Texas economic outlook-Mar 2011

8/7/2019 Texas economic outlook-Mar 2011

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This report is available on wellsfargo.com/research and on Bloom berg WFEC

March 01, 2011

Econ om ics Grou p

Texas Continues to Lead the RecoveryTexas continues to lead the U.S. economic recovery in a number of key areas, including jobgrowth, capital investment, population growth and exports. The Lone Star State has added morethan 230,800 jobs over the past year on a December-to-December basis and the unemploymentrate has remained well below the national rate throughout the financial crisis and recession. Thestronger labor market relative to other states has proven to be a powerful drawing card for newbusinesses and new residents. Texas consistently ranks as one of the top states for new andexpanded corporate facilities and has attracted more new residents during the past decade thanany other state.

While Texas has held up better than most other large states, the state is clearly not immune to theproblems plaguing other regions of the country. While lower than the national rate,unemployment has remained persistently high for the past two years, which has caused creditquality to deteriorate and weighed heavily on state and local finances. Housing and commercialreal estate also face significant headwinds, though to a lesser extent than most other parts of thecountry.

Budget Time in TexasState budget issues have flooded national headlines for months now. Several of the countryslargest state governments face prodigious budget gaps for the upcoming fiscal year. Sadly, Texas

was no exception, with estimates of the budget gap reaching $25 billion. The Legislative BudgetBoards (LBB) proposed 20122013 Biennial Budget features a $31 billion drop in total statespending for the two-year fiscal cycle to close the expected gap between expenditures andrevenues.12 This cuts the overall 20122013 All Funds budget to $156 billion from a budgeted$187 billion, equivalent to a 16.6 percent decline from the 20102011 biennium.3 TheComptrollers estimate for biennial revenue totaled $177.8 billion for the 20122013 budget cyclewith $76.9 billion in state income, $70.2 billion in federal income and roughly $30 billion in fees,interest and other income.4 While total state taxes should net Texas $76.9 billion, this numberfalls to $72.2 billion when adjusted for the $4.3 billion shortfall for the 20102011 budget cycle.

So where does the $31 billion cut in All Funds expenditures come from? Roughly 70 percent, $21billion, of the cut reflects a precipitous drop in federal funds allocated to the state. The largestcategory of federal spending in the Texas budget is in Health and Human Services, which the LBBproposes to reduce by 33.8 percent compared with the previous budget cycle. Since its enactment

1The Legislative Budget Board, in coor dination with the governors office, is responsible for preparing a

thorough budget recomm endation to be considered by the state legislature in the fiscal year prior to thenew bu dget cycle.2Texass Legislature only m eets once every two years, which m eans that each budget must span the

entire biennium.3In Texas budget parlance, All Funds r efers to the sum of General Revenue, General Revenue-Dedicated,

Fees and Interest as well as federal funds.4The Texas Comptroller of Public Accounts is responsible for independently preparing a r evenue

estimate based on a forecast for grow th in the state over the course of the upcoming biennium. Therevenue estimate is prepared in January of the fiscal year immediately preceding the new biennium .

Special Commentary

Eugenio J. Alemn, Senior [email protected] (704) 715-031

Mark Vitner, Senior [email protected] (704) 383-563

Tyler Kruse, Economic [email protected] (704) 715-1030

Texas Econo m ic Outlook: March 2011

T e x a s c o n t i n u e s t

l ead t he U . S .econ om ic recov ei n a n u m b e r o f k ea r e a s .

Over 70 percen t ot h e d r o p i nexpen d i t ur es w i lbe f rom f edera lf u n d s .


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Texas Economic Outlook: March 2011 WELLS FARGO SECURITIES, LLCMarch 0 1, 2011 ECONOMICS GROUP

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in February 2009, the American Recovery and Reinvestment Act (ARRA) has allocated $7 billionin federal funds to Texas for use in state healthcare spending (in addition to FMAP matchingfunds), but this temporary boost will unwind by the beginning of the new budget cycle.5 Asindicated by the LBBs proposed budget, Texas does not intend to fill the holes left by theunwinding of ARRA and additionally intends to curtail state revenue funded healthcare spending7.7 percent. Education received a similar boost from ARRA funds, about $6.3 billion, and will see

the second-largest decline in expenditures in terms of overall spending as well as federalallocations. Cost-cutting measures include a proposed cut of nearly 9,000 state jobs, which wouldreturn state employment to levels seen in the 20082009 biennium. Job cuts will likely be feltheaviest in education, roughly 2,000, and public safety and criminal justice, where the LBBenvisions trimming more than 3,000 jobs.

The sheer size of the LBBs proposed spending and state employment adjustments have caused astir inside and outside Texas, but the net effect of the budget, if passed without amendment,would be to bring the size of Texas government back to levels seen before the recession. Inaddition, state revenue spending is due to fall by $9 billion, but the matching funds formulaemployed by the federal government compounds every dollar of fiscal consolidation by statesBoth state and federal spending increased rapidly in the past two biennia to help insulate theeconomy from the recession, but many lawmakers viewed the expansion of government as atemporary response to the financial crisis and not a secular trend toward bigger government.

Although the need to dampen the effects of the recession has faded, Texas population continuesto expand vigorously and demand for public services such as healthcare, public safety andeducation has grown significantly since the 20062007 biennium. Returning the size ofgovernment to prerecession levels will place added pressure on existing public services andthreatens to ignore significant demographic changes in the state. We expect a healthy debate overthe LBBs proposed biennial budget over the next few months. For a more-detailed analysis lookfor our upcoming special on Texas budget issues.

Figure 1

Texas All Funds Biennial BudgetsEstimates, Billion of Dollars

$0

$10

$20

$30

$40

$50

$60

$70

$80

Health

Services

Public Ed. Higher Ed. Public

Safety

Bus. Dev. Gen. Gov. Other

$0

$10

$20

$30

$40

$50

$60

$70

$80

2010-2011

2012-2013

Figure 2

Texas Government JobsRecommendations Begin in 2012, Thousands of Jobs

0

10

20

30

40

50

60

70

80

90

Government Health Education Public Safety Business

Development

Other

0

10

20

30

40

50

60

70

80

90

2009

2010

2011

2012

2013

Source: Legislative Budget Board and Wells Fargo Securities, LLC

Recent Economic Conditions

The Texas economy, after avoiding the worst of the U.S. housing market crisis and recoveringfaster than the rest of the nation, started to slow at the end of 2010, according to the MetroBusiness Cycle Index (MBCI) published by the Federal Reserve Bank of Dallas. Growth for somelarge metropolitan areas in the state has basically flattened, while others have moderated fromtheir relatively strong initial pace following the Great Recession.

5FMAP stands for Federal Medical Assistance Program, a program where the federal government

matches state funds spent on Medicaid by a form ulaic matching level. The level of federal funding isdetermined by the states per capita income.

Cost -cut t ingm easu res i nc lude ap r o p o s e d c u t o f n ear ly 9 ,0 0 0 s ta t ejobs .


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Total nonfarm employment increased by 230,800 jobs in 2010 on a December-to-December basisafter falling by 354,200 jobs during 2009, according to the latest information from the TexasLabor Force Commission. Texas nonfarm employment bottomed out in September 2009 and rosein 11 of the following 15 months. Most of the monthly drops were due to the unwinding oftemporary Census jobs. The private sector numbers provide a better assessment of the labor

market and show gains in 14 of the past 15 months. The total gain for both series, however, mayslightly overstate the bounce back in the states economy. Nonfarm employment declined sharplyin December 2009, making for a sharper year-to-year comparison. Nevertheless, we believe theyear-to-year numbers give a more accurate assessment of the labor markets since the 2010 year-end number is 97,000 jobs above the average level of employment for 2010.

While job growth bounced solidly in 2010, the pace of hiring lags behind previous recoveries.Texas is not alone in seeing a sluggish recovery in job growth. Hiring has lagged in most statesand the nation has added back only a tiny fraction of the jobs lost during the downturn. Moreover,Texas actually saw fewer job losses in the highly cyclical manufacturing sector, with factorieseliminating approximately 100,000 jobs during the Great Recession. By contrast, manufacturerseliminated 169,000 jobs during the 2001 downturn.

There were heavy job losses in other sectors, however. The construction industry eliminated closeto 100,000 jobs during the Great Recession, compared to 23,000 during the 2001 downturn.

Trade, transportation and utilities saw employment fall by 68,000 during this recession, whichwas slightly worse than the 52,000 jobs lost in the prior recession. The financial sector lost20,000 jobs in the Great Recession. By contrast, financial services continued to add jobsthroughout the previous recession. Professional and business services providers shed73,000 positions versus 41,000 in the 2001 recession. Meanwhile, the information sector lost33,000 jobs compared to a 48,000 loss during the 2001 recession. The rest of the sectors were netcontributors to employment growth during both recessions. Education and healthcare continuedadding jobs throughout the past two recessions. Most of the growth has been in healthcareservices, which is expected to continue to grow in the decades to come as the U.S. populationcontinues to age.

The states largest MSAsAustin, Dallas, Fort Worth, Houston, and San Antonioall came out ofthe recession early in 2010, but are faring somewhat differently. Austin is leading the way whilethe Dallas MSA has basically stagnated after a relatively strong start.

The Austin metropolitan area saw nonfarm employment turn positive in the fall of 2009 andenjoyed modest job gains through the middle of 2010. Census hiring boosted payrolls in the latespring and summer months, but both private sector and government payrolls hit a wall late lastsummer. Modest job gains in education and health services, leisure and hospitality and the all-important government sector, helped produce a net gain of 15,100 jobs this past year, on aDecember-to-December basis. The 2.0 percent increase marks a significant improvement fromthe 2.4 percent drop in 2009. While education and healthcare and the leisure and hospitalitysectors will probably remain strong in 2011, the state and local government sector poses asignificant downside risk as the state copes with a widening fiscal deficit. Governmentemployment in Austin accounts for around 22 percent of overall nonfarm payroll employment,compared to 17 percent for the state as a whole. Any negative news coming from the public sectorwill be bad news for Austins economy.

While public sector cutbacks present a real risk to Austin, the private sector appears to be poisedfor stronger gains. Austins high tech sector is benefiting from an influx of companies fromCalifornia and Asia. Growth in the semiconductor and solar industries holds great promise for theregion and the weaker dollar will likely help attract additional investment to the region.

The Dallas-Fort Worth area saw modest job gains during 2010, but gains were very uneven.Nonfarm employment rose 1.3 percent for the year, producing a net gain of 36,200 jobs on aDecember-to-December basis. Hiring has picked up most in the service sector, paced by steadygains in professional and business service and education and healthcare services. By contrast,construction remains a major drag and employment in the financial services sector remained

T h e T e x a sc o n s t r u c t i o ni n d u s t r ye l im ina ted c lose 10 0 ,0 0 0 job s in thp a s t r e c es s i o n ,com par ed w it h j u23,0 0 0 in t h e 20 0reces s ion .

Pub l ic sec tor jobc u t s a r e a r e a lt h r e a t t o t h e A u s tem plo y m entp i c t u r e .


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essentially unchanged for the year. The weakness mostly reflects declines in residentialdevelopment.

We expect hiring to pick up slightly in the Dallas-Fort Worth area this year as financial servicesand leisure and hospitality employment sectors start growing again. Our biggest concern this yearis, again, the public sector, which added 7,300 jobs in 2010, but is expected to shed jobs this year

While government employment in the Dallas-Fort Worth MSA only represents 13.8 percent oftotal employment compared to more than 20 percent for the Austin MSA, its contribution togrowth in 2010, combined with the likelihood of severe public belt tightening in 2011, makes us abit cautious about the hiring outlook.

Houston emerged from the recession a little earlier than most other Texas metropolitan areas.After posting strong gains in the early part of 2010, economic conditions moderated considerablyduring the second half of the year, according to the MBCI. Nonfarm employment finished theyear with a paltry 0.5 percent gain on a December-to-December basis. Hiring has been held backby continued job losses in construction and financial services, as well as heightened uncertainty inthe deepwater oil drilling sector.

The disappointing jobs numbers for Houston are a bit of a mystery. The usual suspects in thegoods-producing sector are actually doing relatively well. Hiring has picked up in the energysector and manufacturing employment improved modestly over the course of the year. Layoffs in

construction have also slowed. Hiring in the service sector appears to have been held back byweak income gains and the ongoing struggles in the regions housing market. The result has beencontinued layoffs in the financial sector and unusually weak job growth in retail trade andprofessional services. Fortunately, the pace of job growth gained some momentum over thecourse of the year. Higher energy prices might also open up a few more opportunities for theregions all-important energy sector.

San Antonio has posted modest, yet consistent gains since May 2010, even though growth hadbeen relatively weak coming out of the recession, according to the MBCI. However, in terms ofemployment, the San Antonio economy weathered the crisis somewhat better than other largeTexas metros, thanks largely to the regions large military presence. The recession still hurthowever, and many San Antonio businesses are still scrambling to get back on their feet. Afterlosing 20,600 jobs in 2009, San Antonio added 7,100 jobs this past year on aDecember-to-December basis. While modest improvement is evident in most industries, thelargest gains came in just two areas, government and retail trade. San Antonio does not face thesame constraints on government employment that some other Texas metro areas do, as more ofSan Antonios government presence is on the federal side, much of which is tied to the large andgrowing military presence in the region.

We expect job growth to pick up in 2011, with stronger gains in healthcare and professionalservices leading the way. Hiring in retail trade and the regions important leisure and hospitalitysector also seems poised for better days.

The Export Sector in ExpansionTexas exports were hit hard by the slowdown in international trade during the recession, butsurged in 2010, surpassing record highs reached back in 2008. Texas total exports surged25.4 percent in 2010 and moved firmly into expansion, exceeding prerecession highs by2.7 percent. Texas manufactured exports rebounded strongly 23.9 percent for the year

Commodities exports have surpassed prerecession highs in both monthly and yearly termsaccording to the December trade report, boosted by a continued bull market in soft commoditiessuch as soybeans, wheat, corn and cotton. Despite the recession, Texas manufactured exports areup roughly 80 percent since 2000 and commodities exports have nearly tripled over the sameperiod. Texas dynamic export sector has expanded faster than the rest of the nations since 2000with the states share of national manufactured exports growing to 16.8 percent in 2010 and statecommodities exports accounting for 9.5 percent of the U.S. total. Exports have remained a crucialdriver of the Texas economy in the past decade, fueling strong gains throughout the state andhelping support more than 13.6 percent of the states nominal gross product in 2010.

Job g row th i nH o u s t o n h a s

g a i n e d s t r e n g t h i nr e c en t m o n t h s , b u t rem ain sd i s a p p o i n t i n g .

T o t a l T e x a s e x p o r t s

s u r p a s s e d p r e r e c es s io n h i g h sin 20 10 .


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popular misconceptions abound, the truth is that Texas is a national leader in production andutilization of alternative and renewable sources. Wind, in particular, has taken a front seat, withtwo of the worlds largest wind farms located in north-central Texas. Unfortunately, wind powerin Texas is a long way from achieving grid parity in the medium term without continuedgovernment subsidies, but alternative fuels of all kinds benefit from unique advantages in TexasTexas is the only state with its own power grid, which makes adapting to new sources of

technology easier. In addition, Texas utility companies only provide power on the Texas grid,which eliminates the need for federal regulation, giving lawmakers in Austin, in conjunction withlocal utility companies and their respective self-regulating organizations, the ability to designunique solutions to states energy needs. For instance, the areas with the highest wind energypotential in Texas lie along the Llano Estacado in the panhandle, but this areas distance from thecore of the grid requires a substantial network of transmission lines to transport the energyefficiently to the rest of the state. The Texas Public Utility Commission (PUCT) worked with utilitycompanies across the state to raise enough funds to begin adding additional transmission lines.

Since 2005, Texas has been keen on fomenting growth in emerging technologies inside state linesprompting the launch of the Texas Emerging Technology Fund (TETF). Since 2007, the TETF hasinvested $40 million in green energy companies and research within the state of Texascomprising nearly 15 percent of total awards for the period. A large portion of these grants werefor development of biofuels from algae and advanced battery technologies. In addition to direct

investment programs, Texas offers a broad range of tax incentives for solar energy companiesaneffort to tap into Texass vast, untapped solar energy potential. It is estimated that one acre ofland in West Texas is capable of producing the energy equivalent of 800 barrels of oil a day. Thecomposition of Texas energy is changing rapidly with investments in green tech, with the hopethat backward linkages will bring green manufacturing jobs to the well-trained energy labor forcealready located in the state.

While green energy is on the rise in Texas, the state still relies heavily on the oil and natural gassectors. The number of rotary rigs operating in Texas plummeted in 2009 as the state felt theeffects of the Great Recession and world demand for oil dropped off; however, in 2010, the rigcount rebounded strongly and should continue to rise with the surge in drilling permits issuedOil prices have yet to recoup levels achieved before the international financial crisis and we expectthem to hover around $100 a barrel for the year, which means growth in the oil industry shouldprogress solidly, although not at the fevered pace seen back in 2008. There was large-scaleconcern that the BP oil spill and the subsequent drilling ban would damage Gulf oil productionand slow business in Texas sizeable refining sector, but, to date, the concentration of the currentadministration has been on the eastern half of the Gulf. New drilling regulations will require everyexploration plan to demonstrate the capability to deal with a potential blowout or a worst-casedischarge scenario. In addition, an independent engineer must approve general well design aswell as specific casing and cementing designs, which is a substantial change from before theDeepwater spill this past summer. The new regulations will result in more regulatory hurdles forpermit seekers and, in the near term, will slow the pace of permit approval and create someuncertainty for companies interested in investing in offshore plays.

Horizontal and hydraulic drilling techniques have changed the Texas oil industry dramatically inrecent years. New techniques have allowed companies to access oil and natural gas in tight rockformations that were previously considered impossible to develop. Texas proven natural gasreserves have risen steadily over the past 20 years, but the pace of expansion has acceleratedgreatly since 2003. Producing wells followed suit as wellhead prices continued to climb; howevernew storage and pipeline infrastructure, coupled with the strong expansion in producing wellsbegan to put downward pressure on prices in 2009. While natural gas production has expandedthe demand for natural gas in Texas remains subdued and has actually fallen since 2000Although the overexpansion in productive capacity is a major drag for natural gas producers, lowprices seen in the past two years have been a boon to local industry. Many Texas utility companieshave begun to replace highly pollutant coal with clean, cheap natural gas to power electrical gridsespecially to cool Texas homes during the scorching summers. Texas refinery and petrochemicalindustry has begun to leverage low natural gas prices to gain a competitive advantage both

T e x a s h a s i n v e s t e d $40 m il li on d o l lar si n a l t e r n a t i v e

energy t echno logyf i rm s t hr oug hTETF.

L o w n a t u r a l g a spr i ces are a m i xed b l es s in g f o r t h eTexa s econ om y .


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domestically and internationally. Utility and industrial natural gas prices remain well belowcommercial and residential prices, which allow refineries to net dramatic savings in their energyconsumption heavy processes. Low natural gas prices remain a mixed blessing for the Texaseconomy in the near term, but the states generous endowment of proven reserves will continue toprovide the nations number one energy consumer with a cheap, local and clean source of energy.

Figure 5

Texas Oil and Natural GasYearly Well Completions, Thousands

0

5

10

15

20

25

30

76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

0

5

10

15

20

25

30

Gas Wells Completed: 2010 @ 4.1 Thousand

Oil Wells Completed: 2010 @ 5.4 Thousand

Figure 6

Texas Drilling Permits and Rig CountThousand of Drilling Permits

0

10

20

30

40

50

60

76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

0

300

600

900

1200

1500

1800

Drilling Permits Issued: 2010 @ 18.0 Thousand (Left Axis)

Average Rotary Rig Count: 2010 @ 659 (Right Axis)

Source: Texas Railroad Commission, Baker Hughes and W ells Fargo Securities, LLC

Hom e Sales Are Still Stuck in Low GearWhile home sales and new home construction held up better in Texas than they did nationally,the state is still clearly dealing with the aftereffects of the housing boom. Home construction roserelative to the states population near the top of the housing boom in 2005 and 2006, but the pacenever got quite as fevered as it did in many other parts of the country. Starts peaked in 2005 at166,203 units and plummeted 62 percent to just 62,980 units this past year. Sales of existinghomes peaked in 2006 at 292,800 homes and fell 30 percent to 205,000 in 2010.

Lending tended to be more conservative in Texas during the boom years. The Lone Star Statelearned about the hazards of too much leverage back in the 1980s real estate collapse and adoptedlaws that made it more difficult for homeowners to tap the equity in their homes. The moreconservative lending environment dampened speculative activity during the housing boom, whichhelped keep price appreciation in check. That said, pockets of overbuilding are clearly evidentalong the Gulf Coast and in portions of nearly every major market. Inventories of homes areslightly higher than they were a year ago, foreclosures have increased and prices have stagnated.

Home sales and new home construction were affected by the extension of homebuyer tax creditsin 2010. The tax credits pulled home sales into the first half of the year and generally supportedprices. Sales collapsed around the middle of the year and have languished ever since. In addition,the controversy surrounding the foreclosure process curbed existing home sales further late lastyear. The supply of homes listed for sale also decreased slightly at yearend. Even with the drop,however, there remains a 7.2 months supply of homes on the market, up from 6.3 months one

year ago.New home construction also got a slight boost from the homebuyer tax credits. Permits for newsingle-family homes were running ahead of their year-ago pace from November 2009 throughMay of 2010, but have been running below their year-ago pace ever since. By contrast, apartmentconstruction gained momentum during the second half of the year. Permits for new multifamilyprojects rose 7.7 percent in 2010, with nearly all of the gain occurring during the second half ofthe year.

While activity remains depressed, Texas is holding up much better than most other majormarkets. All four of the states large markets ranked in the top ten for new housing permits in

T e x a s l e a r n e d i t sl e s son f rom th e198 0 s rea l es tat eb o o m a n d a v o i d ethe w or s t o f t her e c en t h o u s i n gb u b b l e .


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2010, with Houston taking the top spot and Dallas-Fort Worth finishing second. Austin saw theseventh-largest number of single-family permits and San Antonio finished with the ninth-highesttotal.

The year should be the mirror opposite of 2010. The first half of the year is likely to remainrelatively sluggish, with sales being heavily influenced by foreclosure sales. Activity should pick

up in the second half of the year, as job growth accelerates and prices stabilize. Sales of existinghomes are expected to rise close to eight percent in 2011, while permits for new single-familyhomes should rise around ten percent to around 70,000 units. Apartment construction shouldstrengthen further, helping boost multifamily starts at least 15 percent.

Figure 7

Texas Monthly Home SalesThousands, 12-Month Moving Average

6

10

14

18

22

26

90 92 94 96 98 00 02 04 06 08 10

6

10

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18

22

26

Texas Home Sales: Jan @ 16.9 Thousand

Figure 8

Texas Monthly Home SalesThousands

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26

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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16

18

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22

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26

2008

2009

2010

Source: Real Estate Center at Texas A&M University and Wells Fargo Securities, LLC

Comm ercial Real Estate Is Finding Its FootingDemand for commercial properties improved over the course of 2010. Some improvement isevident across all product categories in each of the states largest metropolitan areas. The mostdramatic gains have been in the apartment market, where modestly stronger job growth has led toincreased leasing activity. Occupancy rates have increased the most in Austin and Dallas, wherethey rose 3.1 and 2.6 percentage points, respectively. San Antonio and Houston also saw gains.The rise in occupancy rates has led to a pick up in effective rents and helped fuel a buying spree inapartment communities. Development activity is also increasing.

Office leasing is reviving a bit more slowly. Leasing activity increased during the second half ofthe year, but much of that activity appears to be coming from firms taking advantage of a softmarket to upgrade their location. Overall vacancy rates rose slightly in Houston this past yearwith the entire rise occurring in Class B space. The Houston Realtors Association noted demandfor new Class A picked up over the course of the year, with positive net absorption recorded forthe past three quarters. Dallas is seeing a similar trend. Leasing activity has also picked up in SanAntonio and Austin.

Demand for industrial space has been even stronger, led by an upsurge in the logistics sector,strong growth in the tech sector and increased international trade. Improvement is evident

throughout the state. Demand for warehouse and distribution space has been fairly strongthroughout the state, while demand for general industrial space and flex space has tended to lagAll markets have seen improvement over the past year, with Dallas and Austin seeing thestrongest gain.

Retail leasing was surprisingly strong during the second half of 2010 and vacancy rates tightenedmodestly in most markets. Unfortunately, we are seeing a renewed round of store closings, whichwill likely put some large blocks of space back on the market. With little new construction in thepipeline, however, vacancy rates should rise only modestly.

T h e a p a r t m e n t m ark e t i s lead in g

com m ercia l rea le s ta t e ga in s inT e x a s .


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We expect demand for commercial real estate to continue to revive in 2011 and look for office andindustrial vacancy rates to fall modestly over the next few quarters. While apartment constructionappears set to ramp up this year, we see little prospect of any significant gains in office andindustrial projects. Sales of commercial properties remain brisk, however, and values have clearlystabilized.

Figure 9

Austin Apartment Supply & DemandPercent, Thousands of Units

0%

1%

2%

3%

4%

5%

6%

2006 2007 2008 2009 2010

-8

-6

-4

-2

0

2

4

Apartment Completions: Q4 @ 268 Units (Right Axis)

Apartment Net Absorption: Q4 @ 1,111 Units (Right Axis)

Apartment Vacancy Rate: Q4 @ 5.3% (Left Axis)

Figure 10

Dallas Office Supply & DemandPercent, Thousands of Square Feet

19%

20%

21%

22%

23%

24%

25%

2006 2007 2008 2009 2010

-1,500

-1,000

-500

0

500

1,000

1,500

Office Completions: Q4 @ 0 SF (Right Axis)

Office Net Absorption: Q4 @ 138,000 SF (Right Axis)

Office Vacancy Rate: Q4 @ 24.6% (Left Axis)

Source: Reis, Inc. and Wells Fargo Securities, LLC


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AustinAustin MSA Nonfarm Employment

3-Month Moving Averages

-6%

-3%

0%

3%

6%

9%

12%

92 94 96 98 00 02 04 06 08 10

-6%

-3%

0%

3%

6%

9%

12%3-Month Annual Rate: Dec @ 0.3%

Year-over-Year Percent Change: Dec @ 2.1%

Household: Yr/Yr Percent Change: Dec @ 2.2%

Austin MSA Unemployment RateSeasonally Adjusted

1%

2%

3%

4%

5%

6%

7%

8%

90 92 94 96 98 00 02 04 06 08 10

1%

2%

3%

4%

5%

6%

7%

8%

Unemployment Rate: Dec @ 7.1%

12-Month Moving Average: Dec @ 7.1%

Austin remains one of the more resilienteconomies in the country and continues toattract scores of new businesses and residents.Nonfarm employment grew 2.0 percent in 2010,producing a net gain of 15,200 jobs. Austinsunemployment rate fell 0.2 percentage pointsover the year to 6.8 percent in December.

While job growth was relatively robust in 2010,it was concentrated in two sectors, localgovernment, which added 5,700 jobs, andleisure and hospitality, which added 5,100 jobs.The former looks somewhat suspect and mightbe reversed in 2011. The latter reflects theopening of some new hotels in the region, whichwill not likely be repeated this year. Aside fromthese two areas, job growth is much moremodest, with gains predominantly inprofessional and business services, educationand health care and manufacturing.

Austins housing market is showing sometentative signs of stabilizing. Sales of existinghomes fell 4.3 percent in 2010 but sales inDecember were running slightly above theiryear ago pace and prices appear to bestabilizing. Austin had a lean 5.6 months supplyof homes on the market at yearend andapartment demand rose solidly last year.

Austin should remain one of the more vibrant

economies in the nation this year. Technologyspending is growing on a number of fronts,including IT, semiconductors and alternativeenergy. One risk is that public sector cutbacksreduce state and local government payrolls. Austin MSA Housing Permits

Thousands of Permits, Seasonally Adjusted Annual Rate

0

5

10

15

20

25

30

90 92 94 96 98 00 02 04 06 08 10

0

5

10

15

20

25

30

Single-Family: Dec @ 4,440

Single-Family, 12-Month Mov. Avg.: Dec @ 6,026

Multi-Family, 12-Month Mov. Avg.: Dec @ 1,544

Austin MSA Population GrowthIn Thousands

0

10

20

30

40

50

60

70

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

0

10

20

30

40

50

60

70

Source: U.S. Department of Commerce, U.S. Department of Laborand Wells Fargo Securities, LLC


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Dallas-Ft. Wo rthDallas-Ft.Worth MSA Nonfarm Employment


-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

92 94 96 98 00 02 04 06 08 10

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

3-Month Annual Rate: Dec @ 2.0%


Household: Year/Year Percent Change: Dec @ 1.5%

Dallas-Ft.Worth MSA Unemployment RateSeasonally Adjusted

2%

4%

6%

8%

10%

90 92 94 96 98 00 02 04 06 08 10

2%

4%

6%

8%

10%



Preliminary data show the Dallas-Fort Wortharea adding 36,700 jobs in 2010. Most of thegains were in professional and businessservices, education and health services and localgovernment. Manufacturing employment alsoincreased, pace by gains in the tech sector.

The unemployment rate was essentiallyunchanged over the past year, falling0.1 percentage point from December 2009 to7.9 percent. The drop looks real, however, asboth employment and the labor force increasedsolidly over the past year.

Dallas continues to attract significant numbersof businesses. The semiconductor industry isenjoying strong demand both domestically and

abroad. Significant investments have also beenmade in highway and rail infrastructure in thepast few years, although there is little noticeableimpact in the employment data.

Housing is still enduring a bit of a payback fromthe tax-credit induced buying during the firsthalf of 2010. Sales of existing homes fell7.8 percent in 2010 and there is little sign of anyfirming in demand. Apartment leasing pickedup in the past few quarters, reflecting strongerjob growth and continued population inflows.

Dallas-Fort Worth should continue to postmodest gains in 2011. Strong growth in the techsector combined with a strengthening nationaleconomy should continue to drive gains inmanufacturing and distribution. Rising energyprices are also helping lift the energy sector.

Dallas-Ft.Worth MSA Housing PermitsThousands of Permits, Seasonally Adjusted Annual Rate

0

15

30

45

60

75

90 92 94 96 98 00 02 04 06 08 10

0

15

30

45

60

75

Single-Family: Dec @ 10,980



Dallas-Ft. Worth MSA Population GrowthIn Thousands

0

40

80

120

160

200

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

0

40

80

120

160

200



12/14


12

HoustonHouston MSA Nonfarm Employment


-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

92 94 96 98 00 02 04 06 08 10

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%



Household: Year-over-Year Percent Change: Dec @ 0.6%

Houston MSA Unemployment RateSeasonally Adjusted

3%

4%

5%

6%

7%

8%

9%

90 92 94 96 98 00 02 04 06 08 10

3%

4%

5%

6%

7%

8%

9%



Houstons economy continues to struggle tobuild momentum. Nonfarm employmentincreased just 0.5 percent in 2010, producing anet gain of 13,100 new jobs. Disruptions indeepwater oil drilling have weighed on the localeconomy. While the drilling moratorium hasbeen lifted, no new activity has taken place.

Houstons unemployment rate has actuallyincreased slightly over the past year. Houstoncontinues to attract job seekers from thesurrounding area. The civilian labor forceincreased 1.0 percent in 2010, slightly outpacinghousehold employment growth of 0.9 percent.

Residential construction continues to strugglewith the payback from the homebuyer taxcredits and the glut of foreclosed properties.Permits for new single-family homes fell4.1 percent last year to just 18,910 units. Thatstill was enough to rank Houston the numberone market for single-family starts last year.Sales of existing homes fell 5.7 percent but haveshown some tentative signs of bottoming morerecently. Demand for apartments is picking upbut not as strongly as in Austin or Dallas.

Houstons economy should strengthen over thecoming year, as new petrochemical and naturalgas projects staff up and continue to draw innew investment. Other areas of the economy

look less certain. With the federal budget underintense scrutiny, the Johnson Space Centerfaces an uncertain future. The merger betweenUnited Airlines and Continental may also slowthe regions recovery somewhat. Houston MSA Housing Permits

Thousands of Permits, Seasonally Adjusted Annual Rate

0

20

40

60

80

90 92 94 96 98 00 02 04 06 08 10

0

20

40

60

80Single-Family: Dec @ 18,228



Houston MSA Population GrowthIn Thousands

-50

0

50

100

150

200

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

-50

0

50

100

150

200



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13

San AntonioSan Antonio MSA Nonfarm Employment


-6%

-3%

0%

3%

6%

9%

92 94 96 98 00 02 04 06 08 10

-6%

-3%

0%

3%

6%

9%



Household: Yr/Yr Percent Change: Dec @ 1.1%

San Antonio MSA Unemployment RateSeasonally Adjusted

2%

3%

4%

5%

6%

7%

8%

90 92 94 96 98 00 02 04 06 08 10

2%

3%

4%

5%

6%

7%

8%



After weathering the recession relatively well,San Antonios recovery has tended to lag a bit.Nonfarm employment increased 0.8 percent in2010 and the unemployment rate actuallyincreased slightly, rising 0.4 percentage pointsto 7.3 percent. The rise in the unemploymentrate results from faster growth in the laborforce, which grew 1.8 percent in 2010, comparedto a 1.2 percent gain in household employment.

While job growth was relatively modest, labormarket conditions do appear to be improving.Manufacturing payrolls were unchanged overthe past year and hiring has picked up infinancial services and business and professionalservices. Government payrolls have also risen.

San Antonios housing market appears to havebottomed. Sales of existing single-family homesfell 2.0 percent in 2010, while permits for newsingle-family homes declined 7.9 percent.Permits for multi-family projects more thanquadrupled to 1,731 units, which likely reflects aslight increase in demand for apartments.

San Antonio appears to be well positioned forthe economic recovery. The military isexpanding medical facilities at Fort SamHouston, which should spur significant job andpopulation growth. The influx of militarypersonnel should further spark demand for

housing and services. The federal budget isunder intense pressure, however, and this maydelay or slow the anticipated gains from themilitary.

San Antonio MSA Housing PermitsThousands of Permits, Seasonally Adjusted Annual Rate

0

4

8

12

16

20

90 92 94 96 98 00 02 04 06 08 10

0

4

8

12

16

20Single-Family: Dec @ 3,528Single-Family, 12-Month Mov. Avg.: Dec @ 5,172

Multi-Family, 12-Month Mov. Avg.: Dec @ 899

San Antonio MSA Population GrowthIn Thousands

0

10

20

30

40

50

60

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

0

10

20

30

40

50

60



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Texas economic outlook-Mar 2011

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