Why Texas is becoming a commercial real estate powerhouse

●      Oracle – the giant database, software, and services company – is moving its headquarters from the Silicon Valley to Austin.

●      Tesla CEO Elon Musk has moved his official residence to Texas after selling four homes in California. Tesla itself is now building a manufacturing plant near Austin.

●      Hewlett Packard Enterprise has announced that it too is moving to Houston from California. This move is especially notable given that the company was a Silicon Valley pioneer.

●      Charles Schwab Corporation, the big brokerage, is moving its headquarters from San Francisco to Texas after acquiring TD Ameritrade.

●      In 2019 the giant healthcare company, McKesson Corporation, moved its corporate headquarters from San Francisco Las Colinas, Texas.

Why Texas?

The reason for so much interest in Texas is that the state has an attractive package of benefits for both companies and individuals.

Brett Merz, a senior vice president and asset manager for KBS, points out that Texas offers a diversification of industry, a pro-business environment, a low cost of living, no state income taxes, a great lifestyle, various housing options, strong school systems, and affordable housing. It is also one of the fastest growing states in terms of both population migration and employment growth.

According to Atlas Van Lines, “in 2019 the top destination city for consumers was Austin, TX — the nation’s fastest growing city.”

“Austin,” said the moving company, “benefits from a high concentration of major companies and tech start-ups located in the city, a lower cost of living, a healthy outdoor living culture and an abundance of job opportunities.”

The result, according to the Bureau of Labor Statistics, was that while the national unemployment settled at 6.9% in October it was lower in metro areas such as Austin (5.1%), Dallas-Plano-Irving (6.0%), and Houston-Sugarland-Baytown (6.3%).

The idea of “job opportunities” cuts two ways. On one hand, economic migrants go where the jobs are. On the other, “job opportunities” have a different meaning when seen through corporate eyes. As Redfin CEO Glenn Kelmanexplained on CNBC, “the technology companies, the Wall Street companies, they’re chasing the talent, [and] the talent is chasing affordable housing.”

And Texas, by any standard, has affordable housing. A 2020 study using WalletHub median property value and property tax figures provides important comparisons:

Tax Reform

What the chart shows is that homes in Texas are substantially more affordable than typical properties in a number of other states. What the chart does not show is that when low property taxes are combined with state income taxes affordability in Texas becomes even more attractive. The reason? Changes in the federal tax code.

Under the Tax Cuts and Jobs Act long-time tax policies were changed. The 2017 tax reform package effectively reduced tax costs in states with affordable real estate. Here’s how it was done.

First, the standard deduction write-off was substantially increased from $6,500 for individuals to $13,000 and from $12,000 for married couples to $24,000.

Second, itemized deductions were both allowed and limited. For instance, state and local taxes (SALT) were limited to $10,000. This means the combination of property taxes and state income taxes were capped, effectively raising taxes in high-cost metro cores and lowering taxes in low-cost jurisdictions. Texas – with no state income tax and low property taxes – was perfectly positioned to benefit from the new legislation.

The result was what you would expect. People began to use the standardized deductions more and itemize deductions less. According to the Tax Policy Center about 21% of all tax returns were itemized before the 2017 legislation. That number was projected to fall to 4% after passage.

KBS and Texas

KBS has established a substantial Texas portfolio and has had a presence in Texas since 1993. Currently, KBS has 21 major properties in the Greater Dallas-Ft. Worth area, Austin, Houston, and San Antonio. In total, according to Mr. Merz, the current KBS Texas portfolio includes 5.4 million square feet of office, multi-family and industrial properties. In addition, a new hospitality-inspired 310-unit, multi-family project in the Dallas metro core, Novē at Knox, just completed the first phase of construction and is currently leasing for 2021.

Texas metros like Austin offer desirable live-work-play centers, like The Domain, which include a variety of office, retail, entertainment, restaurant, and residential options. Office buildings like Domain Gateway are part of the mixed-use development and offer employees convenient access to an array of amenities and the convenience of living near work and entertainment/shopping venues.

Learn more about mixed-use properties, like KBS’ Accenture Tower, by clicking here.