San Antonio – 2017 Economic Forecast: Resilient

 San Antonio – 2017 Economic Forecast: Resilient

The San Antonio economy has become more diversified since the military base shutdowns in the early 21st century, and that’s a positive for the area. But it’s not without its challenges, as speakers at the San Antonio Economic Forecast pointed out.

The event, sponsored by Texas CEO Magazine and the University of Texas at San Antonio College of Business, brought together representatives of five key areas in the local economy: economist Tom Tunstall of UTSA; Kim Lubel, the chairman and CEO of CST Brands; Ed Cross, the CEO of San Antonio Commercial Advisors; Lanham Napier, the founder of BuildGroup; and Adam Hamilton, the president of the Southwest Research Institute.

Regional Economy

“We are seeing growth, but not stellar growth,” Tunstall said as he gave an overview of the area. San Antonio’s diversified economy has led to a growth in overall employment, Tunstall said, with modest growth in most industries, despite the downturn in oil and gas. “Specific industries of semi-conductor, communication equipment and computer equipment are trending down with regards to employment,” he added. “That’s because they have become much more efficient.” Overall, though, non-farm employment is still relatively high.

Retail/Convenience Stores

One component of that is retail, especially in the convenience store space. Kim Lubel said her business is fairly recession proof. “Even in poor economic times, people come in for a candy bar and a gallon of milk,” she said. “There is always demand for fuel. We stay steady in both good times and in bad times.”

But that steadiness leads to the biggest challenge in the c-store space — competition. “There are not many sectors where the thing you sell the most of is on the corner of your lot, so because we all price at the street level, it depends on who is across the street from you,” she said. And their competitors are not just other convenience stores. Lubel said her stores also compete with Walgreen’s, CVS, Dollar General and Costco. A low barrier to entry—all that’s required is an acre or two of land and $4 million to build a store — adds to the field’s competitiveness. “For many folks without a college degree, running a c-store is a path toward management,” she said. “It is an industry where there are opportunities that you won’t find elsewhere.”

Competition for real estate is heated, too, as the same corners that are great for convenience stores are also good for banks and drug stores. But the healthy economy has enabled CST (the Corner Store) to expand by 100 stores since it spun off from Valero in 2013, with another 24 stores to be built in Texas before the end of the year.

However, the convenience store industry is facing some other challenges, one of which is wage pressure. The turnover of employees at CST stores is about 150 percent. “That is far too high for me,” Lubel said. In addition, the Fair Labor Standards Act, which takes effect on December 1, raises the minimum salary to be exempt from overtime to $47,000. “It’s a $500,000 to $7 million impact annually for us to comply with the new rules,” Lubel said.

Another expense area is the Affordable Care Act. CST cancelled its previous insurance plan for employees and complied with the act early on. But their costs rose by $3 to $4 million, and they expect another $2 million increase next year. “As employers, not only are we paying more for benefits, but the employees are having to pay more, as well,” Lubel said. “This is very difficult.”

One threat facing convenience stores is tied to the fuel they sell. Cars are becoming more fuel efficient, which means fewer trips to the gas pumps. Lubel says customers will have to come into the stores for other things, such as grocery items and made-to-order pizzas, salads and sandwiches, and food to take home for dinner. “We’re looking for ways to bring you into the store every day, even if you only need to stop for fuel every two weeks,” she said.

Part of the fuel efficiency of cars comes from electric vehicles. “It does make you look at your store differently,” Lubel said. “Do we have enough space to put in a charging station outside?” And if so, what will people do in the store for 15 to 20 minutes while the car is charging?

“This business is not for the faint of heart,” she said. But she sees good long-term prospects. “When you think about it,” she concluded, “you still can’t get a cup of coffee or a gallon of gas over the internet.”

Commercial Real Estate

In real estate, the last five years in San Antonio have been the best ever, according to Ed Cross of San Antonio Commercial Advisors. Commercial office space is up eight percent, to 2.2 million square feet; market rents are up 14 percent and industrial real estate inventory has grown 20 percent. Both apartment inventory and rent have climbed 19 percent over those five years.

But Cross focused on what he called the “quiet developments” such as industrial real estate. He said a big warehouse used to be about 200,000 square feet. But now, Dollar General has a one million square foot building; O’Reilly Auto Parts has a 500,000 square foot building in Schertz; and Carrier, which built a 500,000 square foot building a few years ago, is now building an 800,000 square foot national distribution center right next door. “No matter where you live, you’re going to get your commercial air conditioner from San Antonio,” Cross said.

The other development is that San Antonio has become a data center hub. Cross categorized data centers as “boxes filled with servers.” Their size is measured in megawatts of power usage. The cloud computing company Rackspace used to use two megawatts. But Cross said he recently helped with a couple of deals that would use 16 to 24 megawatts. Microsoft has three data centers in San Antonio, using 48 megawatts, and will soon build the fifth largest data center in the world in the Texas Research Park. It will cover 1.2 million square feet and use 160 megawatts. That’s $300 million in real estate, and the computers it houses will easily cost $1 billion, Cross said.

Why has San Antonio become a hub for data centers? Partly, it’s a lack of catastrophic weather events, such as tornadoes, hurricanes and earthquakes, Cross said. “Also, our power is cheap and it’s green,” he added. He said Microsoft put green power at the top of their list of requirements, and San Antonio’s CPS Energy has lots of solar and wind power.

Since 2008, Cross said, retail development has fallen 75 percent nationally, but there are some notable projects. “Amazon has done four transactions for facilities in San Antonio,” he said. “They did a big building in Schertz four years ago, then finished one in San Marcos that will open in time for Christmas, and they have done two more facilities here that have been very quiet.”

As far as risks in real estate, Cross said it all comes down to interest rates. He showed a chart highlighting the 10-year Treasury rate since its peak in 1980. “The wind has been at our back in the real estate business ever since,” he said. But he thinks we’ve hit the bottom, and it’s hard to predict what rates will do in the future. “If you ask me, ‘What’s the future of real estate,’” he said, “I’m going to ask you, ‘What’s the interest rate?’”

Venture Capital

BuildGroup’s Lanham Napier said the venture capital business is “smokin’ hot,” but that poses a potential problem. He compared the present to the Silicon Valley boom time around 2000, when companies with no revenue or profit were valued at over a billion dollars. “We are living in that time,” he said. “Dot com, dot bomb — we’re back.”

The ones who benefit from the venture capital market are the venture capitalists themselves, Napier said. “People who are at risk are the everyday investors who are not playing inside baseball, along with the founders, entrepreneurs and employees of the companies who are holding the common stock,” he added.

And when venture capital’s asset allocation and asset performance are measured, Napier said it’s not a very good deal. “If you look at the long term returns of venture capital, it’s like 9 percent,” he said. “If you look at the S&P 500 returns over the last 90 years, it’s about nine percent. What that tells you is, VC’s are great marketers and sometimes it works.”

But the VC market in Texas, according to Napier, is “lame.” He said we’re just bouncing along. “We tend to cruise between $200 million to $400 million a quarter in Texas,” he said. “The deal size tends to be in the single digit millions.” California VC deals, he said, are four to five times the size of Texas deals.

In Texas, said Napier, the center of the VC industry is in Austin. But the largest Austin-based venture capital firm, Austin Ventures, no longer exists. “What happens in Austin,” he said, “is when your company gets above $20 million in sales, the investors from the coasts will descend on you.”

So, what is the future of VC in Texas? Napier said there are VC companies that want to set up shop in Austin, and he thinks that will happen, but they don’t have enough funding yet. A bigger problem, he said, is that ambition in Texas is not high enough. “Most of the entrepreneurs I talk with are very happy if they can sell their company for $15 million and head for the lake,” he said. “I feel like we sell out way too early in Texas in the software business and that people don’t want to go the distance. To me, that’s anti-Texan.”

He urged entrepreneurs to take a long-term view of success — a 12- to15-year growth period instead of 3 to 4 years — and to keep creating jobs and putting their profits back into their companies. “Then, you’ll break through some of these barriers,” he said.

Life Sciences and BioTech

Adam Hamilton of the Southwest Research Institute said the biotech, life sciences and health care industry is one of the three largest segments of San Antonio’s economy, and it could have a bright future if we take the right actions.

The Southwest Research Institute (SwRI) is a 501(c)3 non-profit, with 240 buildings spread over 1,200 acres. In 2015, it did $592 million in funded research. In the life sciences, SwRI is focused on wound care, micro- and nano-encapsulation, computer modeling to design new drugs before they go to clinical trials, stem cell research and clinical manufacturing.

Hamilton said the life sciences could work with other components of the San Antonio economy, such as cybersecurity, cyber technology and information technology. “Today, you can now get your whole genetic code sequenced for about $700,” he said. “And soon, it will be an everyday diagnostic. Can you imagine the amount of data this will create? Somebody has to store it, somebody has to secure it, somebody has to be able to weed through it and analyze it.” Hamilton suggested that, if the life sciences industry collaborates with information technology and cybersecurity, it could pursue interesting new markets.

He tipped his hat to collaboration that is already going on between four San Antonio institutions: the University of Texas Health Science Center San Antonio, UTSA, the Texas BioMedical Research Institute and the Southwest Research Institute. “There is no better model of collaboration than these four have, and we’re adding others,” he said.

Hamilton said San Antonio’s majority Hispanic demographic provides a great opportunity for research. Hispanics are about 66 percent of the population in the San Antonio area, he said, and the city has most of the sub-demographics within the Hispanic genome. “We have the opportunity to study genetic-related diseases in this particular community, which is going to become more important and more critical in the years to come,” he said.

In fact, Hamilton sees the opportunity for San Antonio to become a gateway city to the Hispanic world in life science, biotech and health care. “A gateway to Latin America, a gateway to Spanish-speaking nations around the world, providing access to a health care, life sciences and biotech that are advancing on either coast,” he said.

To do that, San Antonio has to overcome a weakness in transportation. “The airport folks are working on this to get more direct flights to San Antonio,” Hamilton said. Another weakness is a lack of civic investment in biotech. “The organizations that are here, have done it on their own,” he said. He also cited a lack of local philanthropy. “We do have local philanthropists, but a lot of those dollars leave San Antonio,” he said.

Hamilton sees the lack of a top-tier research university as a threat to the life sciences and biotech industries, as well as what he called “bi-coastal momentum.” Hamilton said the East Coast and West Coast have the eight best cities for biotech jobs. “We’re fighting that all the time,” he added, and the city’s affordable housing is a draw for talent to come to San Antonio.

Hamilton outlined some strategies for growth. First, each of the institutions must continue to grow organically, but must more aggressively pursue business development efforts together. The life science, bioscience and health care industries are working with the Chamber of Commerce on a “G3” initiative — good to great to global. “The accelerated techniques we’re looking at are: how do we buy into it?” he said. “How do we recruit experts and have them come to San Antonio? How do we have incremental growth through acquisitions and other business models?”

There is optimism for the future, he concluded, “But we have to act.”

Q&A

Dean Gerry Sanders asked the panel about their higher education needs for businesses over the next 20 years.

“There has been a lot of discussion about STEM — science, technology, engineering and math,” Napier said. “Within the high tech and software world, I think what’s going to drive the future are cognitive analysis, so artificial intelligence technologies applied to large data sets. So the data science that comes out of that really matters.”

Lubel said she is looking for people with business degrees. “We have a hard time sourcing managers and we look for leadership skills and the ability to collaborate with a team,” she said. Then, we look for the written and verbal skills required to communicate effectively.

“STEM education is great,” Hamilton said, “but what we also need is a cultural change. We have to not only reach the kids, but we also need to reach the parents and influence them to encourage STEM education.”

Another questioner asked what is the greatest opportunity for growth in San Antonio.

“We are heading toward a winner-take-all world across lots of industries,” Napier said. “Where is the number one financial center in the U.S? It’s New York City. Who’s the number one energy city? It’s Houston. I don’t know what it will be for San Antonio.” He said San Antonio has the blessing of being diversified, but a diversified economy has no number one. “We are still as a city trying to discover what’s going to make us number one, that will create 100,000 jobs,” he said.

Thank You to Our 2016 Speaker Series Sponsors:

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