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Analysts: Austin tech scene is back from recession

Brian Gaar, Austin American-Statesman, Analysts: Austin tech scene is back from recession

May 10, 2014

Back in 2009, in the middle of the nation’s economic downturn, Austin’s tech sector was taking a beating.

Worldwide PC sales were slowing. Companies were tightening their belts. Tech startups were failing. At the end of 2009, the area’s number of jobs in key tech industries had slumped to less than 82,000 — the lowest since the dot-com bust of the early 2000s.

“It was a grim place for tech in the worst of the recession as layoffs were being reported all over the city,” said tech analyst Patrick Moorhead of Moor Insights & Strategy. “It was ugly.”

But five years later, things are looking brighter for Austin’s technology sector.

Despite national fears of another tech bubble, local analysts and economists say they’re optimistic when it comes to the health of Austin’s tech sector.

Austin’s tech sector’s total employment has climbed back up to more than 100,000 jobs — a jump of about 19 percent since the end of the recession in 2009, according to Brian Kelsey, principal of Civic Analytics, an Austin-based economic consulting firm. Austin is on pace this year to exceed its 2001 tech employment, Kelsey said, “which would be a remarkable achievement given the depths of the recession experienced locally after the dot-com bust.”

Local high-tech companies supplied about 9 percent of the area’s jobs in 2012, according to data from Civic Analytics and the Austin Technology Council. If local tech jobs reach 101,000 this year, those numbers would rise to almost 12 percent of the metro area’s roughly 855,000 jobs.

As it bounces back, the area’s tech sector does, however, have a different look as it evolves away from hardware and PC sales. At the same time Dell Inc., long the anchor of the area’s tech scene, is now privately held and in transition. Apple Inc. is boosting its Austin presence with a new operations center. At Flextronics’ Austin site, they are building the first U.S.-made Apple computers in years. Advanced Micro Devices says it is poised to boom.

“The overall strength of Austin’s tech sector,” Kelsey said, “has created a much different experience during this recovery compared to the dot-com bust.”

Time of transition

Perhaps the biggest transition can be found at Dell Inc., which went private about six months ago in a $25 billion buyout headed by company CEO and founder Michael Dell. Since then, the company has downsized through a combination of layoffs and voluntary severances. The company hasn’t said how many employees have exited or been laid off.

That shrinkage comes as Dell Inc. — which made its name selling personal computers — continues to remake itself into a stronger supplier of advanced information technology hardware, software and services for business customers.

Dell Inc. needs to transition into more kinds of “infrastructure hardware” like data centers, which will require more expertise in networking and storage – things that Dell historically hasn’t been involved in as much, said Cody Acree, managing director and senior research analyst for Ascendiant Capital Markets.

Eventually, Dell will “look a bit more Cisco-like or IBM-like, for that matter, where there’s a lot of software and services that go along with the hardware,” he said.

Elsewhere, Advanced Micro Devices, which is struggling to regain lost sales in the lucrative market for server processors, unveiled a chip that’s aimed at reviving sales of chips that run servers, the powerful computers that store and dish out data for websites and corporations.

Lisa Su, a senior vice president at AMD, gave the first demonstration of the Seattle chip, which uses ARM Holdings technology, at a presentation in San Francisco last week.

AMD, the only other maker of processors using Intel’s x86 standard, is switching some of its designs to ARM, betting that the technology that dominates in phones and tablets will find a role in servers. The Sunnyvale, Calif.-based chipmaker is targeting machines used by companies such as Facebook Inc. and Google Inc. to perform simple functions, such as logging users into their accounts.

“For our customers, we’re trying to be here creating something you can’t get anywhere else,” Su said. “We are setting ourselves up for the future. It’ll take time.”

AMD, which has a significant presence in Austin, also said this month that it has obtained an ARM architecture license. That license will allow AMD to design its own ARM-based chips as opposed to just using the available ARM cores. The new chip could be huge for AMD, Moorhead said, because it could get AMD’s products into the tablet market, as well as Google-made laptops.

“This could be a game-changer,” Moorhead said.

Moorhead said Austin is tops in the country for chip design, with huge presences from such companies as AMD, as well as Intel, Apple, Samsung, ARM, Freescale and Qualcomm, all of which have design operations here.

The city is also strong in mobile technology, but not as much in devices, given lackluster offerings from companies like Dell, he said.

Moorhead pointed to venture capital as a soft spot locally, saying the level of investment has fallen off precipitously since the dot-com era of the late 1990s.

“Overall, the Austin tech scene is very healthy as there is a good deal (of) investments in mobile and the cloud,” he said. “We are a bit hardware heavy, and I’d like to see more world-class software and services activity, but we need more VC investment to make that happen.”

Austin is continuing to see an evolution from manufacturing to services, but job growth is evident in both lately, Kelsey said. Mobile is driving a lot of the growth in Austin — such industries as custom programming and systems design have grown by nearly 7,000 jobs since 2009. On the manufacturing side, Austin is back above 2009 employment levels in many industries, he said.

“In fact, comparing employment today to where we were coming out of the recession in 2009, a slight majority of tech manufacturing industries in Austin have added jobs,” he said.

According to data compiled by Economic Modeling Specialists International, there were more than 97,000 jobs in key tech industries in the Austin area last year – ranging from semiconductor manufacturing to software programmers.

That’s up from 2009, when there were less than 82,000 tech jobs. It’s also higher than 2007, when there were more than 91,000 such jobs.

The Dell factor

Of course, Austin’s tech sector health is always partially tied to Dell Inc.’s health, given that the company is the largest private employer in the area, with about 14,000 employees.

In a note to company employees this month commemorating the company’s 30th anniversary, Michael Dell said the company is building momentum.

“We’re leading the industry in enterprise flash deployments, and leading with our security and cloud integration solutions,” he wrote. “Our services business is rapidly acquiring new customers and huge deals in key verticals like healthcare and finance.”

If Dell Inc. is headed in the right way, that’s good news for the Austin area, Acree said.

“I think it’s continuing to grow and be very strong, but of course Dell’s position in the PC space drives a lot of that,” he said. “And with the PC market in decline – and that’s not likely to change – Dell has got to figure out … if it can be equally important to other sectors of tech.”

Other companies’ impact

Austin’s other major tech players are making important moves as well — among them tech giant Apple Inc.

The California-based computer maker is building on a 39-acre site adjacent to its present Austin operations, which employ more than 3,000 people in its Americas Operations Center. While the company didn’t respond to requests for comment from the American-Statesman, it has provided some details about its Austin project in return for the estimated $35 million in state and local tax incentives it will receive for the Austin expansion.

The company has said it plans to spend $282 million on new buildings and equipment in Austin over the next decade. That is expected to include seven new office buildings with a combined 1 million square feet or more of space. Those buildings will house an estimated 3,600 new workers needed to support Apple’s continued growth.

The jobs will run the gamut of skills required to run Apple’s business operations for the entire Western Hemisphere.

But Apple has also hired employees in chip design and development locally. Those jobs presumably are supporting the Intrinsity Inc. design team that Apple acquired in 2010. That design team, analysts say, has been heavily involved in developing the new systems chips that run Apple’s mobile products — both iPhones and iPads.

And late last year, Apple confirmed that its new Mac Pro computers would be built at the Flextronics Americas factory in Northwest Austin.

That further solidified Central Texas’ status as one of Apple’s primary hubs outside Silicon Valley. By locating Mac Pro production in Austin, Apple has established a direct or near-direct role in almost 5,000 current Central Texas jobs — and could expand that to as many as 8,700 over the next decade.

A Flextronics spokeswoman declined to discuss the company’s relationship with Apple.

Elsewhere in the Austin tech scene, IBM has shifted from a former manufacturing outpost to an engineering and technology development hub.

Last month, IBM introduced a new Power Systems server that was developed in Austin, with an open platform that gives programmers more flexibility to develop uses for the device.

Power8 is the name IBM has given to the new hardware, which includes a new microprocessor and a lineup of servers. The servers and processors were developed in Austin, which is a leading research and development site for IBM with an estimated 6,000 employees here.

Semiconductors are also one of Austin’s longtime areas of tech expertise. And perhaps no company has invested more heavily in Austin than South Korea-based Samsung Electronics Co.

Samsung has made a historically big manufacturing investment in Central Texas and created one of the biggest chip manufacturing complexes in North America, with at least $15 billion in new investment. The company employs about 2,600 people locally and produces, among other things, advanced low-power processors that are used in mobile devices such as phones and tablets.

“We make up a huge portion of Samsung’s overall capacity in that market,” Samsung spokeswoman Catherine Morse said. “And so what we do here is crucial.”

In another promising sign for local tech employers, Emerson Process Management earlier this year unveiled a $70 million facility in Round Rock designed to help its customers operate large-scale automation projects. And even smaller players like Active Power, which makes backup power systems, tout such big-name clients as Oracle, Yahoo and Hewlett-Packard.

Overall, analysts say, the future for Austin’s tech scene looks good, as Dell Inc., AMD and others move to diversify their businesses and become less reliant on PC sales.

“If companies can adjust to the new normal, which is really what has happened in the last two years,” Acree said, “then an economy like Austin’s reaches a degree of stability, where that diversity is offsetting the declines in the PC market.”

Additional information from Bloomberg News.

Austin jobs in key tech industries

2014: 101,000*

2013: 97,135

2012: 94,278

2011: 88,643

2010: 83,154

2009: 81,792

2008: 90,280

2007: 91,248

2006: 86,549

2005: 84,265

2004: 81,593

2003: 80,616

2002: 84,016

2001: 95,630

*Estimated

Source: Economic Modeling Specialists International

Major Austin tech employers

Dell Inc. (14,000 jobs) – PC maker and supplier of advanced IT hardware, software and services

IBM (6,000) – engineering and technology development

Freescale Semiconductor (5,000) — produces and designs embedded hardware

Apple Inc. (more than 3,000) – business operations, chip design

Samsung Electronics Co. (2,600) – chip manufacturing

Advanced Micro Devices (2,000) — develops computer processors and related technologies

Intel Corp. (more than 1,000) – chipmaker

Expert reporting

This story is part of the American-Statesman’s ongoing coverage of the Austin technology sector. Tech reporter Brian Gaar has tracked the area’s top technology-related stories, including Dell Inc.’s transition to a privately held company, Apple Inc.’s expansion in Central Texas and the growth of the area’s mobile technology sector.

Texas Economy: Miracle or Myth (Revisited)

Governor Perry’s signature economic development programs are under the microscope again this week. Perry, meanwhile, was in New York, talking up the “Texas Miracle” and challenging Governor Cuomo to a debate, who has also been very active in economic development the last few years, to the tune of $1.5 billion.

Given the flurry of activity, I thought it would be a good time to update my Texas: Miracle or Myth presentation from the TEDC conference last October. Here are the claims for your consideration:

1. Texas is leading the U.S. in job creation.

2. Texas has the fastest growing economy in the U.S.

3. People are fleeing California for Texas in droves.

4. Most new jobs in Texas are low-wage.

5. Economic growth in Texas is due entirely to oil and gas extraction.

Is each statement mostly miracle or mostly myth? Click on the image below to jump to the slides for my take.

Political theater is an easy target, but behind this “debate” is a serious challenge for local economic development efforts in Texas. The standard narrative of the Texas Miracle–low taxes (including no income tax), lax regulation, and business-friendly legal environment–serves as a distraction from recognizing the contributions of the nearly 700 combined Type A and Type B economic development corporations in the state. If economic prosperity can be guaranteed with sufficient commitment to the Miracle formula, then why should communities continue to support the investment of sales tax revenue into community and economic development projects? Why not eliminate the EDCs, lower the sales tax rate, and watch the private investment and jobs come rolling in?

That would be a mistake. While we need more EDCs to take a leadership role in championing things like career and technical education and workforce development, the program as a whole is one of the best vehicles you will find in the country for making community-driven economic development possible. EDC expenditures represent a small fraction of total state tax collections and provide important resources for communities in an environment of declining support from federal and state agencies.

A real miracle defies explanation. Local economic developers in Texas, along with their business, community, and education and workforce development partners, deserve better than that.

One-person firms on rise in Austin

Dan Zehr, Austin American-StatesmanOne-person firms on rise in Austin

April 24, 2014

The idea of leaving an established employer to launch a company often seems fraught with risk. James Higginbotham took that leap because it offered more security.

Higginbotham realized that his company’s rapid development of new technologies meant its need for his product-management work would dissipate with each new launch. By leaving one employer and taking on a variety of clients — each with varying launch cycles — he could actually create a more secure stream of work.

“Those kinds of skill sets tend to lend themselves to specific seasons in a company’s life cycle, so it made sense to be independent and to help several companies in that capacity,” he said.

Blue Jazz Consulting was born in 2006. By 2012, Higginbotham’s firm was one of almost 153,000 non-employer companies in the Austin metro area, making it part of one of the largest and fastest-growing communities of one-person businesses in the country, according to data released Thursday by the U.S. Census Bureau.

Roughly 3,700 new non-employer firms went into business in Travis County alone during 2012, and their receipts jumped 9.1 percent from the prior year — the largest increase of any county in the nation, the Census Bureau said.

Across the entire metro area, almost 6,500 new one-person firms came online during the year, and their receipts grew at an even faster rate, rising 9.6 percent to almost $7.8 billion, according to Census data.

That was enough to rank Austin 21st among all the metro areas in the country. But on a per-capita basis, Central Texas ranked fifth, with its non-employer firms pulling in $4.25 for every resident in the metro area. It trailed only Miami, San Francisco, Los Angeles and New York on that score.

“I’ve seen a trend with businesses being more open to reaching out to someone like myself to get the expert insight they need while they’re growing their teams,” Higginbotham said.

In fact, the high-tech and other white-collar industries in the professional, scientific and technical services sector produced more than 1,000 new single-person businesses in 2012, more than any other major economic sector. Combined with the real estate and construction sectors, the trio dominated the ranks of non-employer companies in Central Texas.

According to Census data for 2012, the one-person shops in those three sectors accounted for 42 percent of all the non-employer businesses in the metro area and generated 56 percent of the total receipts, almost $4.4 billion.

“Self-employment usually tracks broader industry trends in a regional economy,” said Brian Kelsey, principal of Civic Analytics, an Austin-based economic consulting firm. “The home building and real estate markets in Austin right now are firing on all cylinders, and a significant portion of self-employed firms are in those industries”

The entrepreneurial spirit that pervades Austin’s high-tech scene lends itself to startups and single-person shops. Programmers and developers can work from afar, and startups that are cost sensitive often prefer the idea of contracting out tasks rather than taking on the expense of a full-time employee.

“Austin’s tech sector is creating plenty of opportunities for independent contractors, developers, etc., to launch and grow new businesses, which often start out as self-employment,” Kelsey said.

A wide range of economic, local and personal factors can influence the creation of non-employer firms. Their ranks often swell during times of tepid economic growth, when companies looking to control costs cut full-time positions and rely more heavily on temporary and contract workers.

Laid-off or underemployed workers might use the opportunity to start their own companies, or do so as a necessity in a difficult labor market.

The decision to jump into self-employment could become even more palatable with the passage of the Affordable Care Act, said Jon Roberts, principal of TIP Strategies, an Austin economic development firm.

By lessening a worker’s dependence on an employer for health insurance, Roberts said, the program could give people greater flexibility to start their own business without the risk of prohibitively costly medical expenses hanging over them.

“A lot of external factors will continue to influence the logic someone brings to decisions of self-employment,” Robert said. “But it will be easier to be self-employed, and more desirable for corporations to adopt that model as well.”

Leaders grapple with poverty at Williamson County summit

Andra Lim, Austin American-StatesmanLeaders grapple with poverty at Williamson County summit

April 22, 2014

ROUND ROCK —

At least 30 people are moving to Williamson County per day, and many are poorer than their new neighbors.

Local school and nonprofit leaders — who say they have already been straining to provide counseling, affordable housing, child care, gainful employment, equal access to education and transportation for residents — gathered Tuesday to discuss what to do as demand for their assistance grows even greater.

Working together to provide and fund a spectrum of services is one way to make few resources go a long way, agreed speakers at a summit organized by United Way of Williamson County, the Georgetown Health Foundation and other groups.

“We’re behind the game in meeting this need,” the Rev. Alan McGrath, who helped get the fledgling nonprofit Hutto Has Heart off the ground, said to an audience of more than 200. “We are heading out into a torrential storm with a $3 umbrella.”

Poverty’s quick spread to the suburbs is a nationwide phenomenon, but it has occurred most rapidly in the Austin metro area, said summit speaker Elizabeth Kneebone, who co-authored the book “Confronting Suburban Poverty in America.”

The number of Austin-area suburban residents living below the federal poverty line — which is $23,850 for a family of four — increased by 162 percent from 2000 to 2012.

A key reason for the shift to the suburbs is the affordability of housing outside the city, experts at the summit said.

For instance, the median cost of a square foot of housing in Williamson County is $112, compared with $165 in Austin, said Brian Kelsey, founder of the economic research and consulting firm Civic Analytics.

Many who flocked to the county near job-rich Austin in 2010 were low or moderate earners who brought in less than the $65,778 the average Williamson County household made that year, Kelsey said. Nearly half of households moving to Williamson County four years ago were from Travis County, and they made an average of $45,828, Internal Revenue Service data show.

Since around that time, Round Rock-based nonprofit Hope Alliance, which provides temporary housing to family and sexual violence survivors, has seen requests for service more than double in some areas of the county, executive director Patty Conner said.

“We’re turning away 40 families a month, and when I get a call in the middle of the night that a woman a mile and a half away from my shelter was killed, my first thought was, ‘Oh my gosh. Did she call the center trying to get in?’” Conner said.

Conner and two other panelists said the most critical need is affordable and accessible transportation, which can make it difficult for people to get to a job, or even to food.

“Certainly, it would be nice for me to go to Austin, see a concert and ride the train back home. That’s not the kind of transportation our clients need,” said Dan Hilliard, a board member at Williamson-Burnet County Opportunities, which runs a Meals on Wheels program.

Investing in education should be a priority, Kelsey said. Over the next decade, 70 percent of job openings for positions paying $17 an hour — enough to support a family of one adult and one child — will require a post-secondary degree, but the majority of Williamson County’s working-age population hasn’t attained that level of education.

But it can be difficult for suburbs, which are generally inexperienced in dealing with poverty, to address such issues, Kneebone said.

In Williamson County, there’s a reluctance to acknowledge the significant working poor population, or simply an ignorance of the issue, members of a six-person panel said.

“There’s a perception in Georgetown that there are no poor people,” said Ginna O’Connor, executive director of The Caring Place.

On top of that, federal anti-poverty programs, which receive $82 billion in government funds, were structured to help inner cities, Kneebone said. Suburbs tend to be more fragmented than an urban core, which could lead to competition, rather than collaboration, between neighboring agencies, she said.

Williamson County’s conservative bent means the private sector might take on a larger role here in paving a road out of poverty, said Scott Alarcon, chief executive officer of the Georgetown Health Foundation.

For now, nonprofits have seized the lead.

Alarcon and a United Way chief gave out their contact information at the end of the summit, saying they wanted to “help lead conversations” about community groups joining efforts. What happens after talks begin isn’t yet clear, they said.

Hutto Has Heart, a group started by pastors, city staff and a school official that meets once a month, could provide a model, McGrath said in an interview. The 15 or so people who attend meetings, including nonprofit representatives, discuss how they can help one another with community events, McGrath said. The organization also runs a hot line matching Hutto residents with services.

“It’s hard to claim what’s going on in your own backyard,” McGrath said. “It’s a lot easier to say, ‘The need is over there, it’s somewhere else. I can go over there and help. Or I can write a check.’”

Experts see signs pointing to strong Austin housing market for years to come

Shonda Novak, Austin American-StatesmanExperts see signs pointing to strong Austin housing market for years to come

April 19, 2014

If you’ve bought or sold a house — or even tried to buy a house — in the past 2 1/2 years in Central Texas, you know the local housing market roared back to life after the recession. Homes in many parts of the Austin area are selling fast, and there’s no shortage of would-be buyers battered by a bidding war.

All indications — job and population growth, housing starts, home sales, price appreciation, and a low supply of homes relative to high demand — “point to a very strong and robust housing market” with no signs of slowing in the near future, said Eldon Rude, a local housing market analyst who is principal of 360 Real Estate Analytics, an Austin-based market research and consulting firm.

“Austin, Texas, has probably the best economy on the planet,” said Mike Castleman Sr., who has been observing housing markets nationally for 40 years as a founder and former CEO of Houston-based Metrostudy, a housing market research and consulting firm that he and co-founder Mike Inselmann sold last year. “Look around. There just aren’t any economies any better.”

But as Castleman and other housing experts know, real estate is cyclical. So those who have ridden the merry-go-round over the decades say the current ride won’t last forever.

So how long can we expect this run last? Depending on which expert you ask, the answer could be another two to four years, or as many as eight years.

Castleman, who lives in Dripping Springs, said every market has its local set of variables that dictate how it behaves. External forces also come into play.

“On the local horizon, there do not seem to be any obvious pitfalls to the economy,” says Castleman, who with Metrostudy co-founder Mike Inselmann sold the firm last year. “So chances are if we are to encounter an interruption to this groundswell of prosperity over the next four or five years, it is most likely to be inflicted from the outside,” that is, originating outside of Austin, and Texas.

Castleman and others say the any number of triggers could precipitate a slowdown. It could come in the form of another financial collapse like in 2008. Or high inflation. Or soaring interest rates. Or what Castleman says is the next shoe to drop: the student-loan crisis, a $1 trillion debt bubble he says will ultimately pop.

Mark Sprague, another housing market analyst based in Austin, said economists can always tell when a market hit bottom and turned. “Unfortunately,”said Sprague, with Independence Title, “they can’t tell you when it’s going to turn.”

But Sprague, a predictably conservative forecaster — he says people tell him they listen to him because “‘if the baby’s ugly, you’ll tell the truth’” — surprised me when he recently said he thinks the Austin metro is 2 1/2 years into a postive run that will last more than 10 — that’s right, 10-plus — years.

“I just don’t see many hiccups, barring a catastrophic event,” that would cause the local housing market to lose its luster, Sprague said.

But Sprague himself pointed out in a recent newsletter that “most positive economic runs, particularly in Texas, last no longer than 6 years.” So where does his optimism come from?

Sprague backs up his forecast with a litany of pluses that Austin, and Texas as a whole, have going for them. Like California in 1950, Texas is a “land of opportunity” where families and corporations are flocking. Job creation. Low tax burden. Business-friendly climate. Housing affordability. And on and on.

“With wages staying stagnant, many consumers are looking to Texas because their paycheck stretches farther,” including their housing dollar, Sprague said.

The throngs moving to the Austin area are being drawn by job growth in a region that added an enviable 32,600 net new jobs in the 12 months through February, and continues to see “very low unemployment,” Rude said.

“The most reliable predictor of the real estate market is population growth, and the most reliable predictor of population growth is job growth, and we have full steam ahead for job growth,” said Steve Crossland, an Austin real estate broker.

Although the Austin area saw prices of existing homes rise 8.5 percent last year, which many locals might consider high, people moving from some other areas, including the West Coast and Northeast, “continue to look at Austin as very affordable,” Rude said.

Brian Kelsey, principal at Civic Analytics, an Austin-based economic research and consulting firm, said he thinks home prices will continue to increase provided that “job growth continues to outpace other regions and home prices are relatively cheaper compared to markets where we are drawing the most number of new residents from.” (He cautioned that “we should keep an eye on other high-performing job markets, such as Nashville, that offer many of the amenities that people report to love about Austin — at about half the cost in terms of housing.”)

Castleman said the local variables are so positive — Austin’s technology sector, the planned new medical school and teaching hospital, the stimulative effect of the oil and gas boom on the overall Texas economy, that “it’s very difficult to see anything locally that would all of a sudden just shut this thing down, or even gradually shut this down.”

Crossland concurs. Because the local housing market is being driven by “honest-to-God, true-blue supply and demand” — that is, loan-qualified buyers who need a place to live vs. speculators betting on some unsustainable bubble — “I think we have three to five years of running room ahead of us,” Crossland says.

“I just don’t see any of the leading indicators doing other than showing green lights,” Crossland said.

Occupancy Limits

The Austin City Council voted last month to lower occupancy limits, the maximum number of unrelated people who can share a home, from six people to four people. The new four-person limit is temporary (two years) and will be applied only to newly permitted single-family and duplex properties in greater central Austin, which is roughly bounded by Highway 183, MoPac, and William Cannon (i.e. McMansion Overlay), while the city works on updating the land development code. The ordinance change was largely a response to central neighborhoods unhappy about the proliferation of stealth dorms, which refer to high-occupancy, single-family zoned properties designed for housing, presumably, more than four unrelated people.

Austin is struggling to come to grips with declining affordability as population growth, increasing wealth, and demand for central-city living put upward pressure on home prices. Austin’s priciest neighborhoods are centrally located, and still a bargain for people of means relocating from places like San Francisco, Los Angeles, and New York–or from Dallas or Houston or other places in Texas, where the majority of transplants to Austin originate. Given no apparent signs of a slowdown yet, the proposed change in occupancy limits sparked a healthy debate about housing affordability–i.e. to what extent would lower occupancy limits aimed at stealth dorms result in the proverbial unintended consequences that could make Austin even less affordable, especially for students and low-income workers.

Council Member Bill Spelman lamented the lack of data that could be consulted on the relationship between occupancy limits and housing affordability during the public hearing. A few central neighborhoods in proximity to UT-Austin contributed inventories of perceived stealth dorms, but that work was limited to only a couple of zip codes, with no independent verification of accuracy. Moreover, no such work was done for other neighborhoods located within the McMansion Overlay that would be impacted by this change. Far be it from me to suggest that central neighborhoods ever drive citywide policy in Austin, Texas, but that was among the concerns from critics of the change. On the other hand, no serious person could drive around the most impacted neighborhoods, such as parts of Hyde Park and the North Loop area, and not recognize that some high-occupancy properties were creating problems that needed to be addressed.

The question, therefore, was how to do it–a targeted policy limited to central neighborhoods reporting the greatest impact, or something more far-reaching that, according to supporters of the change, would “protect” neighborhoods across Austin from ever having to deal with the problem of stealth dorms in the first place.

The Austin Board of REALTORS convened a small group of us to see what we could do in terms of bringing a more data-driven perspective to the debate. We got about four weeks to complete a “study” of the relationship between occupancy limits and housing affordability in Austin. Since four weeks is nowhere close to enough time to finish anything that could remotely qualify as a “study” of such a complex issue, we collected and analyzed whatever data we could before City Council was scheduled to vote on the new occupancy limits on March 20. We waited until Friday, March 14, for the last of the data to come in and then had approximately 72 hours to complete a report in time to be reviewed by City Council in preparation for the March 20 meeting. You can download a copy here:

Affordability Impacts of Proposed Changes to Occupancy Limits in Austin

The report fell short in several areas, for lack of sufficient time, no peer review, and no housing economist to guide the work, for that matter. But I hope the report can serve as a starting point for continuing the effort under CodeNEXT. And in the interest of teeing up that future work, here are a few points that we didn’t have time to fully articulate in the report. They all warrant much more public discussion than they received on March 20.

1. The stealth dorm apocalypse appears to be a ways off, even in the most severely impacted neighborhoods. We identified 1,796 possible single-family zoned high-occupancy properties with five or more unrelated occupants in Austin. These properties represent approximately 0.5% of all households in the city. The most severely impacted area is 78751 (Hyde Park/North Loop), where high-occupancy properties make up 1.6% of total housing units. In other words, a significant change, albeit on a temporary basis (for now), to Austin’s housing policy was just passed based largely on the stated preferences of a few central neighborhoods where high-occupancy properties make up less than one out of every fifty homes. One out of fifty. We’re not exactly entering Walking Dead territory here.

2. Many of the neighborhoods with the greatest number of high-occupancy properties don’t seem to be at the table for this conversation. We identified 100 or more possible single-family zoned high-occupancy properties in 78702, 78751, 78745, and 78723 (78748 is not far behind with 99, but outside the McMansion Overlay).

High-Occ Map Zoomed_Revised2

More time for a real study would have provided useful perspective on how high-occupancy properties are impacting communities in 78723, 78702, and 78745, where, presumably, UT students are not the primary drivers of demand for stealth dorms. At the very least, more time would have allowed for targeted outreach to invite new stakeholders to participate, now that we know where high-occupancy properties are most prevalent.

3. And what about those well-heeled UT students who can afford the reported $1,000 per bedroom rents charged in the stealth dorms taking over neighborhoods near campus? Well it turns out that, with the exception of 78705, very few stealth dorms are inhabited by UT students. According to student address records provided by UT for the study, nearly every high-occupancy property we identified in 78705 is occupied by UT students. In fact, our estimate in the report of 64 possible high-occupancy properties in 78705 appears to be low, after reviewing the student address file that arrived too late to make it into the report.

By contrast, only three high-occupancy properties in 78751 were found in the student addresses, which means that non-UT students occupy 98% of high-occupancy properties, or stealth dorms if you prefer, in the portions of Hyde Park, Northfield, and other neighborhoods in 78751. Further, no high-occupancy properties with five or more UT students living there could be found in the three other 100+ zip codes, 78702, 78745, and 78723.

Now, a major qualifier here is that approximately 50% of students don’t have a local address on file with UT, according to the data we received. In addition, future researchers should request student address records from St. Edward’s, Huston-Tillotson, and other colleges in Austin to complete this picture. However, our preliminary analysis indicates that, outside of 78705, the “stealth dorm issue” is more a question of housing availability for workers and other non-student residents than it is about student housing.

4. Finally, while the grandfathering clause was indeed a necessary provision–the new four-person limit will apply only to new construction–it does nothing to settle many unanswered questions that need to be addressed. We are no closer to understanding the root cause of why the market is responding with high-occupancy properties in the first place. Stealth dorm opponents argue that profit-driven developers are tearing down “affordable” homes that would otherwise be available to families with children. With most central neighborhoods now well north of $200 per sq ft and therefore well out of reach for most families, this argument seems a bit disingenuous when made by serious people. On the other side of the debate, the report doesn’t offer much ammunition for people advocating greater population density in the form of higher occupancy limits in central neighborhoods, either.

As the report indicates, all we can say with a reasonable degree of certainty is that high-occupancy properties appear to be more prevalent in lower-income areas of Austin experiencing rising average rental rates, and that relationship holds even when excluding neighborhoods with the greatest number of students.

And what of the new construction that will fall under the temporary, four-person limit during the next two years? In 2013, 2,573 new single-family homes and 101 new duplexes were permitted in Austin, according to data submitted to the Census Bureau. A large portion of those new housing units are likely to be in the McMansion Overlay and subject to the four-person occupancy limit–that’s more than 5,000 housing units that may not be available to students and low-income workers who need more than three roommates to afford rent, especially in central neighborhoods with convenient access to public transportation.

Seems like that would have generated more discussion, or at least six weeks for something more resembling a proper study, in a city that professes to be so concerned with declining affordability.

San Antonio suburb of Von Ormy goes ‘zero tax, zero fee’ to recruit business, provide services

Laylan Copelin, Austin American-StatesmanSan Antonio suburb of Von Ormy goes ‘zero tax, zero fee’ to recruit business, provide services

March 22, 2014

VON ORMY — As motorists speed past this tiny community along Interstate 35, they might not realize they have just passed the “Freest Little City in Texas,” as Mayor Art Martinez de Vara sometimes calls it.

The mayor shies away from political labels. But there is a libertarian tinge to a “zero tax, zero fee” goal as the best way to bring economic development to this poor but proud city that incorporated on the southwest side of San Antonio just six years ago. “I don’t consider myself a politician,” he said. “I just don’t like taxes and regulations.” It’s an attitude that prompted community leaders to cut the town’s property tax rate in half while almost tripling its sales tax revenue with the help of fast-food restaurants and truck stops lured to Von Ormy’s I-35 frontage. City officials hope to recruit larger enterprises once they have installed a sewer system and to eliminate the property tax altogether. But the “Von Ormy Way,” as it is called, is also about offering basic municipal services efficiently — and sometimes in innovative ways — to a community not accustomed to being served. “Here, you have a government experiment,” said Joe Phillips, a longtime Von Ormy property owner. It’s gotten the attention of the Texas Public Policy Foundation, the Austin-based conservative think tank, which invited Martinez de Vara to speak at its annual conference last month. “The primary lesson they’ve figured out is how to run their city more efficiently while creating a better business environment,” said Jess Fields, senior policy analyst at the foundation. “They encourage development by getting out of the way.” The “Von Ormy Way” isn’t for everyone. Von Ormy, population 1,300, relies on a city marshal and two dozen volunteer police officers as well as volunteer firefighters. Its police station is a mobile command trailer the size of an 18-wheeler. It cost $4,500. One of its two police cars was donated. Martinez de Vara said that residents — “after being ignored by San Antonio and Bexar County for years” — are patiently waiting for services as the city pursues a largely pay-as-you-go approach to creating a city from scratch. As the city has prospered, it has installed streetlights and paved streets, and it is building a fire station. It has trash pickup, curbside recycling and negotiated free ambulance service. The city’s only debt is a $120,000, seven-year note that, along with grants, helped buy land where the fire station, a school, a city hall and a park are planned. The key to the city’s future is its pursuit of a public-private partnership to develop a $4 million sewer line that would serve new businesses at the intersection of I-35 and Loop 1604. The revenue from that line, the mayor said, would finance extending sewers to the entire city. No frills This is a no-frills town. “Necessity helps enforce the philosophy,” Martinez de Vara said. The City Council, which meets in a church, has cut the property tax rate by 10 percent each year since its incorporation. The mayor said he expects that will continue until the tax is gone. Brian Kelsey, principal at Civic Analytics and a lecturer on economic development, said property taxes — which are less volatile than sales taxes — make up a larger share of general revenue for most cities. “It’s not uncommon for small communities to see 15 to 20 (percentage) point swings in year-to-year taxable sales during recessions,” he said. “It’s difficult to guarantee residents a minimum level of service they can expect from a city without a stable foundation of revenue.” Martinez de Vara agrees there is a greater risk in relying on one major tax, particularly a sales tax that fluctuates with the economy. For that reason, he said, the city had a reserve fund last year that was one-third of its annual budget and its surplus was almost 50 percent of its budget. “We can take a substantial hit without cutting into city operations,” he said. “We just have to hedge our taxes differently than other cities.” To Martinez de Vara, property taxes pose a risk to landowners: “The property tax is the greatest threat to keeping the land.” That philosophy is rooted in Von Ormy’s history. The mayor, who spent his summers as a child visiting his grandmother in Von Ormy, counts himself as a sixth-generation resident. He estimated 60 percent of the locals are descendants of five families with original Spanish land grants in the area. Their houses and land are handed down through generations. Although the city is almost 90 percent Hispanic, it is named for Count Norbert von Ormay Auffenberg, an Austrian nobleman, who arrived in 1886 with twenty servants. The count gave up his dream of becoming a cattle baron and left after 18 months. But a postmaster, apparently impressed by nobility, renamed the community, misspelling the count’s name in the process. Despite Von Ormy’s long history, it had withered in San Antonio’s shadow — and its extraterritorial jurisdiction. Growing area Von Ormy had tried and failed to incorporate in the past, but a group of community leaders led by Martinez de Vara, a lawyer with Capitol experience, tried again in 2007. The Legislature didn’t pass the bill that the wannabe municipality sought, but there was enough political pressure that San Antonio allowed Von Ormy to go its own way in 2008. “This was a no man’s land,” said Phillips, a landowner at Von Ormy’s intersection of I-35 and Loop 1604. “San Antonio made it very clear it didn’t care about this area before Eagle Ford Shale.” The recent shale oil boom south of San Antonio is increasing traffic and commerce through the area. San Antonio is growing towards Von Ormy. “We knew we couldn’t compete with San Antonio on incentives,” Martinez de Vara said of Von Ormy’s approach to economic development. Moe Lemos said he located his business, Manufactured Housing Consultants, a mobile home dealership, in Von Ormy because of its business climate. “Absolutely,” he said. “We enjoy the benefits of the big city without being burdened with overregulation.” He said the property tax cuts were a “pleasant surprise” that allowed him to expand the business and improve the facilities. Another property owner, Charlie Brown, said he wanted to be sure all of his 100 acres for the Alamo River RV Resort was part of Von Ormy. “Coming from California, I thought I had landed in paradise,” said Brown, a retired airline pilot. “I know how to run my life better than a bureaucrat knows.” Von Ormy typically doesn’t impose fees on companies locating here. When the Pilot Travel Center, a large truck stop, opened a year ago, it had a sign that was taller than normally allowed. Von Ormy granted a sign variance. “We didn’t realize we had a $50 fee for a sign variance,” the mayor said. “We repealed it.” Martinez de Vara estimated the city could have collected $30,000 in “impact fees” if it had the typical fees most cities charge. Instead, city leaders expected to make that up in a matter of months from the city’s share of the truck stop’s sales taxes. Von Ormy has one whopper of a fee, $1 million for would-be junkyards, to discourage those establishments. The city is also adopting “defensive zoning” to encourage commercial — as opposed to industrial — development that would continue its skyrocketing sales tax receipts, the mayor said. “We’re not anarchists,” he said. “We don’t believe in ‘no government.’ But we’re going to keep it simple.” He said city leaders are in the process of cutting 85 pages of a proposed zoning ordinance to about four pages. It’s that approach, Phillips said, that bigger businesses will appreciate. “You not only have no fees and a lowering of taxes,” he said. “You have a community saying, ‘We want you.’”