Issue 2
Update, April 2005
Federal Reserve Bank of Dallas

Revised Job Numbers Suggest Texas Office Markets May See Quicker Turnaround

In March 2005, the Bureau of Labor Statistics (BLS) released revised employment data that showed some of Texas’ major metros performed better in 2004 than previously thought.[1] The two metros with the most significant upward revisions to their job counts were Dallas and Austin. With the revisions, Dallas’ employment grew by 36,400 in 2004, versus the 13,600 previously reported. Austin’s job gain improved by an additional 7,200 (15,900 versus 8,700).[2]

Chart 1 shows employment in Dallas and Austin before and after the data revision (the solid lines reflect the revised data). The additional job gains in 2004 in these two metros are quite noticeable. The employment revisions portend good news for sectors of the economy that depend on job creation for their growth—such as real estate. Office markets in Austin and Dallas, while still weak, may see a recovery sooner than previously thought if the pace of job growth continues or picks up.[3]

In the March/April issue of Southwest Economy, I reviewed the current state of three of Texas’ largest office markets—Dallas, Houston and Austin.[4] The article explains how the high-tech bust in Texas, along with a national recession in 2001, wreaked havoc on Texas office markets—especially Dallas and Austin, which had witnessed a large amount of construction in the 1990s fueled by the state’s high-tech boom. In addition, the slow recovery of the Texas economy following the recession kept demand for office space at a minimum in the years following the recession. These events left Dallas with the highest vacancy rate in the country, and Austin with one well above the U.S. average.[5] Only recently have office markets in Texas begun to show signs of recovery. Leasing activity has begun to pick up and absorption has turned positive in most metros. Moreover, rent declines have slowed and investor interest remains high.

What is the outlook for Texas office markets? In the Southwest Economy article I looked at “office employment”—employment in industries that spur office demand—in the current recovery and in the expansion following the 1990 recession in order to gauge possible prospects for recovery of Texas office markets.[6] Prior to the BLS revisions, the data indicated that office employment in Dallas and Austin had yet to pick up much in the current economic expansion (0.9 percent and 1 percent growth in 2004, respectively). This suggested any turnaround in either metro’s office market remained elusive. With the employment revisions, however, the picture looks somewhat brighter. Chart 2 shows that in Dallas, office employment (solid line) began to increase in month 29 of the current recovery, and the pace of growth has been stronger than previously thought (2.2 percent over the past 12 months). Similarly, revisions show Austin’s office employment began picking up in month 33 (Chart 3, solid line) and has risen at a 3.7 percent pace over the past 12 months.

While encouraging, the acceleration in office employment in Dallas and Austin remains below the pace set during the previous recovery (see original article in Southwest Economy). The 1990 U.S. recession had a much smaller impact on the Texas economy than the most recent one, and Texas employment (both total and office employment) was boosted by in-migration as firms and individuals moved to the state from other areas of the country in the early 1990s. While Texas relocations picked up in 2004, the pace pales in comparison to the one set in the 1990s.

In another good sign for office markets, the revised data also suggest that office employment in Texas’ major metros is outpacing overall employment growth, which has been moderate at best. Over the past 12 months (through February 2005), Austin’s office employment rose at a pace of 3.7 percent compared with 2.3 percent for total Austin employment. Dallas’ office employment increased by 2.2 percent, faster than the 1.9 percent pace of total Dallas employment. While the data revisions suggest Houston’s office-related employment grew somewhat slower than previously thought, it is still outpacing overall employment (1.5 percent versus 1.2 percent in the past 12 months).

To sum up, Texas’ office markets are showing signs of improvement, yet they still have a long road ahead toward recovery. Vacancy rates remain high, especially in Dallas, and even with positive demand, it will take time to fill the large amount of vacant space. Yet, while office employment is not growing as rapidly as it did in the previous economic expansion, its recent acceleration suggests a turnaround in office markets may be within reach.

Looking at each market individually, Houston’s office market remains in better fundamental shape than that of Dallas or Austin, with its vacancy rate closer to the national average. Moreover, with construction still in check in Houston, and moderate growth in office employment, Houston’s market holds good prospects for recovery.

Austin’s office outlook has brightened considerably. While Austin’s office vacancy rate is still higher than the U.S. average, the strong pickup in office employment suggests leasing activity should accelerate, and recent reports suggest the market saw increased occupancy and upward pressure on rental rates in the first quarter of 2005.[7]

Likewise, Dallas’ office market should benefit from the stronger pace of employment in industries that spur demand for office space. Nevertheless, while some submarkets are already seeing improvement in occupancy, overall, Dallas has a large amount of vacant office space to fill, suggesting its office recovery may take longer than in Houston and Austin.

—D’Ann Petersen

About the Author Petersen is an associate economist in the Research Department of the Federal Reserve Bank of Dallas. Notes After the revisions, overall Texas employment did not change much, and job growth for 2004 remained at 1.3 percent. The BLS recently redefined metropolitan statistical areas (MSAs), incorporating some new counties into old MSAs, removing some counties, creating new MSAs, combining some and eliminating some. With the new definitions, Texas now has 25 MSAs compared with 27 previously. The revised charts in this article reflect the MSA definitional changes and incorporate the new definitions in each time series. For more information on the changes, visit the BLS’s web site at www.bls.gov [off-site]. 2004 job growth was revised from 1.3 percent to 2.4 percent in Austin and from 0.7 percent to 1.9 percent in Dallas. In the other major metros employment growth remained the same or was revised down only slightly. See “Empty Spaces: Are Texas Office Markets on the Road to Recovery?” by D’Ann Petersen, Southwest Economy, March/April 2005. Houston’s office market is in better shape than that of Austin or Dallas, with a vacancy rate closer to the national average. Houston is less dependent on high-tech industries than the other two metros, so its 2001 downturn was less drastic and less damaging to office real estate. Office employment in this article is defined as the broad NAICS supersectors of information, financial activities, and professional and business services. These sectors include finance and insurance, real estate, professional services, management of companies, administration and support, and information. See “Austin’s office market continues recovery,” by Shonda Novak, Austin American-Statesman, April 16, 2005 About Southwest Economy Southwest Economy is published six times annually by the Federal Reserve Bank of Dallas. The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. Articles may be reprinted on the condition that the source is credited and a copy is provided to the Research Department of the Federal Reserve Bank of Dallas. Southwest Economy is available free of charge by writing the Public Affairs Department, Federal Reserve Bank of Dallas, P.O. Box 655906, Dallas, TX 75265-5906, or by telephoning (214) 922-5254.