January 6, 2015 Brian Kelsey

Austin’s economy in 2015: Momentum likely to continue

This article was written by Dan Zehr and appeared in the Austin American-Statesman on 01/03/15.

Austin’s economy in 2015: Momentum likely to continue

Austin’s economic growth moderated over the past couple years, and most projections suggest the same general trend for 2015.

But consider the context.

For years, Central Texas had been “punching above (its) weight,” said Brian Kelsey, principle of Civic Analytics in Austin. And yes, he told 350-plus people at the Greater Austin Chamber of Commerce’s recent economic outlook luncheon, the area’s rapid growth has eased a bit.

“But you always have to keep in mind,” he added, “that moderation for us is explosive growth for the rest of the country.”

Austin averaged 5.7 percent annual economic growth from 2002 to 2013, Kelsey said. Only twice in that span, in 2002 and 2007, did the national gross domestic product fare better than Austin’s.

So a year of moderate growth in 2015 shouldn’t sound all that bad. A compilation of forecasts for the metro area suggests that 2014’s employment growth should come in around 3.8 percent this year. That will slow slightly to 3.1 percent in 2015, the projections say.

In an area gaining better-educated people — and adding enough jobs to absorb all those new residents — there’s plenty of room for upside. A June report from IHS Global Insight estimated 3.9 percent economic growth this year, followed by a jump to 4.7 percent growth in 2015. At that rate, the report said, the Central Texas GDP would hit $117.5 billion.

Barring another world-shaking event, not much should threaten that expansion in the near future. But as Austin’s economic progress picks up speed, so also do the headwinds it faces.

Soaring property taxes and a higher cost of living might make the region less attractive to some companies and workers, particularly when combined with Austin’s tepid wage growth in recent years. And although Austin has less exposure to the oil and gas industry, the sharp drop in oil prices as 2014 closes could drag on the local and state economies.

But those factors will do little to slow the metro economy in 2015. Growth might be moderate, but as the following forecasts for the area’s business sectors suggest, Austin’s version of moderate will still look awfully good.

Here’s a sector-by-sector look at what we might be able to expect for Austin’s economy in 2015:

TECHNOLOGY

Prognosticating the technology business is always tough, and analysts say the fortunes of Austin’s tech sector will be tied to the larger economy.

But analysts say 2015 could be a good year for Dell Inc., the Austin area’s largest private employer. Many of Dell’s rivals are going through transitional phases, and that could open up opportunities for Dell to gain market share in both its client hardware and enterprise solutions businesses, said Roger Kay, an analyst with Endpoint Technologies Associates.

On the client hardware side, Hewlett-Packard Co. announced a breakup of the company this year, and Kay said that could allow competitors such as Dell and Lenovo to pounce.

As for enterprise solutions, Dell has been putting together its portfolio, acquiring software businesses and growing others organically. Meanwhile, rivals like IBM have strategies that are “a bit up in the air,” Kay said, and that again creates an opening for Dell.

“(Dell) can gather momentum while their rivals are still trying to put their stuff together,” he said.

Overall, the success or failure of commercial technology markets is tied to the wider economy, which is also true of most Austin tech companies, said analyst Patrick Moorhead of Moor Insights & Strategy.

“The U.S. and Europe will more than likely improve, but could be pulled down by troubles in Brazil, Russia and a flat China,” he said. “So net-net, it’ll probably be flat, but there’s still a possibility that we could get into another global recession.”

One potentially risky situation could be South Korea-based Samsung Electronics Co., which has a huge Austin presence and is very tied to the consumer market. Samsung is losing mobile market share to both Apple Inc. and Chinese competitors like Xiaomi and Coolpad, Moorhead said.

“It will be a defining year for Samsung, as they need to show they can muscle through this difficult time in mobility,” Moorhead said.

— Brian Gaar

RETAIL

New shops and restaurants popped up across Central Texas at a rapid pace in 2014, and industry experts expect more of the same in the coming year.

With occupancy approaching 95.5 percent – the highest rate in nearly a decade – developers have been busy adding space to meet demand, according to Michele Gary, vice president at Austin-based Endeavor Real Estate Group.

Work is in varying stages on several major retail projects, Gary said, including the Plaza Saltillo mixed-use development near downtown, a 250,000-square-foot shopping center near Cedar Park’s new Costco store and a third phase of the Domain in North Austin that will include a Nordstrom store set to open in 2016.

“This is a very exciting time in Austin; Austin is shining,” she said. “We’re in communications with several exciting retailers that aren’t just new to Austin, but new to Texas. Phase 3 of the Domain, in particular, has attracted numerous retailers and restaurants that Austin hasn’t seen or experienced yet.”

The city’s restaurant scene has been an especially bright spot in recent years, Gary said, with local restaurateurs driving much of the growth.

“One obvious trend is the coast-to-coast recognition that Austin restaurants and chefs are receiving,” she said. “Austin’s culinary talent level is off the charts and I predict our local chef-owned restaurants will continue to experience national recognition.”

— Gary Dinges

REAL ESTATE

The Austin-area housing market has been on a hot streak the past few years, with monthly sales volumes and median prices heading in one direction: up. Fueled by the region’s job and population growth, housing demand has outpaced supply, driving prices higher.

Those rising prices will likely continue in 2015 as well, as Austin continues add people and jobs, but the pace of home-price escalation should ease somewhat, said Eldon Rude, a local housing market expert.

“A likely increase in the number of homes for sale in 2015, as well as some level of increasing buyer resistance to higher prices, will combine to slow the pace of price increases in most areas,” said Rude, principal of 360 Real Estate Analytics.

If so, it would be welcome news for prospective buyers, including renters who are hoping to become home owners. The median price of single family home in the Austin region is up over 34 percent in the last four years, Rude said, with citywide apartment rents up 31 percent.

With apartment rents up so sharply in recent years, Rude said, more prospective first-time home buyers are looking to take advantage of low mortgage interest rates and lock in their housing costs. And while builders will continue to focus on the high-demand $300,000 to $700,000 range they’ve filled in recent years, some of shifted their focus to include more lower-cost options.

But like the Austin economy as a whole, the biggest threats to the metro’s housing market would likely be “outside our control,” Rude said.

“With the price of oil down nearly 50 percent in the last six months, it is becoming increasingly evident that the State’s economy will be negatively impacted,” he said. “While the greatest impacts will likely be in Houston and South Texas, it is not out of the question that if Houston catches the flu, Austin may catch a cold.”

— Shonda Novak

VENTURE CAPITAL

With venture capital flowing into established companies and angel investors continuing to back early-stage entrepreneurs, 2015 promises to be a strong year for Austin’s software industry.

Austin’s strength in hot investment areas — such as e-commerce, mobile technology, cyber security and cloud computing — should continue to draw investment dollars from both coasts as well from Austin-based venture firms that are putting new funds to work.

S3 Ventures and Silverton Partners, which each raised $75 million funds last year, are expected to be actively pursuing Austin deals in the new year. And LiveOak Venture Partners, which closed on its first fund of $100 million this year, will also be looking for new opportunities in Austin and the Southwest.

“The balance of investors we have now, both outside of Austin and those based here, is good for everybody,” said Kirk Walden, an adjunct business professor at Texas State University and principal of Austin-based Walden Consulting, which follows the venture capital industry. “When you can go to more than one door, it’s always better for the entrepreneur, and that’s what we’re seeing now.”

Meanwhile, the Austin startup ecosystem will feel the ripple effects from this year’s robust investment activity. In the fourth quarter alone, five companies each received $25 million or more for expansion.

The companies, which include e-commerce software firm Bigcommerce and cloud-computing software makers Gravitant and Transverse, will use the new funding to add more workers, invest in new equipment, hire service providers, such as accounting and law firms, and ramp up product development and marketing.

Also look for more out-of-state software companies to open development offices here to leverage the region’s software industry workforce. In 2014, more than a half a dozen software companies including Veraction of Tennessee, Taulia of San Francisco and ProjectManager.com of New Zealand, announced plans to ramp up in Austin in 2015.

— Lori Hawkins

WHOLE FOODS

Whole Foods Market might finally be steadying itself after a rollercoaster ride in 2014. After launching a turnaround initiative in the fall, the Austin-based organic foods giant has seen its stock rally back nearly 30 percent since one of its worst days as a public company.

The retailer started out the year facing high expectations. But by May, after tighter competition took a bigger bite out of their robust earnings and forced their profit below expectations, Whole Foods shares fell 20 percent to $38.93.

“It was difficult. The competition took them a bit by surprise,” said Brian Yarbrough, an industry analyst for Edward Jones. “But it seems like in the later part of the year, things started to improve.”

Expectations moderated, and in the fall Whole Foods launched an aggressive new gameplan, which included the company’s first national ad campaign, a new national grocery delivery and pickup service and a customer rewards program, among other moves.

In November, it passed a critical earnings test, regaining confidence from Wall Street, boosting its stock and putting a positive cap on an otherwise tough fiscal year. By mid-December, the stock was back to the $48 mark.

Analysts now are watching to see whether Whole Foods can hold on to those gains — and find a way to build on them — in the new year.

“We still see a great story long term,” Yarbrough said. This year “was difficult. But hopefully we will continue to see improvement.”

— Claudia Grisales

TAX INCENTIVES

The debate over taxpayer incentives for businesses will reach from the state Capitol to City Hall next year.

The Austin economy has a stake in the debate. Since 2005, the Texas Emerging Technology Fund sent a quarter of the tech fund’s first $200 million to Central Texas startups,

The state also used the Texas Enterprise Fund to help local officials close deals to bring Apple, eBay, Facebook and Visa to Austin, as well as persuading Charles Schwab and Samsung to expand their local operations.

State leaders are not abandoning the two funds, though the technology money may be targeted only for universities and to recruit top researchers. Money for startups may be out.

Also some lawmakers favor a share-the-wealth approach to incentives, directing more of the money to rural areas or regions that are lagging the overall state economy.

Locally, city council and county candidates raised questions during the campaign whether locals still need to juice the economy with incentives. The Greater Austin Chamber of Commerce has left no doubt where it stands: Among its top legislative priorities is continued support for the state’s major incentives, which require local participation.

— Laylan Copelin

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