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What happened to the “Texas miracle”?
May 13, 2024

What happened to the “Texas miracle”?

Austin was a red-hot destination for tech companies fleeing Silicon Valley, but its allure may be cooling.

Early in the pandemic, many big tech companies based in Silicon Valley exited California, fleeing the high overhead necessary to do business there. One city — Austin, Texas — was consistently tagged as the top destination. The Texas capital offered lower costs, especially in regard to housing and taxes. Another draw for companies: the state’s more lax approach to regulation.

Well, after a massive influx, the “Texas miracle,” with Austin at its epicenter, is losing some of its luster. In recent weeks, Tesla, which moved its headquarters from Silicon Valley to Austin in 2020, announced it’s laying off 2,700 workers there. And software giant Oracle, which relocated to Austin at about the same time, is moving its headquarters again, this time to Nashville, Tennessee.

Last week, at the Milken Institute Global Conference in Los Angeles, Marketplace’s Lily Jamali asked Austin Mayor Kirk Watson about the state of tech in his city. The following is an edited transcript of their conversation.

Austin Mayor Kirk Watson (Gary Miller/Getty Images)

Kirk Watson: I’ve been on the phone and on Zoom calls, talking to different people about wanting to be involved in life sciences in a way that really has never happened before. And that’s a big part because of what’s going on with Dell Medical School and the announcement that MD Anderson [Cancer Center] is going to be coming to Austin. But also, we had a big announcement that there was going to be $6 billion of CHIPS Act money coming into Austin, and Samsung was going to put $40 billion into growing that ecosystem. And we, in the very recent past, have been working with others to make sure that incentives are there to let them grow as well. So it’s really strong.

Lily Jamali: It’s strong, and you say growing as well. What kind of pressure is the influx of all of this technology from the people involved in the tech industry to executives wanting to move their headquarters to your city? How much pressure has all of that put on your city?

Watson: Well, it’s fun to be the mayor of a city where you can say things like, “A lot of our challenges are a result of success.” And that’s kind of how this feels, in some ways. Sure, there’s some pressure that comes with that. But I think we’re doing a pretty good job of anticipating what that pressure might be and then acting and reacting when appropriate to things. So one of the things, of course, is an issue we look at all the time: How do we ensure people can afford to live, and we do have enough housing?

Jamali: That’s a huge issue. Up 60%, housing prices are, in your city from 2020 to 2022. I know it’s come down a little bit, but so way high from that 2020 level.

Watson: Yeah, so a couple of things about that. One is I try to look at both sides of the coin, if you will. One side is how do I put more money in people’s pockets so that they’ll be in a position to stay in Austin and to afford to stay in Austin, even as we see things happening with the growth? And a key part of that, of course, is that we focus on workforce, we focus on training people to be in these jobs and to be in other jobs. I’m actually trying to change the economic development model, where it focuses not just on how many jobs we create, but how many people in Austin do we put into career paths with those jobs? Of course, the flip side of the coin is making sure we have more housing. And we’re approaching that from a variety of levels.

Jamali: Are you building more?

Watson: Oh, yes. If you look at the numbers and you count it as a part of existing inventory, we are building homes at a rate that’s probably double what you see the average nationwide, and nine times faster than what you see in places like San Francisco and Los Angeles and San Diego.

Jamali: That’s a theme here in California, how we’re not great about building new housing. However, is that going to, even as you do build more supply, is that going to make Austin an affordable city again? Has that horse left the barn?

Watson: Look, we ought to be judged by what happens over time. But when you’re doing the kinds of things that we’re doing with the land development code, which wasn’t updated since 1984, we’ve made huge changes. In fact, next week, I guess it is, we’ll probably vote to change minimum lot sizes so that you can get more supply. What we’re doing with equitable transit-oriented developments and being able to do a zoning overlay there. What we’re doing with density bonuses and what we’re doing with regard to our own Development Services Department, where we had that scrubbed top to bottom and are making changes so that the city doesn’t make things more ill affordable because we’re getting in the way.

Jamali: Let me ask you about a couple of headlines from the last couple of weeks. One is Tesla laying off 2,700 workers at the Cybertruck factory in the Austin area. Austin had offered Tesla $60 million in tax abatements. Obviously, the promise of jobs helped drive a lot of that. Was it a mistake in retrospect?

Watson: Look, one of the things that we have to do is we want to be competitive. And Austin will always be competitive. Everything from those instances where incentives get offered to situations where we have competitive because of the quality of life in the town. You can’t get too worked up because we’ve seen things like this happen before. And we’re going to continue to grow. We’re going to continue to have people come in and look and be a part of Austin.

Jamali: But given the incentives that were offered there, and then same thing with Oracle, of course, another company that moved from Silicon Valley to your city. They got some nice incentives on real estate in your city, and now they’re leaving, going to Nashville.

Watson: Well, they’re moving their headquarters to Nashville, which has yet to be seen what happens otherwise. But look, a key part of what you’re asking is that these companies need to recognize that not everything ought to be transactional. The good news, I think —

Jamali: But we are very transactional, I think we can agree.

Watson: I certainly don’t look at all of these relationships as purely transactional. And I also look at it in the big picture. You know, Oracle moving its headquarters, there’s a couple of things about that. One is, I don’t think we will notice much difference if the headquarters is in a different place than when they had their headquarters here.

Jamali: But mayor, I mean, gosh, they got offered $250 million. That’s a quarter of a billion dollars.

Watson: They got incentives in Tennessee?

Jamali: In Nashville. And I should say, to clarify, in tax abatements and incentives.

Watson: Well, that’s what Nashville offers.

Jamali: Well, what do you think when you hear that number, $250 million?

Watson: Good for whoever wants to do that. That’s their deal. From my perspective, it goes back to what I was saying previously. I don’t see these relationships in our economy as being all transactional. And when you have an economy like we have — look, we’re a mature enough economy and mature enough in dealing with incentives and dealing with companies that we recognize, it’s not the end of the world, especially when we’re ranked the way we’re ranked by Milken and others because of what we’re able to accomplish.

Jamali: Do you feel that there has been a race to the bottom in terms of different localities offering these companies incentives? Should that continue?

Watson: I don’t spend very much time thinking about it at all. Incentives ought to come with it, something that’s going to be beneficial to the public, other than just, “Oh, we will create a certain number of jobs.” So for example, we recently worked very closely with a big company that part of what we did with the incentive package was we focused on child care. And that is something that we know we want more of and we want to address in a different way in Austin. And by dealing with the incentives in that way, we gain additional public benefit, and it adds to the resiliency of our economy and our city. And ultimately, our resiliency is what this is going to be about. And so I don’t spend a whole lot of time worried about what others might be doing.

Jamali: I understand. I don’t mean to beat a dead horse, so to speak, however you may not be so transactional, but many of these companies are very transactional. And if you’re offering incentives, and they’re leaving after a couple of years, I have to ask: Are you considering maybe not offering those kinds of incentives in the future since you already have a pretty robust ecosystem as it is?

Watson: It’s always a big question, isn’t it, about whether or not you need to offer incentives. And unfortunately, when companies do things that put a blemish, if you will, on the incentives by making things so transactional, it does probably add to the difficulty. But that’s one of the reasons I would suggest that companies that want to be in certain places and feel like they want to talk about incentives, that they think of it in a broader sense than just a transaction. It is, how are you going to be a part of this community that offers so much to your employees?

Jamali: What message do you have for other cities that are hoping to be the next Austin, drawing lots of opportunity for tech? What is it like when tech comes to town? How would you summarize the experience?

Watson: Well, Austin wouldn’t be Austin today without the fact that we have tech, and I think it’s going to continue to grow and change. I think you’re going to see Austin play a major role in [artificial intelligence]. I think you’re going to see us dealing in the area of health care and life sciences in a way that we haven’t before because of changes that have happened in Austin. I think it’s a part of the culture like we’ve had in Austin, a creative, resilient culture. It adds to the quality of life. And then you need to pay attention to make sure that the challenges that get created by having such good things happening, that you’re addressing those challenges in an appropriate way.

More on this

Journalist Christopher Hooks of Texas Monthly has been writing about the migration of tech players out of Texas — in some cases back to California, which Hooks calls proof of a cultural change. In his words, “the sudden hotness Austin enjoyed in 2020 has dissipated, at least a bit, into notness.” For techies, it turns out, being able to rub shoulders with, say, potential funders in Palo Alto, Menlo Park or San Francisco is an enduring incentive.

On the flip side, Inc. notes that entrepreneurs in Austin are just fine with big tech companies, like Google and Meta, “ghosting” the city’s downtown. They’re leaving millions of square feet of office space unoccupied. For smaller startups, writer Sam Blum suggests, maybe that’s a good thing.

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