Many factors can be considered in looking at an economic profile and major economic indicators of a community. In this case, a brief description of the history of the local economy is given followed by more detailed information regarding current national and metropolitan area's economy.
History of the Metro Economy: The Austin metropolitan area (and the State of Texas) generally experienced strong economic growth from 1980 to 1985. The area's population and employed work force increased rapidly, and real estate prices escalated sharply upward due to greater consumer demand and developer speculation that the economy would continue to boom. In the beginning of 1986, world oil prices suddenly dropped sharply and the tax laws were modified, all of which slowed the growth of the local economy. Real estate prices, which had been inflated due to speculation, also, then plummeted. During the period from 1986 to 1990, the local metropolitan and state economy experienced difficult economic times as evident from a much slower employment growth rate, dropping real estate prices, fewer businesses locating to the state, numerous financial institution failures, and many foreclosures and bankruptcies.
From 1992 to 2000 the Austin economy experienced strong job growth and was generally ranked as the fastest or second fastest growing metropolitan area in the nation. Local hi-tech growth, particularly, help fuel this growth. Since the high-tech bust in mid 2000, the growth of the local economy was substantially slowed and the few years to follow would be spent in recovery from the bust. By 2004, appreciation in the Austin MSA exceeded levels that would be considered normal in other parts of the nation, which continued until mid 2007. In many cases, this appreciation approached 20% to 25% per year. We have considered 12% per year to be a conservative estimate. This can be tied to many factors that included increased land costs which translated into higher lot values, an unemployment rate under 4% that left builders bidding for construction workers, extraordinary local job growth, and salary increases tied to substantial numbers of new high-tech jobs that led to multiple contracts on homes for sale and contract prices frequently over asking prices. By 2006, the local economy had recovered to a point that prompted new commercial development and record level residential development. Growth continued until mid-2007 when evidence of the failing sub-prime mortgage market began to surface.
Current National Economy: The National Bureau of Economic Research announced that the United States fell into a recession as of December 2007. This announcement along with the tightening of credit had significantly decreased consumer confidence which had directly impacted major indicators of economic health such as decreasing retail sales and job layoffs. The weekly public announcements of major companies laying off numerous jobs and/or filing for bankruptcy and the record-high declines in the stock market over the last few years had crippled consumer trust resulting in increasing savings and decreasing spending and investment from individuals and businesses alike. According to the first edition for 2010 of The Economist, titled The World in 2010, from the beginning of the recession through to mid-2009, households had lost $12 trillion, or 19%, of their wealth, because of the collapse in house and stock prices.
By the end of 2009, consumer sentiment began improving as the market suggested strong signs of recovery with the recession statistically ending as positive GDP was indicated in the 3rd Quarter 2009. Also, the DOW Jones index reached the 10,000 benchmark when it was near the 6,500 territory just a year ago. Further signs of recovery have unveiled including significant increases in home sales (aided by government stimulus in the form of homebuyer credits), slight increases in retail sales during this holiday season compared to the previous year’s sales, a slight decline in the unemployment rate to 10%, and slightly increase in payrolls.
While signs of improvements are evident, many other factors are in play that can slow or even derail the economy back into a recession. According to an article in The Economist, titled Square-root reversal, “the American economy in 2010 will be torn between two opposing forces. The first is that deep recessions usually lead to strong recoveries. The other is that financial crises usually produce weak recoveries. The interplay of these two forces will produce a cycle that resembles not a V, U, or W, but a reverse-square-root symbol: an expansion that begins surprisingly briskly, then gives way to a long period of weak growth”. Based on historical trends of U.S. growth after recessions, the American economy, which shrank by some 4% over the course of the 2007-2009 recession, should grow by as much as 8% in its first year of recovery, and unemployment, now at 10.0%, should fall down to 8%.
However, without a self-sustaining cycle of private spending and income growth, the previously described predictions based on historical trends will not likely occur as majority of the positive gains have been heavily subsidized by government spending and stimulus. This is because consumer spending is the major component of GDP making up nearly 70%. According to IMF economists, “U.S. household consumption declined sharply in late 2008, against the backdrop of a deepening financial crisis. Personal consumption expenditure, which had peaked above 95 percent of disposable personal income in 2005, fell below 92 percent by the second quarter of 2009. This decline, if sustained, would break the trend of steady increase in the U.S.
consumption rate since the 1980’s. Our analysis suggests that U.S. household consumption and saving rates will settle at 89½–91½ and 5–7 percent, respectively, over the next several years. Similar levels of consumption and saving rates were last seen in the early 1990s. Though not too far from the 2009 saving rate of nearly 5 percent, the forecast implies a significantly lower share of private sector demand in GDP by about 3 percentage points compared to the pre-crisis (2003–07) average. However, the forecast uncertainty is large: a 95-percent confidence interval has width of about 7 percentage points (3¾ percentage points on each side).” Negative factors such as high unemployment and wage cuts will keep consumer spending at “below-normal” levels. Also, if deflation sets in, real debt burdens will increase further depressing consumer spending. With national debt rising at record levels due to increasing annual budget and trade deficits, the government will not likely be able to continue to subsidize GDP growth and further dependence will be placed in the business sector to generate new jobs to get money in the hands of the consumer to return the economy back to sustainable levels of growth.
A major loss in wealth described above was in real estate. “Residential- and commercial-property values fell by $8 trillion, or almost 20%, from the beginning of the recession through to mid-2009, impairing existing loans and eroding the collateral for new ones.” With regulators imposing higher capital requirements and lenders’ balance sheets still deep in the red, borrowers are running into trouble when their maturity date looms or their properties are reevaluated resulting in the borrowers being obligated to inject capital they do not have and/or cannot borrow because of tightened lending restrictions. However, the national attitude in the banking world has been to “Extend and Pretend”. In other words, lenders are extending the maturity dates of loans and pretending balance sheets will fix themselves versus the other option, which would be to flood the market with foreclosures and REO sales at large discounts similar to the Savings and Loans crash. The primary fear in the real estate industry is that the looming maturity dates for the majority of risky loans issued during the peak of the bubble will create a collapse of the banking system. According to Korpacz Real Estate Investor Survey, published by PriceWaterHouse Coopers as of 4th Quarter 2009, “the delinquency rate for commercial real estate loans has more than doubled at the 100 largest U.S. banks in the past year, moving to 9.56% in the third quarter of 2009. Since property cash flows are not expect to improve fast enough to rescue troubled borrowers and fully relieve the $1.4 trillion of commercial real estate debt maturing by the end of 2012, refinancing difficulties could easily sidetrack the U.S. economic recovery and subsequently detour the recovery of the commercial real estate industry.”
In conclusion, the nation appears to be improving at a slow pace. Experts believe the progression will continue upward, but a slow rate as companies repair their balance sheets and credit becomes available resulting in expansion and, in turn, job growth. The major hurdle will be to restore liquidity to the banking industry to allow real estate transactions to occur to motivated buyers and sellers and to allow businesses to borrow credit to facilitate daily operations.
Current Metro Economy: Currently, in the Austin-Round Rock-San Marcos Metropolitan Statistical Area, the occupancy rates and rents for the industrial, office, retail, and apartment segments of the real estate market have started to show signs of decline since the beginning of 2008. It is our opinion that supply of commercial product (vacant and new construction) has surpassed current demand (absorption). Based on historical job and population growth in the Austin MSA and considering the ease of obtaining financing prior to the national credit crisis, many new large scale developments were completed prior to the end of the decade which has resulted in an oversupply of commercial product (vacant and new construction). The current commercial inventory coupled with increasing vacancy rates and declining rent rates will most likely pressure builders to continue to hold off on plans for future development. At the end of this section are multi-family, retail, and office national forecast maps and value cycle tables showing Austin recovering from the recession faster than the majority of the country.
The housing market has begun showing signs of recovery with median prices remaining relatively stable. Dr. Mark Dotzour, the chief economist for the Texas Real Estate Center, believed that home prices had remained stable since the beginning of the recession due to the high-tech bust which kept home price stable unlike the housing boom that was occurring throughout rest of the country during that time frame (specifically California, Florida, and Arizona who are currently experiencing the worst housing declines in the country). Although the local commercial market is likely to exhibit a slowdown in the short term, the housing market was projected to have an optimistic recovery. According to Eldon Rude of Metrostudy, “Austin has never experienced a ‘bubble’ in home prices; Central Texas is poised for significant growth in population over the next 5-10 years; tight financing has created pent-up demand for homes that will give our market a boost when more financing options become available, and businesses continue to location in Austin.” Rude recently reported in January 2010 that “[Austin’s] relatively stable home pricing, minimal levels of available inventory, lower volume of foreclosures and the general resilience of our economy are in sharp contrast to many areas of the country that will be much slower to see recovery in their housing markets”. Local builders have begun expressing optimism as they witness demand on the rise likely due heavy buying incentives such as low interest rates, tax credits, and home concessions. With the $8,000 first-time homebuyer tax credit extended from the end of November to the end of April 2010, the local housing market will likely continue its slow pace towards recovery in the following quarter.
Although fundamentals have weakened locally, the Austin area has been far more resilient to the effects of the recession than most of the county. Both the Korpacz Investors Survey’s Report and Grubb & Elliss 2010 Forecast Report named Austin the number 1 place to invest in commercial real estate. In June 2009, an article in Forbes magazine listed Austin the best city poised for recession recovery in the nation bolstered by GDP growth projections ($5 billion by yearend 2010) by Moody’s Economy.com, unemployment figures from the U.S. Bureau of Labor Statistics, and homes prices, incomes, and affordability data from the National Association of Home Builders. In October 2009, BusinessWeek ranked Austin the 2nd strongest metro economy in the U.S. next to San Antonio. Per U.S. Bureau Labor Statistics, Austin is ranked 6th in lowers unemployment rate among the 50 largest metros, with San Antonio ranking 4th. The MetroMonitor, published by Brookings in December 2009, ranked Austin 2nd best performing metros during the recession based on lowest annual job loss rate (-0.8%) and Gross Metro Product (GMP) growth.
Two indicators of the current and future commercial market stability are the local Gross Metropolitan Product (GMP) and venture capital investment. Bureau of Economic Analysis reported a GMP of $80.1 billion in 2008, up from $75.7 billion in 2007, nearly a 6% increase for the Austin-Round Rock-San Marcos MSA, exceeding Texas’s GDP growth of 2% during the same period. Capital Area Council of Governments (CAPCOG) announced in August 2009 that GMP has declined by more than 1.2% in the second and third quarters of 2009 but is forecasted to increase by 1% in the 4th Quarter 2009. Based on growth projections, 2009 will have been a stagnant year of growth for the metro area. However, the MetroMonitor indicated Austin MSA’s GMP grew by 2% from the 4th Quarter 2008 to 3rd Quarter 2009, the fastest amongst the 100 largest metro areas in the nation. According to Pricewaterhouse Coopers, venture capital investment in the Austin MSA in 2009 was estimated at $171.3 million (47 deals), a 48% decrease from the 2008 investment of $328.3 million (56 companies and 65 deals), and a 75% decrease from 2007 making it the lowest level recorded since 1996. Assuming CAPCOG’s GMP forecast is accurate, venture capital spending will likely increase as the local area capture pent-up investor demand to invest in growing metros.
Major Employers: The State of Texas alone employs over 65,000 people in the Austin area. While all of the major government employers are important, The University of Texas is felt to be the nucleus of growth in the current economy. According to the National Association of College and University Business Officers, the University of Texas System ranks fifth in total size of endowment at $15.6 billion ranked behind Harvard University, Yale University, Stanford University, and Princeton University in that order. In 2008, the University of Texas – Austin was reported to have a $7.2 billion endowment, with $3 billion being private funds and $4.2 billion being public funds allocated out of the $15.6 billion University of Texas System permanent endowment fund. This indicates a benefit of approximately $144,000 per student enrolled based on 50,000 students. UT presently has 288 endowed chairs, 506 endowed professorships, and 265 endowed faculty fellowships and lectureships.
In the 1980's, two major events occurred that helped shape the future focus of the Austin high-tech market. This was the formation of MCC and Sematech. First, in 1983, Austin was the successful bidder for Microelectronics and Computer Technology Corporation (MCC). This was the first national high-tech consortium, and the focus of this consortium is software development. Then, in 1987-1988, Austin mounted a campaign to bring Sematech to town. The campaign was successful, and Sematech moved to Austin in 1988. Sematech is a high-technology research consortium whose membership is comprised of most of the largest computer companies in the United States. The focus of this organization is high-tech research on a national level. Since this time, Austin has become the location of over 2,000 high-tech companies including Dell Computers, Applied Materials, Apple Computers, the Gallup Organization, Lotus Development Corporation, and, most recently, Samsung Electronics. In recent quarters, many of these major high-tech employers, both locally and nationally, have announced plans to layoff jobs to cut costs in order to curve the anticipated drop in national demand which has drastically decreased projected revenues.
The on-going vitality and potential growth of a city depends to a large degree on the number of new companies it can attract to its metropolitan area either through new start-ups or relocations and to the expansion of the existing companies already located in the area. The Austin area has been extremely successful in enticing numerous growth companies. Although Austin’s Chamber of Commerce is not as aggressive in attracting enterprises to move to the area as it was in the 80s to bring in the high-tech industry, the city has been promoting a new enterprise, solar power, primarily to spur job growth and, in turn, attract ancillary growth from related businesses to relocate to the area (solar power manufactures, retailers, distributors, etc.). Angelou reported in his annual forecast luncheon that “[Austin] must support the chamber in attracting high-paying jobs by providing incentive package to lure major employers. For those looking to start a new business, Angelou said cheap office space and an abundance of talent make 2010 the ideal time.”
The latest employment figures from the Texas Workforce reports employment in metro Austin has decreased from 783,800 in December 2008 to 781,000 in December 2009 indicating an annual decline of -0.4%. Unemployment figures for the Austin area as of December 2009 were 6.9%, up from 5.2% in December 2008 but remained the same from the previous month’s rate similar to the nation. The current 6.9% unemployment rate is still one of the lowest in the state (state average – 8.0%) and below the national average of 9.7% per Texas Workforce. The U.S. Bureau of Labor Statistics recently reported the unemployment rate declined for the first time since the beginning of the recession to 10.0% in November 2009 and then remained unchanged at 10% in December 2009.
The chart below shows Angelou’s forecast for job growth over the next few years. He predicts 26,300 jobs will be added to the Metro over the next two years.
Looking to the future’s economy, Angelou predicts that clean technology and renewable energy will be the biggest industries over the next 10 years. Although we have a good reputation for clean energy, Oregon and New Mexico are more aggressive in attracting wind and solar manufacturing.
