The economic seas all around Austin look a little choppy these days, but it should remain smooth sailing for the metro area this year.
Low oil prices and a strong U.S. dollar cooled the Texas economy’s growth in 2015, and likely will do so throughout much of 2016, according to most forecasts.
In the midst of that, though, Austin keeps chugging along, with only a little slowing at the edges of this fast-growing region.
Given the pace of its ongoing expansion and the size it has attained, the metro economy probably will moderate no matter the effect of oil prices, said Brian Kelsey, principal of Civic Analytics, an Austin-based economic consulting firm.
“Unless we’re talking about the NFL, as things get larger, they tend to slow down,” Kelsey said. “Austin is the 11th largest city in the country now, and while we have a long way to go to catch some of the expensive coastal cities we tend to use as benchmarks, prices are becoming more of a factor in Austin’s competitive advantage relative to peer markets.”
The sustained low energy prices that forced layoffs across many parts of the state in 2015 could weigh on Austin’s growth, especially if tax collections suffer and state government payrolls are pared.
Statewide, small and midsize exploration and oilfield services firms have felt the squeeze, and most forecasts expect a wave of consolidation to sweep through the industry.
Those tighter conditions have seeped into Austin as well. FieldPoint Petroleum Corp. recently said Citibank cuts its borrowing base in half. Parsley Energy announced it had sold off almost $40 million of assets. And Forestar saw its credit rating slashed by Moody’s, in part because of its energy holdings.
“With oil prices at multi-year lows,” the rating agency said, “we expect the company’s metrics will remain under pressure in the next 12-18 months.”
The same outlook holds true for the Texas economy. At a recent Austin Chamber of Commerce economic forecast luncheon, Texas Comptroller Glenn Hegar said the state is not like the 1980s, when an oil and real estate crash sent the state economy into recession. It’s more like the 1990s, he said, when a drop in oil prices merely slowed Texas growth.
Will Texas outpace U.S. economy over the next few years? It’ll be tight, Hegar said, but the state economy well positioned to accelerate as the energy sector rebounds.
“Yeah, we have a litany of issues,” he said, “but it’s better to have that litany of issues here, in this state, than other states.”
The economic research team at BBVA Compass agreed, saying the state will stave off recession in 2016 and return to its potential in 2017.
“Ultimately, short term factors will inevitably fade, again bringing to the forefront Texas’ true value as a global leader in growth and innovation,” Boyd Nash-Stacey, the banks senior economist, said in a release.
Meanwhile, Austin itself should continue to provide a solid push for the broader state acceleration. The energy sector’s impact on Central Texas – while notable – should have only a marginal impact on region’s economy as a whole.
The strength of the U.S. dollar, which might rise further now that the Federal Reserve has started nudging up its rate targets, might curb area exports and local tourism spending. A strong dollar makes U.S. products and travel more expensive for people overseas.
Austin isn’t immune to those macroeconomic factors, of course, but its growth engine powered through them in 2015 and is poised to do so again in the coming year.
Austin and Texas continue to attract some of the highest rates of job interest from workers outside the state, said Daniel Culbertson, economic research analyst at Indeed.com. The region and state also get a lot of searches from workers outside U.S., he said at the Chamber event.
It helps that Austin remains more affordable than the tech-driven markets on the coasts, Kelsey said.
“But rising residential and commercial prices in Austin are starting to level the field a bit,” he said, “and companies and economic developers in markets like Raleigh-Durham are well aware of that fact.”
More changes for tech sector
Last year saw some of Austin’s largest public companies – Freescale Semiconductor, HomeAway and SolarWinds – acquired by bigger players.
Experts say more Austin companies, both big and small, will likely be snapped up in 2016, including those that might have once considered an initial public offering.
“You’re going to see more acquisitions and fewer IPOs because the IPO bar is getting higher and higher,” said Kirk Walden, an adjunct business professor at Texas State University and principal of Austin-based Walden Consulting. “That’s not specific to Austin, it’s the general trend. For startups, it shortens the time for payoff. For the buyer, it makes more sense to acquire something that try to create it or compete with it.”
Meanwhile, venture capital is expected to continue to flow to Central Texas companies, thanks to the region’s strength in hot investment areas including cloud computing, mobile technology, cyber security and e-commerce.
Experts expect 2016 to stay on pace with last year. During the first three quarters of 2015, 82 deals raised $628 million, compared with 615 million raised by 114 deals in all of 2014.
“Austin is on the national stage for innovation, and investors are coming here to do deals,” Walden said. “For startups, that means more options to choose from when looking for financing.”
Also in 2016, look for more out-of-state software companies to development development offices here to leverage the region’s software industry workforce. In 2015, Apple Inc. continued to push ahead with its 38-acre campus in northwest Austin, while Oracle Corp., the world’s second-largest software company, announced plans to build a new corporate campus on 27 acres overlooking Lady Bird Lake.
“For California companies, Austin has just what they need: A skilled technology workforce and a lower cost of living,” Walden said. “We’ll see more companies following the lead of Google, Facebook and the others. If you’re growing and you’re hiring, this is a good place for you to be.”
Outlook strong for housing market
In 2016, things are shaping up for another strong year for Central Texas’ housing market, industry experts predict, if job and population growth continue as anticipated.
Austin ranks fourth among Trulia’s top 10 markets with the strongest potential for growth this year, thanks to the area’s employment growth, population growth and its share of millennials.
“As millennials become a greater force in our housing market, builders are challenged with providing homes that meet the needs of this growing demographic,” said Eldon Rude, a housing market consultant who is principal of 360 Real Estate Analytics. “In Austin that means trying to identify urban locations where home construction is still feasible at prices that millennials can afford.”
Realtor.com expects single-family home sales in the Austin metro area to climb by 10 percent over last year, and the median price to increase by 5 percent.
In recent years, Central Texas’ sharply rising home prices in the metro stemmed from housing supply lagging demand – not the speculative home buying that bubble markets like California and Florida saw during the past decade, Rude said.
“Much of the growth in the new home market in 2015 has been in the lower price ranges,” Rude said. “With apartment rents in the region continuing to increase — average citywide rents are up 40 percent in the last five years — I expect this segment of the market to continue to be strong in 2016.”
Families looking for homes in close-in locations in 2016 will continue to pay more for existing homes, as little new supply is added in these areas, said Charles Heimsath, a local real estate consultant. “Some relief from the increasing prices can be found in new, smaller units in higher density developments in the central city.”
Jim Gaines, chief economist with the Real Estate Center at Texas A&M University, said the pace of growth in the housing market, locally and across other major Texas metros, could slow some due to the energy decline, with Houston expected to be most affected and the Austin and Dallas metros the least. But nevertheless, “a slowdown will result,”Gaines predicts.
— Shonda Novak
Retail scene should stay hot
Austin’s retail scene was red hot in 2015 and shows no signs of slowing down in 2016, local developers say.
Many of the new additions on the way are at The Domain in North Austin, including Nordstrom and Restoration Hardware, as well as the 100,000-square-foot Rock Rose development featuring a mix of mostly local shops, bars and restaurants.
Nearby at the Gateway Shopping Center, Off 5th, Saks Fifth Avenue’s discount outlet, has leased space.
“We expect 2016 to be more of the same for the Austin market,” said Britt Morrison, senior vice president for the Weitzman Group, a commercial real estate firm. “By that, I mean a tight market for space and limited new construction. The new space for 2016, though, will outpace 2015, because rents are reaching a level that will justify development costs and the demand from anchors and junior anchors.”
Outside of The Domain area, other hot spots, according to Morrison, include South Congress Avenue, downtown Austin and many suburban areas.
“We’ll see new space come online in Lakeway, Leander, Cedar Park and others,” Morrison said. “The city of Pflugerville has been one of the biggest beneficiaries thanks to Texas 130, and it remains one of the hottest young markets.”
Restaurants, in particular, are on the hunt for space to expand, Morrison said. Several new-to-Austin salad chains, for instance, have said they’re looking to gobble up more than 20 storefronts throughout the region.
“We’re seeing a lot of growth from local concepts, like Hopdoddy, which recently leased a prime site at The Triangle,” he said. “Other growing local concepts include P. Terry’s, Verts, Torchy’s, Chi’lantro and Sway. Some out-of-state concepts are entering the market, too, like high-profile Shake Shack, but many of these are from small chains such as Voodoo Doughnut, Eureka and Fox Restaurant Concepts.
“The local chef-driven concepts have been huge in areas such as East Austin and Airport Boulevard, and restaurants continue to march northward along Burnet Road. The stretch between West 45th Street and Anderson Lane has quickly established itself as one of the major restaurant and bar destination centers in Austin.”
Whole Foods points to better 2016
Austin-based Whole Foods Market ran up against a challenging year in 2015, but 2016 will be different, company executives say.
Whole Foods, in the midst of revamping its brand to battle a growing army of competitors, will be focused on a nine-point turnaround plan this year.
The plan ranges from launching a new chain of smaller, value-focused stores, 365 by Whole Foods Market, to cutting costs, lowering prices and boosting marketing to communicate a new message.
“I think the biggest thing that is going to happen for Whole Foods is the nine-points” plan, co-founder and co-CEO John Mackey told the American-Statesman recently.
Whole Foods is one of Austin’s highest-profile companies, with 91,000 employees for 434 stores worldwide and about 2,500 employees located in Central Texas.
One of the retailer’s major initiatives this year will be the new 365 stores, with a first location slated for the Los Angeles suburb of Silver Lake in the first half of 2016. So far, the retailer has signed off on eight new 365 stores, including a Cedar Park location slated for 2017.
The 25,000 to 35,000 square foot stores with compete directly with the likes of Trader Joe’s, Sprouts and other smaller format, value focused brands.
Mackey said Whole Foods looked at their competitors and took the “best of Whole Foods, best of Trader Joe’s, best of Sprouts — the best of everybody that we have seen out there.”
“There’s not going to be any expensive items in those stores,” Mackey said. “Truthfully, that’s one of Trader Joe’s secrets, they just curate there product mix well. …That’s not rocket science, we can do that.”
— Claudia Grisales