Commercial Real Estate Advisors

CCIM 2013 Symposium: Growing Pains of Austin

Posted by on Feb 12, 2013 in Austin, CCIM, Commercial Real Estate | 4,814 comments

CCIM 2013 Symposium, January 30, 2013

By Rosalie G. Keszler, CCIM

The annual CCIM Symposium took place the morning of January 30, 2013 at the Renaissance Austin Hotel in northwest Austin.  This year’s theme, “Growing Pains of Austin”, and the line up of highly regarded speakers brought commercial real estate players out early for the breakdown of our fair city’s climate.  The CCIM Central Texas chapter president, Lise Wineland, CCIM, of Marketplace Real Estate Group, introduced the morning line up of presenters:  Brian Kelsey, founder of Civic Analytics, LLC; Senator Kirk Watson, District 14 Texas state senator; Joseph Beal, former CEO & General Manager of LCRA; and Dr. Ted Jones, Sr VP & Chief Economist with Stewart Title Guaranty Company.

Up first, Kelsey laid out three investment talking points to answer the question, “Why Austin?”:

  1. Austin’s unique combination of “big city” growth rates with a small university town feel;
  2. Austin’s diversified economy insulated itself for the current recession; and
  3. Austin’s quality of life at comparably affordable rates.

Population Growth:

  • The Austin-Round Rock-San Marcos MSA (“Austin”) population is way above US metro cities;
  • Austin has experienced unheard of growth over the past 100 years;
  • Texas cities (Houston, Dallas, Austin & San Antonio) are in the top fastest growing US metro areas:
    • Austin is out-pacing giant, major US cities in nominal growth, adding the 10th most people to its numbers in the last 10 years.
    • Austin adds 50,000 people each year, the equivalent of adding a “Cedar Park” each year;
    • California leads the list in people exiting Cali and relocating to Austin;
    • Relo’s AWAY from Austin?
      • Nashville, TN:  Music and Dell
      • Asheville, NC:  Retirees
      • Hot Springs, AR
      • Albany, NY:  IBM / Sematech
      • Popular Austin Neighborthoods:  Steiner Ranch is #1 spot for out of state relo’s, followed by UT campus.

Job Growth:

  • Austin averages 3 to 4% higher than rest of US in way of employment;
  • During the recession, Austin grew 10% in Real GDP;
  • Skilled Workforce Availability:  Productivity in Austin grew nearly twice as fast compared to US metro areas between 2001 and 2010;
  • Manufacturing Renaissance:  Dell’s outsourcing took a toll on local jobs, but by 2010 the output per worker was more than $300,000 per worker.  What’s helping to push manufacturing?  Samsung chip in the iPhone… the chips are from Central Texas!
  • Austin Industries:  As of 2011, #1 job rank is government, which is the stabilizing factor (insulates and prevents growth speed).  Manufacturing went from #3 to #11 by 2011, and is #1 in GDP rank.  Tech services sector is moving up from #4 to #2 in job rank.

Per Kelsey, what Austin companies need to be successful:  Innovation & Entrepreneurship…

  1. Infrastructure, such as ATI, Capital Factory, and Conjunctured;
  2. Networks, like SXSW Interactive, Pecan Street, Inc., and Austin on Rails;
  3. Connectors, including AustinVentures and Capital Factory; and
  4. Corporate Anchors, like Dell, IBM, and Applied Materials.

Wealth Creation:  Austin has become a “high priced foodie town”, per Kelsey, that is contributing to the growing wealth in Austin.

  • # of households with >$200,000 annual income has doubled since 2000;
  • Discretionary spending grew 27% in retail spending between 2001 and 2011 (compared to 1% in Dallas, and 22% statewide);
  • Austin has a well positioned tech sector – mobile apps, cloud storage, analytics – for VC investment.

Housing Affordability:  Austin still remains an affordable place to live.  Austin’s median list price for housing is $141 psf, and $387 psf for its highest priced neighborhood (downtown), well below major US cities like San Francisco, DC, Seattle and Denver.

Kelsey’s Key Questions:

  1. Can Austin maintain its cost of living advantage with the current growth trajectory?
  2. Will it make public service, infrastructure (water) and amenity investments necessary to keep up with growth?
  3. Can its economic development be more inclusive?

A Cautionary Tale:

  • There is a danger of bifurcation of jobs – high skills earning >$75k, and bottom or low-paying job services with not enough jobs in between;
  • Austin does enjoy a lower cost of living compared to the US national average; but most of its growth is in the periphery of the city, i.e. the suburbs (71% of Austin metro area’s population growth between 2000 and 2010 occurred in suburban areas, up from 53% between 1990 and 2000.  The problem with this is the majority of the cost is in housing and transportation.  .
  • 37% of all jobs will require post-secondary degree (47% of Austin’s population has post-secondary degrees vs peer cities); Austin’s population is not prepared to face future challenges for jobs.

Summary:

  1. We need to continue to “think big” in Austin, take risks and invest in economic competitiveness;
  2. Avoid a zero-sum game mentality to be successful in dealing with growth pressures;
  3. Top priority is linking education and workforce development by making post-secondary education relevant to middle and high school students, offering internships, job shadowing – rethink our approach to close gaps.
  4. Kelsey’s PowerPoint presentation:  CIVIC Analytics CCIM Presentation

Senator Watson was the 2nd presenter, with a familiar topic of making Austin the center for healthcare excellence.  The Senator provided a review of the recently passed “Prop 1” and his “Ten in Ten” speech, with the number one goal to develop the medical school.  “Travis County made an investment in their future,” stated Watson.

Where are we now?  The dean search has begun.  UT’s medical school, its schools of pharmacy, nursing, engineering and natural sciences are all getting international attention.  UT’s nursing school is currently in the top 10 ranking, and will rise when the medical school is added.  Per Watson, the medical school will create 15,000 jobs, with 60% of these jobs requiring at least a technical certificate (as from ACC), and NOT requiring a 4-year degree.  There are currently 200 biotech companies in Central Texas now – with the medical school, this will explode.  Watson’s stated goal is to have the medical school open by 2015.

“We are moving forward, not letting any grass grow,” advised Watson, with regard to his aggressive ten year plan.  The “Community Care Collaborative” public/private partnership is working with the Chamber to meet these goals.

When asked about the location of the medical school, Watson stated that the location has been identified – the area from Brackenridge at 15th & IH-35 to MLK to Trinity and down to the Erwin Center (the “elephant parking lot”) is slated for the teaching hospital site, leave Erwin alone, situated across from the School of Nursing on Red River, and utilize the “expensive tennis court” land.  This allows for co-locating the medical school with the UT campus, the land is owned by UT / Seton, and it will be near nursing school and hospitals.

After a break in the morning’s presentations, Joe Beal brought a dose of reality to the group in the way of his discussion about water in Texas.  “You can’t sustain growth without water,” advised Beal.   Both water and energy are needed in econometric models – per Beal, we have a bit of a knowledge gap with Central Texans not understanding that our water source is the Colorado River.

The experts follow at least 100 years of data that shows Texas’ worst period of time, or “drought of record” began in 1949 and broke in 1957.  At least 244 Texas counties were declared disaster areas.  Similar to today’s drought conditions, there was no rain, it was very hot, they lost vegetation. Because of a hurricane in the Gulf of Mexico, Lake Travis rose 58’ – then it didn’t rain for 4 years.  The fix back then was to build reservoirs for water storage.  After 1972, NEPA & EPA made it more difficult to build reservoirs.  Our population has doubled since 1972.  Today’s drought is worse than the 1940s critical drought, and we can’t build more reservoirs.  Today, it takes 20-25 YEARS to get a permit to build a reservoir, IF you can even get one.

Beal’s projections:  We will stay dry for an extended time.  We have similar conditions in today’s drought to the 1940s critical drought.  The good news, per Beal, is that “there is enough water in Texas, but it’s not where the people are.”  There is plenty of water in East Texas that is not being used, such as in the Toledo Bend Reservoir.  The solution is pipelines – conjunctive use of surface and underground water.

There are 25 million people in Texas, expected to grow by 100% in the next 40 to 50 years, which projects Texas at 50 million people.  We have the need for infrastructure – more need for the next 50 years than we have had in the previous 175 years!  Per Beal, “We are in a world of hurt State-wide from a water supply standpoint.”

Suggestion?  Economically speaking, it will take $5 per month per connection to get Senate Bill 1 planning implementation – Demand elected officials do their job and make funds available and take action.  Right now inner-basin transfer is against the law, but this will change.  Beal reminded the group that surface water belongs to the state – we WILL see water move.  Also, a critical need is conservation – absolutely necessary, and the cheapest way to obtain ‘new’ water.

The final presenter is no stranger to the commercial real estate world.  Dr. Ted Jones is a staple in economic prognostication.  Jones’ presentation was titled: “Things Are Looking Up After the Economic Hurricane – An Economic and Real Estate Outlook for 2013”.  A fast talker, Jones ran through his presentation quickly but the general concerns are government related.

Jones’ MEGA THEMES:

  • Time to Overweight in Real Estate;
  • Residential Renting vs. Owning;
  • Fiscal Cliff – Deficit, Debt Ceiling, Entitlements; and
  • Massive Uncertainty from DCand stalement once again from the election.

Jones commented about recovery saying “we don’t recover because we don’t know what the rules are.”

  • The capital gains rate went from 15% to 20% + 3.8% “Obamacare” tax = 23.8%.  Still on the table.
  • Worst recovery in 4 decades.
  • Small business will suffer.
  • People are no longer in the workforce.

Business Tax Enviroment:  Texas is #9 best out of the 50 states, with South Dakota #2 (Bakken Shale).

Austin-RR MSA Jobs:  32,800 net new jobs were added in the last 12 months.

Commercial Lending:  Liquidity has returned to commercial real estate.  Lending rules today:  It qualifies or it is considered “distressed”.

  • 30 to 35% equity
  • 125% DCR
  • Quality tenant(s)
  • Longer-term lease(s)

Functionally obsolete properties, such as outlet malls – bankrupt.  The difference in design – buildings used to be spread out with parking in the middle, now the buildings are clustered together with parking around.

Connectivity is reducing the need for office space – people can work remotely.

Dirt costs are going up.  “Got land?”

No housing inventory – need to build more houses but transportation is terrible.

US 2013 Forecast:

  • Existing home sales up 8%
  • Median home prices up 5%
  • New home sales up 20%
  • New home prices up 8%

QE3 – Quantitative Easing 3:  $40 billion in new cash per month until the economy improves.  Interest rates are artificially low – long term fixed rate loan is good, but causes the value of the dollar to go down.  The dollar is 1.35 to 1 Euro.  RATES WILL GO UP.

During 2012, $0.091 of every tax dollar went to pay the interest owed on the federal debt.

  • Debt Ceiling
  • Budget
  • Funding

Self-employment tax is 12.4%.

Social Security:  Taxes collected in the current year are used to pay current year benefits.  Excess funds have been spent on non-SS spending with the US gov’t issuing “IOUs”.  All of the “boomers’” future retirement money has been spent by the US gov’t.

The Congressional Budget Office estimates that this legislation will reduce revenues and increase spending by a total of nearly $4.0 trillion over the 2013-2022 period.

Annual increased public debt per household of $128,096 from 2008-2022.

In 2022, interest on the debt would total $0.245 of every tax dollar.  Can you afford your payments?  It’s not about how much you borrow…

Oil & Gas in Texas:  Domestic crude oil production is at estimate of 500 million barrels per month vs imports of crude oil and petroleum products at 300 million barrels per month.

2013 Concerns:

  • Fiscal cliff – debt ceiling;
  • GDP = Consumption + Investment + Gov’t Spending + Exports – Imports;
  • Energy:  US imports >60% of oil;
  • GOV’T CAN’T FIX EVERYTHING.

Jones concluded saying we must be efficient to survive.  Jones’ PowerPoint presentation:  Ted Jones CCIM Presentation

For more of his views, visit Ted’s blog  http://blog.stewart.com/

The Central Texas CCIM Chapter offers top quality commercial educational courses, the latest technological training, numerous timely and relevant business programs and frequent networking activities and social events, further enhancing and promoting recognition of the CCIM designation as THE STANDARD for professionalism among the general public and the members of the real estate industry.  For more information, www.ccimtexas.com

 

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