On the Rebound

New Partnerships Help Jump-Start Texas Economic Growth

By Eileen Schwartz

With new tools for attracting capital investments and bringing highway projects online, Texas' future is looking brighter.

The state is leading the nation in highway construction spending, according to the Texas Department of Transportation, which reported a fiscal year 2004 total of approximately $4 billion in transportation construction contracts-more than any other state.

Texas was second in the nation only to California in educational construction in 2004 with an estimated $3.58 billion in education construction spending, according to McGraw-Hill Construction/Dodge Analytics, which, like Texas Construction, is a part of the McGraw-Hill Cos. The group predicts that the value of all construction in Texas - minus single-family housing - will total roughly $24.5 billion in 2005, or about 6 percent better than 2004's $23.1 billion.

It seems safe to say that the rebound has finally arrived in the Lone Star State. After a sharp decline that began during 2001, followed by several years of cautious optimism, the outlook for Texas in 2005 is positive, with economists and state leaders expecting to see continued improvement.

But while an improving commercial market is on the state's horizon, the rate of growth is predicted to be slow-but steady.

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"The Texas economy has been through a tough couple of years, with 2002 and 2003 marking the first time in 15 years that employment declined in the state," said Kim Kennedy, manager of forecasting for McGraw-Hill Construction/Dodge Analytics.

"But the economy is now on the rebound as jobs have grown by 69,000 in the first 10 months of 2004 compared to the same period of 2003. In fact, the trough in employment occurred in January 2004, and this economy has produced an additional 234,000 jobs during the first 10 months of 2004."

According to Gov. Rick Perry, Texas attracted nine of the 20 largest capital investments in the nation in 2003, including the new $800 million Toyota manufacturing plant in San Antonio, which broke ground in March 2004.

A key factor in Texas' job-creation success is the $295 million Texas Enterprise Fund, which has attracted nearly 14,000 new jobs and close to $6 billion in capital investments, according to the governor's office.

Under the legislation establishing the TEF in 2003, Perry, Lt. Gov. David Dewhurst and Speaker of the House Tom Craddick must agree to fund a project. Working together, the three state leaders have approved funding job creation in several sectors, including aviation, agriculture, high-tech, biomedical, tourism and data processing.

To date, the fund has been used to attract the relocation or expansion of 13 companies or higher-education institutions. Several other job-creation prospects are under review. The TEF has been so successful that Texas boasted the largest job-creation announcement in the nation in 2003 with the $3 billion Texas Instruments wafer-fabrication plant expansion. The new, 1 million-sq.-ft. research and manufacturing plant broke ground in Richardson in November. Austin Commercial Ltd. is the general contractor for the plant, which will employ about 1,000 workers.

Another TEF project is a $50 million investment to enhance engineering and computer science programs at the University of Texas at Dallas, which played a key role in Texas Instruments' decision to build its new manufacturing plant in Richardson.

Centex Construction Corp. of Dallas broke ground on UTD's new $85 million Natural Science and Engineering Research Building in November. The facility, designed by Dallas-based PageSutherlandPage, is expected to add momentum to UTD's drive to become one of the nation's "Tier One" academic research institutions.

Kennedy said that, ironically, better economic times will bring slower growth, but not a decline, to the Texas construction sector in 2005, largely due to rising mortgage rates that will slow the state's housing sector. While McGraw-Hill predicts that residential construction and single-family housing in general will slow, apartment construction numbers are expected to rise by double digits.

"What will save construction from decline in the state is a rebound in commercial construction," Kennedy said.

Texas Comptroller Carole Keeton Strayhorn agreed. The comptroller's Fall 2004 Texas Economic Forecast pointed to national economic developments in predicting that the state's economy will continue to grow at a healthy rate, but at a slower pace than previously forecasted. In its Biennial Revenue Estimate, the comptroller's office predicted that Texas nonresidential construction activity in 2004 and 2005 would gradually increase as excess inventories of office and other commercial space decline. The report added that Texas nonresidential construction put-in-place annually more than tripled during the office, retail and other commercial building boom between 1990 and 2001, jumping from 52.1 million sq. ft. to 167.9 million sq. ft. As vacancy rates soared and rents fell in 2002, however, nonresidential construction began to fall sharply. Despite anticipated gains, nonresidential construction put-in-place is expected to reach only 145.4 million sq. ft. in fiscal 2005-13 percent below the 2001 peak.

While delays in passage of federal highway legislation may stall some project starts around the nation, the Texas Department of Transportation will continue to implement new public-private partnerships to expedite road projects such as the $1.5 billion State Highway 130. (For more information on the state's highway forecast and the biggest highway projects under way in the state see the "2005 TxDOT Forecast and the Top Highway Projects report)

Meanwhile, the state is in the process of implementing new "industry cluster initiatives" designed to foster growth in six high-tech industries.

"We will have a coordinated, market-driven economic development strategy that focuses on areas where we have the greatest growth potential and on fostering that potential," Perry said in announcing the new long-term, strategic job-creation plan in October.

The Texas Workforce Commission, working in conjunction with Harvard economist Michael Porter and Waco-based economist Ray Perryman, identified six industry clusters as having unlimited potential for the state's future: advanced technologies and manufacturing, aerospace and defense, biotechnology and life sciences, information and computer technology, petroleum refining and chemical products, and energy.

McGraw-Hill predicts gains in 2005 in the majority of the state's identified industry clusters with overall commercial and industrial construction starts up 17 percent.

"After several years of declines due to the dot-com failures and the recession, this sector will provide the strongest growth opportunities of 2005," Kennedy said.

Institutional construction is expected to remain steady in 2005, with some sectors declining slightly while others grow. Educational building may see a mild 1 percent decline. Health care, public buildings and amusement, however, will each grow by impressive double-digit gains with construction starts predicted to be up in each sector by 23 percent, 30 percent and 18 percent, respectively.

Public works and utilities are seen as the state's only weak sector with a downturn in 2005 of 8 percent probable.

"After some very strong years behind us, engineering construction will take a slide," Kennedy said. She added that easing housing starts will stall growth for water and sewer projects as well.

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