost of the living and doing business. Fourth, Texas’s major cities have diversified away from the kind of real estate and financial services addiction that plagued the sand states (that’s CA, FL, AZ, NV), where the recession has been the most severe.

The Right Mix

Texas’s major cities are blessed with some of the more stable industries of this economic recovery. Houston is the nation’s energy and medical hub, Austin is an education, high-tech and clean industry leader, and San Antonio is a rock of stability on the pillars of health care, education, and military spending.

Something About Texas

Maybe it’s the lack of a state income or capital gains tax or in general a lower tax burden. Or the lack of a strong union base as a right to work state. Or the plentiful labor supply fromf Mexico, or the lower wages, or the stable and more favorable regulations. There’s something about Texas that makes it the most popular place for business to do business, as CEO Magazine and many other studies have found. With businesses looking to improve their bottom line by seeking lower tax states, the attraction of doing business in Texas has dramatically improved and will continue to.

Where are we?

All four metros are seeing good residential and commercial growth, with the housing consumer really focused on master planned communities such as the Woodlands and Cinco Ranch in Houston, Alamo Ranch in San Antonio, and Circle C, Avery Ranch, and Crystal Falls in Austin. All of these master planned communities offer the economic stability, cultural environment, infrastructure, educational bases that were mentioned earlier. These communities never really saw a slow down during the recession.

Houston

Houston continues to be strong. Resales are good, bringing inventory down to 3.6 months — which is the lowest supply of homes on the market since December 1999. Houston is leading the nation in home starts, adding pressure to the market. 2013 should bring in excess of 23,000 starts. This is still far below the boom days of 2006, when home starts neared 50,000, but a strong recovery compared to other cities. Rental rates are also way up — in office towers, in apartments, warehouses and even for people who are leasing single-family homes.

• Apartment absorption has caught up with new construction ,shown by the 90% occupancy citywide
• Days on the market for resales and rentals has dropped dramatically to levels not seen since 2007
• Foreclosures have slowed
• As with all of Texas, Houston continues to see a large number of out of state immigrants moving into town

San Antonio

Housing resale inventory is at 5.3 months, compared to 6.6 months at this time last year. Equilibrium, or a market balanced between sellers and buyers, is 6 months supply, which places San Antonio as a sellers’ market. With this quick turnaround in sales, the market is skewing in favor of sellers with homes being sold for 96.9 percent of list price. Homes sold in the price range under $200,000 accounted for 66.8 percent of total homes sold and those between $200,000 and $500,000 accounted for 29.2 percent.

• Apartment leasing is still strong at just under 93% occupancy and rents are still rising, even with over 8,000 units coming on line this year
• Office continues to be a bit challenged compared to other Texas metros, with 82% occupancy. This is due primarily to corporate relocations to owner-occupied and/or build-to-suit properties. That said, rents are stable with a little rise, due to the Eagle Ford Shale play south of SA
• As in other Texas metros, foreclosures have slowed

Dallas / Fort Worth

The number of single-family homes listed for sale with real estate agents in the Dallas area is the lowest in more than two decades. At the end of the1Q13, on average there was just a 2.6-month supply of houses on the market in the area. Couple this with the improved rental market for landlords with improving rents and higher occupancy from a year ago. Multifamily developers will deliver 13,250 units to the DFW apartment market, more than twice last year’s total. As in 2012, Dallas will account for approximately 80 percent of all completions in DFW, yet the market will remain healthy at over 93% occupancy.

Austin

Austin has an extremely limited supply of resale homes – 2.6 months of inventory, which is a 40% decline from a year ago. Residential and commercial rents continue to rise due to lack of supply. Austin apartment owners are in an enviable position with 95+% occupancy, even with a record number of new units coming on line. Almost all channels of Austin’s economy are comfortable at or above prerecession values and income. With the good fortune of job creation, drawing over 60,000 people per year to the Austin area, the market should continue to hold its values and strength.

The bottom line is that our metros offer the amenities and economic stability that so many are looking for. Texas will continue to grow as individuals and businesses move here.

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