Is Texas’s growth sustainable?

Texas needs an additional 10.5 million housing units by 2050 to accommodate our growing population. Considering that the majority of growth will take place in Houston, DFW, San Antonio, and Austin, this is equivalent to adding 70,945 housing units per year, per metro.

“Texas is projected to add around 30 million residents, an increase of nearly 120%, over the next four decades,” said Dr. Jim Gaines, research economist with the Real Estate Center in the Mays Business School at Texas A&M University. For you that are not familiar with Dr. Gaines or the Texas A&M real estate center, they are the top real estate data source in Texas and one of the top in the nation. They are not paid by the industry, but are academics, which in my eyes lends a lot of credence to their findings.

This finding begs the question: is this growth sustainable? Can this strong economy last that long? After 35+ years of watching the Texas economy, I would say the answer is yes.

First, let’s start with the ‘can do’ attitude of the state. Many Texans through the oil and real estate recession of the late 80’s and 90’s. Oil and real estate within months lost 90% of their values and caused a large economic shock to the region, which took a decade to recover from. This may be one reason that Texas businesses were more conservative about expansion than the rest of the country during the last boom. Instead, state, municipal, and business leaders got together to map out strategies to make our state more economically diverse and less dependent on single industries.

In Austin after the 2000 tech bust, the private-public partnership ‘Opportunity Austin’ was created to make the city’s economy more diversified and less dependent on one industry. Austin has been recognized as being highly successful with their wider economic base of recruitment, to the envy of other metros and states. Houston which has long been the “energy city” has a much broader base outside of energy, driving the area’s growth. A diverse economy helps to insulate the state from recessions.

Texas led all states over the last ten years with an increase of 427,000 people, according to census estimates released last December. Eight of the 15 fastest-growing U.S. cities and towns for the year ending July 1, 2012, were in the Lone Star State, according to population estimates released by the U.S. Census Bureau earlier this year. Half of the top ten metros were in Texas, No. 2 Houston, No. 4 San Antonio, No. 5 Austin, No. 7 Dallas, and No. 10 Fort Worth.

The number of Texans more than doubled from 1970 to 2010 (to 25.1 million) and is approaching 27 million. Depending on the assumed rate of people moving into the state, by 2050 this number could well double again.

The Texas triangle of Dallas-Fort Worth, Houston, and the Austin-San Antonio corridor have seen the majority of the growth, but the fracking boom has helped Midland-Odessa and south Texas to grow as well..

The country is well aware of Austin’s growth, which added 25,395 people this year, increasing the population to 842,592, and moving the city from the 13th to the 11th most-populous city. When you look at the growth numbers, there’s no indication growth in Texas is slowing down.

Look at the potential explosive growth in pure numbers of the larger metros:

•The Dallas-Fort Worth Consolidated Metropolitan Statistical Area is expected to grow to nearly 16.8 million in 2050, an increase of 163% from 2010.
•The Houston-Sugar Land-Baytown San Marcos MSA is projected to expand to more than 14.9 million, a growth rate of more than 143%.
•Expectations have Austin-Round Rock-San Marcos MSA more than tripling to over 5.3 million residents by 2050, while the San Antonio-New Braunfels MSA’s population will hit 2.4 million, double the number in 2010.

Among all small US cities with over 50,000 people, San Marcos grew the fastest, at 4.9 percent during the year. The home to Texas State University made the list by the thinnest of margins — its population estimate was 50,001. Following it in quick succession in the top 15 fastest growers were Midland (3), Cedar Park (4), Georgetown (7), Conroe (10), McKinney (11), Frisco (12) and Odessa (13). To put this in perspective, consider that no other state had more than one city on the list.

Now that I’ve wowed you with population figures, what exactly is the case that Texas will be able to sustain this growth? Obviously, we can’t see the future, but we know what drives growth: jobs. And over the past year, Texas added jobs in 10 of the 11 major industries, including professional and business services, leisure and hospitality, trade, transportation and utilities, education and health services, construction, government, financial activities, mining and logging, other services, and information.

Management, scientific and technical consulting services – This channel is expected to have 83% growth over the next 10 years. Whether it is the financial, energy or tech industry, all of these have a strong foothold in Texas, with all metros have their separate strengths in each channel.

Services in the health industry – Health services are expected to grow 74% nationally. Again Texas looks good, with the number of baby boomers coming of age in this state and the continued immigration of those from other states due to our lower cost of living. This includes medical, health services, elder care, etc.

I had knee replacement in the last year and know many people who will need similar care soon. The projected growth is great. It starts in Houston with its world-renowned medical center. But the other Texas metros are stepping up quickly, with new medical facilities and teaching schools opening. Remember Texas is projected to have a 40% shortfall of general practitioners within 20 years.

Technology – With the successful run of Dell, Rackspace, Texas Instruments, and other high tech companies, the continued projected growth of that industry (data processing, cloud computing) all have strengths in their respective metros, and all are projected to have over 50% growth in the next ten years.

Energy – The shale play has caused a 32% increase in jobs in the last 12 months. Based on current projections the growth in jobs will slow, but there is a strong projected growth of 35%+ over the next ten years in the energy sector.

We have the jobs, and we have the people. Even with all this demand, one major factor is holding down growth in real estate – the lack of developed lots. Austin is projected to have a shortage for the next 3-4 years. Houston and San Antonio are similar, and DFW is not far behind. All are in the top ten markets in the nation in housing starts while also being in the top ten for lots needed.

In the August national builders 2013 survey, 59 percent of builders reported that the supply of lots in their markets was low or very low—up from 43 percent September of last year, and the largest low supply percentage seen since they began conducting surveys in 1997. The same survey found that lot shortages tended to be especially acute in the most desirable locations. Thirty-four percent of builders said that the supply of A lots was very low, compared to 18 percent for lots in B and 12 percent for lots in C locations. The shortages have also translated into higher prices for builders who are able to obtain developed lots to build on.

Builders have been unable to respond to the high demand for housing due to these lot shortages. Additional barriers include a shortage of labor in carpentry and other key building trades, tighter lending requirements, and a recent uptick in interest rates. There is not a lot of land in the pipeline ready to go, so land developers are working to meet the demand from home builders, but it takes time to obtain all the entitlements -so this could still be an issue in 2014-15 particularly in those markets where the entitlement process is longer.

The growth has not been without cost to rural Texas. In 2010, more than 64% of the Texas population lived in one of the four major metros. However, by 2050, nearly 75% of all Texans will reside within those major areas.
As these metros continue to expand, growing pains will arise, primarily those linked to water and transportation. But do I think it is sustainable? I think there is a strong case for optimism over the next 10 to 40 years. Barring a catastrophic event, It is hard to imagine why you would not want to invest in Texas and its growth.