Houston Economic Overview
Economic Overview

Houston, Texas is among the fastest-growing and most diverse metropolitan statistical areas (“MSA”) in the country. Thriving on consistent and national-leading population growth, affordable costs of living and business, a young and well-educated workforce and a resilient energy industry, Houston has fared the global recession better than several of the nation’s largest employment bases. Like the rest of the country before it, Houston has indeed suffered some effects of the recession. However, many experts have projected Houston will prove leader in employment growth and economic expansion in the recovery – the dawning of which many believe is already underway.

Houston has also emerged as a major center for international business. Twenty-eight Fortune 500 companies as well as multi-national and domestic companies maintain operations in the region. With such a presence, Houston ranked second among all US metros in the number of Fortune 500 companies having headquarters or divisional headquarters in the city. ExxonMobil (#1), ConocoPhillips (#2), Marathon Oil (#5), Sysco (#7), Enterprise GP Holdings (#65), Plains All American Pipeline (#79), Halliburton (#141), Anadarko Petroleum (#162), Continental Airlines (#167), National Oilwell Varco (#200), Waste Management (#201), Reliant Energy (#214), Apache (#217), Knight (#223), Baker Hughes (#227), KBR (#234), CenterPoint Energy (#238) and Smith International (#250) comprise the Houston companies within the top 250 overall, each spanning various industries including energy, food distribution, airline, waste and shipping industries.

HOUSING CONSTRUCTION & AFFORDABILITY

The Houston MSA and the state of Texas have been of the strongest single-family and multi-housing residential markets in the country since 1990. Having avoided the precipitous rise and regression in housing values experienced elsewhere in the country, housing in Houston and in Texas has remained affordable for the majority of its residents, providing perhaps the state’s greatest defense mechanism against the national recession and its most stable foundation for growth in the future. Houston has proven the most housing-affordable, high-growth MSA in the nation. According to the Council For Community & Economic Research, Houston’s median priced home was $213,864 at the end of the third quarter 2009, 28.4% less expensive than the national median of $299,023. Houston routinely ranks among the least expensive metropolitan areas in which to live in large part because of the area’s low housing costs, a function of strong housing construction. Tighter lending standards in recent years have caused single-family permits to drop in recent years. In fact, Moody’s estimates that single-family starts declined to just over 28,000 in 2008 followed by a further decline to approximately 22,000 in 2009 – a 60% drop from a record high 55,000+ in 2006. The bulk of the falloff has taken place in the sub-$175,000 range. Single-family starts are expected to rebound in 2010 and rebound significantly thereafter, more than doubling by 2013.

POPULATION GROWTH

Texas is the second most populous state in the United States with an estimated 2009 population of 24.7 million residents – following only California’s 36.9 million residents. Texas gained more people than any other state in 2009, adding 478,012 new citizens. Over the past decade, those seeking employment opportunities and a more affordable lifestyle flocking to Texas accounted for the addition of 3.93 million new residents for the state – more than 27.0% ahead of runner-up California, which added 3.09 million in the same time period. Texas has exhibited this level of growth due to broad expansion within several population centers at both the MSA and county level. The last year of population growth proved particularly robust as Texas boasted 8 of the nation’s 50 fastest growing MSA’s from 2007 to 2008. Dallas-Fort Worth-Arlington (#1), Houston-Sugar Land- Baytown (#2), Austin-Round Rock (#5) and San Antonio (#9) all finished within the top ten, combining to account for 383,253 new residents. Growth within these MSA’s was so particularly strong they represented a disproportionate 28.1% of the 1,360,432 new residents the top 50 MSA’s gained in that time period. Counties being located within the borders of those four MSA’s also performed well from 2007 to 2008, as ten of the country’s 25 fastest growing counties were located in Texas. Harris County (Houston MSA) was the second fastest growing county nationwide, adding 72,153 new residents in that time period. Tarrant County (Dallas-Forth Worth MSA) finished fifth adding 40,842 new residents and Bexar County (San Antonio MSA) finished tenth adding 32,753 new residents. Combined, these three counties accounted for 30% of growth within the nation’s top ten counties in population growth from 2007 to 2008. Demonstrating the likelihood of Texas’ continued growth in population, Moody’s Economy.com predicts Texas cities will comprise four of the top ten in terms of absolute population growth from 2008 to 2013. The City of Houston (not the ten county MSA, the City) is anticipated to gain more than 600,000 new citizens in that time period, or more than 100,000 per year.


EMPLOYMENT GROWTH

In the decade ended 2009, Houston created 233,100 jobs. The years 2005 (83,800 jobs), 2006 (105,800 jobs) and 2007 (87,000 jobs) were particularly robust for Houston. While the city marked a considerable deceleration in 2008, adding only 22,500 new jobs, Houston still proved a national leader even at this level. The year 2009 proved formidable for all of Texas’ major markets, including Houston. For the twelve months ending December 2009, Houston lost 92,500 jobs. However, in the last three months of 2009, Houston created 15,600 jobs – perhap
s effecting stabilization in the local employment market. Still, Houston is expected to remain a top performer relative to other MSA’s nationwide in the long-term. According to Moody’s Economy.com, not only will the City of Houston rank first in the nation in job growth between 2008 and 2013 (221,800 jobs), but Texas will boast five of the top ten cities nationally in job creation.

Mirroring the nation’s economy, Houston’s Health & Educational Services sector was the fastest growing in 2009, adding 6,700 jobs or expanding by 2.31%. Meanwhile Houston’s Government also proved recession-resistant, adding 5,200 jobs or 1.41%. Also mimicking the national job market, each the Construction (-25,500, -12.51%) and Manufacturing (-19,100, -7.82%) sectors experienced significant contraction on reduced demand for development and consumer goods. Together, these two super sectors accounted for nearly 50% of Houston’s job losses in 2009. The MSA’s ability to limit its majority of job losses to the Construction and Manufacturing sectors is a credit to the city’s ability to diversify its economic base.

ECONOMIC BASE DIVERSIFICATION

Since 1986, Houston’s economic base has diversified dramatically, sharply decreasing its dependence on the energy sector. Today, Houston’s economic base can be categorized into three main sectors: Upstream energy (oil/gas exploration, oilfield equipment manufacturing, and pipeline transportation) – 35.3%; downstream energy (refining and chemical manufacturing) – 15.5%; and diversifying, or energy-insensitive, sectors – 49.2%. The substantial structural alteration in Houston’s economy over the past 25 years has reduced Houston’s vulnerability to fluctuations in the energy sector, which nonetheless continues to influence Houston more than it does the nation as a whole. Upstream energy grew 5.3% in the twelve month period ending January 2009 (latest data available). Downstream energy contracted 0.3% in the same time period while diversifying or energy-insensitive sectors grew 1.4%. Since 1986, the energy-insensitive portion of Houston’s economic base has grown at a compound annual rate of 5.9%. Diversifying sectors have accounted for 71.0% of net job growth in the Houston region since 1986. Today, upstream sectors represent just over a third of Houston’s economic base jobs, versus more than two-thirds before the recession of the 1980s and still more than half at the bottom of that recession in 1987. Energy-insensitive sectors, which were less than a quarter of base employment in 1986, have since more than doubled as a percentage of Houston’s total. The Houston MSA currently has a non-farm employment base of over 2.6 million–more than the states of Colorado, Alabama and Louisiana. Houston’s workforce is employed in industries with strong long-term growth prospects, including energy, chemicals, engineering, information technology, aerospace/space sciences, medicine/life sciences, transportation, trade, utilities and education.

ENERGY

As the domestic and international center for virtually every segment of the petroleum and natural gas industries, Houston is known as the “Energy Capitol of the World.” Forty-three of the nation’s 144 publicly traded oil and gas exploration and production firms, including ten of the top 25, are headquartered in Houston; six of the remaining 15 have subsidiaries, major divisions or other significant operations in Houston. Fifteen of the nation’s top 20 natural gas transmission companies have corporate or divisional headquarters in Houston, controlling 79.5% of US capacity. In total, the Houston MSA has more than 3,000 energy-related establishments, including more than 500 exploration and production firms, more than 150 pipeline transportation establishments and hundreds of manufacturers and wholesalers of energy-sector products. Forty-eight percent of the region’s economic base – those sectors of the local economy that export goods and services outside the region – is related to energy. This concentration of expertise and experience has meant a large number of relocations to Houston in recent years, including:

  • Citgo moved its base of operations from Tulsa, Oklahoma;
  • Schlumberger relocated its corporate headquarters from New York;
  • Parker Drilling relocated its headquarters from Tulsa;
  • ConocoPhillips chose Houston as headquarters for their merged companies;
  • Sonangol, Angola’s national oil company, located its US headquarters here;
  • TotalFina relocated its US headquarters from Dallas to Houston.

In July 2008 (latest data available), the Houston MSA had 28.9% of the nation’s jobs in crude petroleum and natural gas extraction (47,000 of 162,800) and 13.2% of jobs in support activities for mining (42,900 of 325,400). The Texas Gulf Coast has a crude operable capacity of 4.081 million barrels of refined petroleum products per calendar day. This corresponds to 85.9% of the Texas total and 23.2% of the national total. Worldwide recognition of Houston’s preeminence in the energy industry continually brings foreign companies to Houston. The city has an enormous infrastructure, encouraging foreign firms to develop equipment, expertise and business. Changes in the structure of the industry have led oil and gas firms to develop new ways to capitalize on skills, international contacts and expertise. Accordingly, Houston has become a center for these new energy ventures.

PETROCHEMICAL/CHEMICAL MANUFACTURING

Houston is one of the largest manufacturing centers for petrochemicals–the basic building blocks for producing thousands of consumer goods and products. Whether it is plastic soft drink bottles and disposable diapers or highly engineered automobile body parts and medical equipment, much of today’s modern economy is built from petrochemical-based products that were manufactured in Houston or along the upper Texas Gulf Coast. With more than 413 chemical plants employing nearly 33,100 people, the Houston-Gulf Coast region has 40.8% of the nation’s base petrochemical capacity. According to the Port of Houston, the $15 billion petrochemical complex that lines the Houston Ship Channel is the world’s tenth largest in terms of tonnage. The chemical facilities in the Houston area provide an ample and easily accessible supply of raw materials to manufacturers – local, out-of-state, and overseas.

One of Houston’s advantages as a center of the petrochemical industry is its allowing companies to capitalize on the synergies created by the existence of both internal and external suppliers and customers within one geographic area. Integrated oil companies take advantage of these markets and encompass all operations from finding and producing oil and natural gas to transporting it into fuels or petrochemicals and marketing products–either as intermediates that other companies use to make final products or for retail sale directly to consumers. Successful integration combines these operations in the most efficient manner, reducing the cost of processing, streamlining the transportation links between various stages, and choosing the processing direction that realizes the greatest value from each hydrocarbon molecule. Houston enables companies such as BP America, ExxonMobil, and Shell to more closely link their upstream activities with their downstream operations. In addition to being a major petrochemical manufacturing center, Houston is home to a number of research and development labs for the chemical industry. ExxonMobil, Shell Oil, and Cameron are just a few of the many corporations that maintain state-of-the-art research facilities in the Houston area.

ENGINEERING

Houston is a dominant presence on the engineering scene. According to a recent Engineering New-Record report, 23 of the nation’s 25 largest engineering and design firms maintain offices in Houston. And of the nation’s 20 largest engineering and design firms, more than 41,000 of their employees are located here. The city has more than 77,500 engineers and architects of all disciplines, the most numerous being civil, aerospace, chemical, electrical/electronic, and petroleum. In all there are more than 2,700 engineering and architectural firms in the Houston area. The design, engineering, and construction of large projects are clearly major industries in Houston. Engineering and construction companies provide and supervise staff on a contract basis to design and build projects all over the world. These projects range from factories, office and other buildings, power plants, and water or sewer systems to roads, airports, hazardous waste facilities, and petrochemical plants. The most important market for Houston engineering companies is one of the world’s largest–building and upgrading chemical and fertilizer plants, oil refineries, and other continuous-process industrial facilities. In many cases, engineering work has shifted to Houston because of the degree of engineering specialization in the city, as well as a lower cost of doing business. Compared with its chief competitors in this field–Boston, Philadelphia, Los Angeles, and San Francisco–Houston offers a strong talent pool with much cheaper labor and occupancy costs.

Although low costs help Houston compete, there are several additional factors providing a cohesive atmosphere, enticing engineering firms to Houston. First, Houston is the focal point for new technologies in the design and construction of petrochemical facilities. To ensure involvement and proximity to these advances, design and engineering firms must be located in Houston. Second, many of the industry’s best customers–major chemical companies and integrated oil companies–are located in Houston. Third, the area’s large number of engineers provides a deep employment base of skilled employees.

AEROSPACE/SPACE SCIENCE

NASA’s Johnson Space Center (“JSC”) is a $1.5 billion, 1,620 acre complex located approximately 25 miles southeast of Houston’s central business district. One of NASA’s largest research and development facilities, JSC employs a civil workforce of some 3,400 people, the majority of whom are professional engineers and scientists. Additionally, approximately 50 companies provide more than 13,000 contractor personnel to JSC, who work onsite or nearby. JSC manages the design, development and assembly of the International Space Station; manages the Space Shuttle program; serves as NASA’s lead center for life sciences research and application; selects and trains astronauts; controls manned space flights; directs industrial efforts to design, develop, build and upgrade piloted space craft; and oversees many medical, scientific and engineering experiments conducted aboard the space shuttle. JSC Mission Control’s recently-expanded facilities now include the International Space Station Flight Control Room, a Training Flight Control Room used to practice simulated spaceflights, a Life Sciences Control Room used to oversee various experiments, and an Exploration Planning Operations Center used to test new concepts for operations beyond low-Earth orbit. NASA selected Lockheed Martin Corporation as the prime contractor to design, develop and build Orion, the new generation crew exploration vehicle. Manufacturing of Orion will take place in Texas in addition to several other states in the southwest, with an anticipated completion date of 2014. JSC plays a central role in NASA’s program for the commercialization of space technology, including:

  • The National Space Biomedical Research Institute established by NASA and led by Baylor College of Medicine, is a consortium of academic and research facilities. It conducts biomedical research to support human development of space and fosters technology transfer to the private sector.
  • The Mid-Continent Tech Transfer Center, based at Texas A&M University, is one of six NASA Regional Technology Transfer Centers. The center helps businesses identify and implement technological innovations from NASA and other federal labs.
MEDICINE/LIFE SCIENCES/BIOTECHNOLOGY

Houston’s vast network of renowned hospitals, institutions, and specialty treatment centers has consistently ranked among the worlds best for patient care, treatment, and research. Accordingly, patients travel from all parts of the world seeking its finest medical care. From innovative cancer treatments to new therapies for diabetes, revolutionary advancements are being honed here that set the stage for a new generation of medical care. Houston’s medical strength is cultivated at the Texas Medical Center (“TMC”), ranked as the world’s largest medical complex by several criteria including total acreage (1,000+), patient visits (5.5 million in 2008) and its impact on its local economy. The TMC’s 47 member institutions directly employ more than 75,000 people and indirectly supports another 80,000 jobs outside its borders. Proving one of the largest economic engines powering Houston’s financial health, the TMC is responsible for the direct and indirect expenditure of $3.86 billion for the immediate area, allowing immediate and regional businesses to gain from its synergy. Moreover, $9.2 billion in cumulative capital has been invested in the TMC, creating jobs in several fields including construction, research and development, treatment and diagnostics.

Houston has the largest concentration of researchers, physicians and medical professionals in the world. The medical center–home to seven general care hospitals, six specialty hospitals, two medical schools, four nursing schools, a dental school, a public health school, two colleges of pharmacy, various health science programs, and a magnet high school–is in the midst of expanding from 22 million square feet in 2000 to 32 million square feet by the end of 2009, creating 50% more jobs within the TMC’s borders. While its “city within a city” size and capabilities are impressive, so are its links to other industries, all in the name of medical advancement. A major emerging industry in Houston is biomedical research, spawned by the leading academic institutions in the TMC. One indicator of the medical center’s prominence is the fact that its institutions have received more than $5.0 billion in research grants over the past five years. Some prestigious TMC institutions conducting biomedical technology transfer include:

  • Baylor College of Medicine – ranked number one on the National Science Foundation list of leading universities and colleges for research expenditures in biological sciences. U.S. News & World Report has ranked the College 10th overall among the nation’s top medical schools for research and 11th for primary care
  • U.S. News & World Reports ranked M.D. Anderson as the nation’s top cancer hospital. The hospital has been ranked in the top two since the survey’s inception in 1990. M. D. Anderson has ranked number one five times in the last seven years.
  • The University of Texas Health Science Center at Houston – oversees six schools and Nobel Laureate Dr. Ferid Murad leads the Institute of Molecular Medicine.
  • Texas A&M University’s Institute of Biosciences and Technology – links America’s largest agricultural university with America’s largest medical center. Its interdisciplinary research focuses include animal biotechnology, animal genetics, arthritis and bone diseases, cancer biology and nutrition, and biotechnology policy and ethics.
  • Texas Heart Institute at St. Luke’s Episcopal Hospital – is the largest cardiovascular center in the world and a leading developer, manufacturer, and marketer of medical products designed to assist or replace the pumping function of the heart.

These institutions, along with the Houston Technology Center and BioHouston, a non-profit biotechnology center composed of leaders in life sciences, business, and government, are providing steadfast support in helping researchers and start-up companies market new therapies. Clearly, Houston has emerged as a global center for the life sciences.

TRADE, DISTRIBUTION & TRANSPORTATION

Houston’s strong transportation infrastructure makes it a logical location not only for corporate offices but for distribution centers as well. The region offers the Southwest’s most extensive freeway and toll road system, the second largest port in the country, three other regional ports, the fourth largest airport system, and two major rail systems. Houston’s location in the south central United States places it equidistant from the east and west coasts–and a natural launching point to Mexico and Central and South America. Without question, Houston offers one of the most efficient, intermodal transportation systems in the United States.

Infrastructure
Houston is the hub of a major trucking network for the United States, aided by an extensive highway network. The city’s most heavily trafficked highways are US Interstate 10 and US Interstate 45, which intersect at Houston’s central business district. Houston’s other major highways include US Highway 59, US Highway 90, US Highway 290, State Highway 249, State Highway 288, State Highway 225 and the Hardy Toll Road. In addition, Houston has four concentric loops which include an elevated system encircling the Central Business District, US Interstate 610 (a 38.3-mile facility at a radius of six miles from the CBD), Beltway 8/Sam Houston Tollway (an 88-mile facility at a 12- mile radius from the CBD), and the Grand Parkway (a 172-mile facility at a radius of 25-30 miles from the CBD). Approximately 735 longdistance truck lines operate in Houston, including special-commodity irregular carriers (such as oilfield equipment haulers, tank truck lines, and household carriers) and common carriers, which operate daily scheduled service between Houston and other major US cities. For local movement, more than 200 firms offer delivery services. Houston’s trucking industry is well integrated with the Houston Airport System, the Port of Houston, and the mainline railroads serving the area.

Houston Airport System
The Houston Airport System is the fourth largest airport system in the United States and the sixth largest in the world, according to the Airports Council International. George Bush Intercontinental Airport/Houston (IAH) is located on the north side of Houston near the intersections of US Interstate 45, the Hardy Toll Road, Beltway 8 and US Highway 59. William P. Hobby Airport and Ellington Field are located in the southeast sector of Houston near NASA’s Johnson Space Center, along US Interstate 45, equidistant between US Interstate 610 and Beltway 8. Together, these three airports constitute one of the world’s most accessible airport systems. The Houston Airport System served more than 50 million passengers in 2009. Passenger aircraft as well as dedicated scheduled and chartered air cargo freighters fly to 120 domestic and more than 70 international destinations from Houston. To meet the increasing aviation demands of the Houston community, the Houston Airport System initiated a $2.7 billion program that includes numerous airport improvement projects that range from terminal expansions to parking improvements, cargo expansion, apron extensions, and a variety of field improvements.

Port of Houston & Houston Ship Channel
Waterborne cargo services are available to and from every corner of the world from the ports of Houston, Galveston, Freeport, and Texas City, which offer Houston area businesses easy access to the sea lanes of the world. In addition to a wide selection of ship services, low-cost barge transportation is available via the Gulf of Mexico or on the 1,300 mile IntraCoastal Waterway, which links the Houston region with more than 14,000 miles of commercially navigable waterways in the mid-continent regions of the Mississippi River and its tributary system. The Port of Houston alone is the world’s tenth largest port and ranked first among national ports in volume of foreign tonnage and second in total tonnage. A 25-mile complex of diversified public and private facilities, the port includes more than 100 wharves. The Houston Ship Channel, a 52-mile inland waterway, connects Houston with markets throughout the world. In 2008, the Port generated over $180 million in operating revenue, an all time high. Over 1.5 million containers were received and shipping in the same time period, also an all time high. Also, an estimated 150,000 barges travel along the Houston Ship Channel each year.

Rail Capacity
Houston is one of the nation’s busiest rail centers with more than 700,000 rail cars arriving in and departing from the port city each year. Two major rail systems operate more than 80,000 miles of track in the Midwest and Western United States. Mainline railroads in the region are Burlington Northern Santa Fe and Union Pacific – two of the largest rail networks in North America. Rail service is available to all Port of Houston Authority facilities as well as more than 150 industries along the Houston Ship Channel. The rail system is further integrated with the local trucking industry via six intermodal terminals, the local highway system (which includes three interstate routes), Houston’s three major airports (all with rail facilities nearby), and the barge system on the Gulf Intracoastal Waterway.

Investments
Ongoing investments in the region’s infrastructure will further increase Houston’s access to the nation and the world. Some of these investments include:

  • The region’s massive freeway and thoroughfare system continues a construction program that has added an average of $1 billion annually over the past 15 years.
  • In 2004, the Metropolitan Transit Authority of Harris County (METRO) opened its 7.5 mile light-rail line linking downtown with three major universities, museums, and cultural centers, the TMC and Reliant Park. Future lines will extend to Houston’s airports and employment centers and encompass more than 72 miles of service.
  • The Texas Department of Transportation (TxDOT) has approximately 145 Texas highway projects – representing $2.2 billion in funding – designated for the Interstate 69 corridor. The proposed trade route stretches from Canada to Mexico and includes the Houston region. Currently, construction is taking place in Fort Bend, Harris, and Montgomery counties.
  • The Port of Houston Authority is currently in the final stages of building the $1.6 billion Bayport Terminal for container ships, increasing the PHA’s existing container capacity by over 100%. A $385 million Harris County bond will partially fund the facility. The first phase of new terminal has already opened and is receiving shipments. Upon completion, the Bayport Terminal is expected to handle 2.3 million containers annually and will also serve as a new cruise ship terminal.
  • The Port, with the assistance of the federal government, is widening and deepening the Houston Ship Channel. This $508 million project will help the port accommodate increasing ship traffic and larger marine vessels.
ECONOMIC OUTLOOK FOR HOUSTON

Houston’s strong economic base and proactive business climate continue to attract both people and businesses to the area. Much of the growth since 1990 is a result of the expansion of solid core industries and the area’s emergence as a major international center. The region’s status as an international center is reflected in the breadth and depth of the area’s international representation. Houston ranks among one of the top three cities in the nation in the number of consular offices with 86 nations represented. Moreover, Houston is the base of operations for the international energy exploration and production industry and for many of the nation’s largest international engineering and construction firms. A key center for international finance, Houston leads the Southwest with eleven foreign countries having representation through Houston’s 21 foreign banks. It is these incredibly strong international ties, and their relationship with all of Houston’s major growth industries, that promises to keep Houston a vibrant and growing global center. The Houston metro economy will likely experience strong growth over the next several years, fueled by strength in its core industries. While the energy industry may remain modest over the next few years, there will be steady growth in the trade, health care, technology and leisure/hospitality sectors. In addition, Houston will experience growth in both Port and convention traffic. Longer term, continued diversification of the metro area’s industrial structure, above average population, and lower cost of living will ensure Houston’s healthy economic growth.

Jim Hinton, Jr.
Holiday Fenoglio Fowler, LLP
jhinton@hfflp.com