Austin’s economy in 2017: Still strong, but facing some challenges


The Austin economy eased to a more sustainable pace in 2016, but the deceleration deepened throughout the year and appears poised to linger into 2017, as well.

To be clear, the metro area continues to enjoy one of the more vibrant regional economies in the country. But job creation and other indicators show that Austin’s growth dropped below its long-term averages, and the numbers suggest few signs of an imminent rebound.

The annual rate of job creation in November dropped to a seasonally adjusted 2.1 percent, according to the Federal Reserve Bank of Dallas. In each of the four prior years, Austin employers added jobs at double that speed.

To some extent, Austin will be weighed down by its own success. The tight labor market could force some employers hold off on adding less-critical jobs as competition over workers raises wage pressures. And at times when help-wanted ads surge, an unemployment rate hovering around 3 percent — as low as Central Texas has seen since 2000 — can make workers harder to find.

Yet some statewide headwinds that might otherwise slow Austin’s growth have started to ease. With rising commodity prices, the oil and gas industry has pulled itself off the floor and eventually could help rejuvenate state budgets. Measures of statewide manufacturing activity have rebounded in recent months, and the Texas private service sector continues to expand.

It’s unclear how much those statewide forces — combined with a national economy that’s awaiting the changes of a new White House administration — will help the region in the months to come. Austin shrugged off the worst of those outside trends in the past. At the start of 2017, anyway, the statewide gains suggest some evidence for an eventual re-acceleration locally.

For the year as a whole, though, Austin might have to settle once again for growth rates that look slow from within, but look plenty healthy from most other vantage points.

Here is a look at what 2017 could hold for various sectors of Austin’s economy and some of its biggest, most important companies:

Quieter year for Dell, chipmakers?

Analysts said 2017 should be a quieter year for Round Rock-based Dell Technologies as the company digests the effects of the merger with data storage company EMC Corp.

“From Dell, we can expect steady as she goes in 2017,” said industry analyst Roger Kay. He said now that Dell is able to better target large corporate and government customers, they can “give IBM a run for its money.” He and other analysts noted that Dell will likely consolidate some of the EMC and Dell product lines.

“We might see certain product lines merge or go away,” said Patrick Moorhead, an industry analyst with Moor Insights and Strategy. “We’ll also see continued churn in the executive ranks.”

Analysts said they didn’t expect any major layoffs to hit Dell this year. “There was already a relatively major one (last year),” Moorhead noted.

Another multi-billion acquisition is set to reshape Austin’s chipmaking industry this year as part of a wave of consolidations hitting the semiconductor industry. San Diego-based smartphone chipmaker Qualcomm is set to buy Netherlands-based NXP Semiconductors in a $38 billion deal. NXP employs about 5,000 people in Austin.

“The economics in semiconductors are getting more and more brutal all the time,” Kay said. “You have to be incredibly large to carry on development, and you have to carry on development to compete.”

What’s unknown is whether Qualcomm will want to keep NXP’s manufacturing facilities in Austin or sell that part of its operations. Qualcomm currently doesn’t manufacture its own chips.

Meanwhile, Advanced Micro Devices, which is based in California but has substantial operations in Central Texas, is poised to have a big year thanks to the release of a new processor architecture called “Zen.” The company will start releasing its new computer processors in the first quarter, and it has new graphics chips it will release this year.

“Right now, all of the Zen news is basically people projecting what will happen,” said industry analyst Nathan Brookwood. “So this coming year is when AMD says hey, it’s is real, you can touch it, you can buy it,” Brookwood said. “2017 should be a banner year for AMD.”

Kay says he thinks AMD is an acquisition target this year, though other analysts disagree, in part because the stock price more than tripled this year, making AMD more expensive.

“The company has been pretty vocal about wanting to remain independent,” Brookwood said. “It will be an interesting contest to see whether or not somebody can come along with a sufficiently rich offer to motivate AMD’s shareholders to become part of another company.”

—Lilly Rockwell

VC slowdown could chill startups

Venture capital investing cooled significantly nationwide in 2016, and Austin startups will likely continue to feel the chill well into 2017.

During the first three quarters of 2016, 74 Austin deals received $415.8 million in funding. That’s a 37 percent drop from the first three quarters of 2015, when 87 deals took in $650.8 million.

Venture capitalists have pulled back worldwide, rattled by market uncertainty, a lack of strong initial public offerings and an ongoing skepticism about high valuations for unproven companies.

They’re unlikely to jump back in any time soon, said Kirk Walden, an adjunct business professor at Texas State University and principal of Walden Consulting.

“The VCs are not constrained — they have plenty of money to invest,” Walden said. “They are choosing not to invest. They don’t like the valuations right now, and they are happy to wait it out.”

That means startups that have previously received funding could struggle to raise additional capital to sustain their growth. That would likely result in more Austin companies being acquired, Walden said.

“Even if you’re not burning through cash, even if you’ve been calm and judicious with your money, if you’re running on empty and you can’t raise more, then you’re an acquisition target,” he said.

But on the bright side, software design, one of Austin’s strengths, will continue to see investment dollars and growth, Walden predicts.

“I still see software being strong. Look at self-driving cars — that’s nothing but software. Take that and apply it to anything else of the landscape — medical software, biotech, it’s all going to be software driven. I look for more investment in software than we have historically seen. That plays to Austin’s strengths, and it’s great for us.”

Also in 2017, look for more out-of-state software companies to develop offices here to leverage the region’s software industry workforce. In 2016, Google, Facebook, Apple and other California-based tech giants continued to build out their Austin teams, while Oracle Corp., the world’s leading software company began work on a new corporate campus on 27 acres overlooking Lady Bird Lake.

“Austin has the skills these companies need, and a lower cost of living. And it’s easy for companies to convince people who aren’t in Austin to move here,” Walden said. “It’s an easy sell.”

-Lori Hawkins

Personal tech sector still evolving

The story of personal tech in 2017 might be that we’re no longer in a purely Apple vs. Android world.

While smartphones have been driving tech the past few years, many Austin software developers are moving beyond these mobile platforms in anticipation of where our eyes, ears and dollars are going next.

That means taking virtual and augmented reality seriously in the wake of the success in 2016 of “Pokemon Go” and the release of several hardware products for VR enthusiasts including Facebook’s Oculus Rift, the HTC Vive and PlayStation VR. Austin has a growing group of businesses working in VR and AR; but will the technology go mainstream quickly enough to keep enough of these businesses afloat in 2017?

Amazon’s Echo voice-activated platform became so popular that its artificial intelligence bot Alexa became a tech celebrity. Now there’s a race to integrate Alexa into other technologies and to develop Skills (voice-activated apps) that work with Amazon’s products.

Chatbots — artificial intelligence agents that work through messaging platforms such as Twitter and Facebook Messenger — are an emerging industry in town through businesses such as Conversable and Message.io.

Platforms matter and the ecosystems of personal tech will continue to be affected by which ones customers choose to work and play in: will Apple rebound from a controversial year of iffy design decisions? Will Internet of Things products, which have struggled, be buoyed by the success of products such as the Echo as apps and hardware make way for voice commands and more ambient technology? Or is that ecosystem due for a crash, as the market for wearables appears to be headed? 2017 should reveal a lot about which direction tech will continue to integrate in our lives and separate fads from the future.

—Omar L. Gallaga

Austin housing market cooling a bit?

By all accounts, the Austin area continues to be one of the brightest spots in the nation’s housing market.

But could our region, which has seen several years of record home sales and sharp price appreciation, lose some of its housing luster next year?

Some local real estate agents interviewed during the last half of 2016 said that, while still strong, the market had tapered off some from the feverish pace that has characterized it the past few years.

One possible culprit could be job growth.

Job creation fuels demand for housing, and recently it has slowed in Central Texas, said Eldon Rude, a housing market analyst.

“The potential for slower economic growth in Central Texas exists because of reduced job growth, and this could begin to tip the extreme imbalance we’ve had in our market over the last four or five years,” Rude said. “The result may be a moderation of the rapid home price increases we’ve experienced over the same period.”

After four consecutive years of creating more than 38,000 jobs a year (plus 3.5 percent), the most recent employment figures from the Texas Workforce Commission show job growth in the region has slowed to less than 20,000 jobs annually through November, noted Rude, principal of 360 Real Estate Analytics, an Austin-based consulting firm.

“Because job growth is the key driver for housing demand, builders and developers will be keeping a close eye on this metric as we start 2017,” Rude said.

Along with what lies ahead for job growth, other questions are how will rising mortgage rates impact the market, and at what point will rising home prices begin to negatively impact home sales? The answers to those questions, Rude said, “will be the primary influences on how the market fares in 2017 and will become apparent over time.”

“Any impact on the housing market from rising mortgage interest rates will be tied to both how much they go up and how fast,” he said. “The most recent increases might have resulted in some prospective home buyers accelerating their purchases to avoid potentially higher rates in 2017.”

Although interest rates are always an important factor for home buyers, Rude said, “history has shown that if the job market is good, wages are increasing, and home prices are going up, people will continue to purchase homes. It’s all about confidence. When my wife and I purchased our first home in 1993 our interest rate was just under 8 percent, and we were excited about just being able to own a home.”

All things considered, Rude said he expects the local housing market to remain strong in 2017.

—Shonda Novak

Retail boom roars on in 2017

Central Texas saw a flurry of retail and restaurant openings in 2016 — and we can expect more of the same in 2017, commercial real estate experts say.

Several major shopping centers are set to open this year, adding much-needed space in what has been one of the tightest markets for retail leasing in the entire country.

According to The Weitzman Group, retail space in the Austin area is more than 96 percent occupied.

“Some relief has finally arrived,” said Britt Morrison, a senior vice president in The Weitzman Group’s Austin office. “There’s been a need and desire for a number of the national and regional folks to expand throughout Austin with little to no options. Fortunately, 2016 has seen a flood of new construction. However, as a testament to the demand, the majority of the new developments are delivering space with occupancy already north of 90 percent.”

Most of the growth, Morrison said, is being fueled by tenants in the food, dining, entertainment, fitness, health and wellness, beauty, and medical/dental categories.

Recently completed retail centers include Domain Northside and the Oaks at Lakeway. Still in the pipeline are the latest phase of the Mueller redevelopment project, which will feature a new Alamo Drafthouse theater, and The Parke in Cedar Park, where the region’s first 365 by Whole Foods Market will be located, along with Dick’s Sporting Goods, Field & Stream and others.

In Dripping Springs, Belterra Village will have a 14-screen movie theater, Spec’s Wine Spirits and Finer Foods and Torchy’s Tacos among its tenants when it debuts in the fall.

And the Plaza Saltillo redevelopment will transform six blocks in East Austin. Groundbreaking is set for early this year.

“We’re pouring our hearts into curating an extraordinary street retail experience in this transit-oriented district,” said Michele Gary, a vice president with Endeavor Real Estate Group, the Austin developer overseeing the project. “We look forward to welcoming some of Austin’s most celebrated local restaurants along with emerging concepts that we’re incredibly excited about. The culmination of the restaurant offerings, the highly anticipated 30,000-square-foot public market, the public park/outdoor spaces, and the Lance Armstrong Bikeway extension will create a memorable destination not just for the residents and employees of Plaza Saltillo but the whole community.”

—Gary Dinges



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