Sunday, September 19, 2010

Turtle Power: How San Antonio Beat The Recession

by Derek Thompson
National Journal Magazine

San Antonio -- The Riverwalk is the top tourist destination in Texas, but the narrow river barely looks like it's moving. There is no froth, except for the foam gurgled by Rio Taxis. The river winds through the city, traced by a crowded walkway flooded at night with families and young couples munching on burritos, sipping margaritas, and staring at the water rippling by.

To see the Riverwalk in the summertime is to understand San Antonio: patient, less than dynamic, but always moving. During the downturn, only one major metropolitan area outside famously recession-proof Washington has ranked in the top 10 for the fewest jobs lost and the highest economic growth. It's San Antonio, and -- except possibly for Washington -- it may count as the most recession-resistant city in the United States.

The story of the Alamo City offers a real-life version of the tortoise and the hare. For years, the hares -- in California, Florida, and Nevada, especially -- raced ahead on the tailwind of a real estate boom. The winds have shifted, and debt and defaults have held back the rabbits of the past decade.

But 2010 may be the year of the tortoise. The boom that brought the crash was all about proximity to capital, to exotic financial instruments spun on dizzying home prices. The post-recession era may depend on proximity to capitals, to state governments and federal spending on military, health care, education, and energy. The United States has 52 metro areas with a population of 1 million or more, and last year only three of them saw an increase in both net earnings and personal income. One was Washington. Another was Virginia Beach, a military hub. Then there was San Antonio. The steady city by the lazy river suddenly looks like it's moving.

Why San Antonio?

Call it the "eds and meds" effect. In the past decade, education and health care have been the most dependable -- perhaps the only dependable -- industries in the country. They combined to create 5.2 million jobs between 1999 and 2009, a lost decade when private-sector employment grew by only 1.1 million. San Antonio is home to a $16 billion health care and bioscience industry that employs one of every seven workers in the city. Its 31 colleges and universities enroll more than 100,000 students in a population of about 1.3 million.

San Antonio has a third line of defense against economic despair: the military. Bookended by the Randolph and Lackland bases, San Antonio anchors the country's Air Force training program. The city also won the lottery in the federal government's recent base-closure-and-realignment round, receiving $2.2 billion to build the largest new military medical complex near the city's center, at Fort Sam Houston. The secret to San Antonio's recent economic success, it turns out, is eds, meds, and enlisteds.

Also: hotel beds. Home to Texas's top two attractions (the Riverwalk and the Alamo), San Antonio has a thriving tourism industry that represents one-tenth of the local economy. Even the city's leisure business is somewhat recession-proof. Because San Antonio is primarily an in-state destination -- half of its tourists come from Houston and Dallas -- the city benefits from Texas's buoyant economy.

Cheap rooms, free attractions, and oversized margaritas add to the allure, with San Antonio serving as a backup destination for families on a budget. Once the recession struck, "people stopped taking the major trips overseas or to Disney and Vegas, and they came here," said Davis Phillips, the owner of Phillips Entertainment, which manages three shops that face the Alamo. "When folks stay closer to home, that's great business for us."

Nonmilitary-Industrial Complex

In the hare states, where the bubbles have burst, instability has spilled over into other sectors. When the housing market collapsed, construction companies went under, unemployment skyrocketed, and foreclosures rolled through neighborhoods like dominos. In San Antonio, it was stability that spilled over. "Health care, education, and the military underpin the resilience of our city," Mayor Julian Castro said in his City Hall office. "They've outperformed other sectors, but they also work well together."

San Antonio basks in a military-industrial complex. In this case, however, the industries are not defense-related but health care and education. Take the Health Science Center at the University of Texas (San Antonio). It is a medical research juggernaut, a cancer research center, and a consortium of five schools offering dozens of degrees to thousands of students.

William Henrich, the center's president, cited an estimate that up to 14,500 people here provide supplies or services to the organization. "From something as basic and mundane as food services," he said, "to scientific supplies, to construction for new laboratories, to the services required because of the patient population -- the effect of the health science center reaches into virtually every sector of commerce in the community."

Or take the San Antonio Military Medical Center. It will be "the largest training facility for medical specialties in the world," according to Richard Butler, an economist at Trinity University in San Antonio. In addition to serving the families of active and retired soldiers, the facility underwent a $2.2 billion expansion that accounted for approximately one-third of the city's nonresidential construction in 2009. "The boon from constructing and operating these facilities is going to be a source of jobs for years," said Suzanne Cuda, a physician who oversees the medical construction authorized by the base-closure law.

The ripple effect is wide. Ask Michael Cortez, who explained over the clatter of his 24-hour restaurant Mi Tierra that revenue is down only a few percentage points; his friends in Connecticut, meanwhile, complain about drops of 40 percent. Or ask Bill Holland of Hill County Interiors, who, despite having had to cut back inventory at his furniture store, hears from national reps every week about "how incredibly fortunate we are" compared with the rest of the country. As the economic tsunami swept across the United States, San Antonio's business owners felt the spray without getting soaked.

Tortoise Economics

San Antonio isn't a lonely oasis of stability. It stands near the center of a larger island of prosperity that is Texas. Six of the nation's 21 most resilient cities are in Texas, according to the Brookings Institution's Metro Monitor. No other state has more than two. (See sidebar, next page.)

The secret to Texas's success is well documented. The state experienced only a modest real estate bubble, mostly thanks to its vanilla lending practices after the savings and loan crisis in the mid-1980s. High energy prices through 2008 delayed the recession's onset in this oil-rich state. A diversified economy with low taxes, easygoing regulations, and cheap labor softened the downturn and has hastened the recovery.

The steady state of eds and meds -- and government -- has saved other cities as well. "Look at these cities in the middle of the country," said Alan Berube, the research director of the Brookings Institution's metropolitan policy program. "Des Moines. Omaha. Kansas City. Each has a ... mixture of government employment and universities, and a diversified service sector." Each depends on local businesses, such as in health care, that have thrived. And like Texas, they avoided the housing bubble.

The Lone Star State may be known for its don't-mess-with-Texas swagger, but San Antonio's boosters rather liked hearing their city described (even by a Yankee reporter) as a tortoise. The most common response to the analogy was a smile of recognition. Jealousy of Dallas and Houston for their faster growth either did not exist or was politely disguised. "Any time that you see somebody else with the highs, you take note of that," said Angela Shields, president of the San Antonio Board of Realtors. "But we're grateful that we don't see the lows."

Bill Lyons, the owner of Casa Rio, the first restaurant built on the Riverwalk, was downright enthusiastic. "We just haven't gotten into a hurry about things. There's sort of a siesta mentality to the city, and the benefits can take years to see."

A lazy river, however, won't lift many boats. San Antonio's wages recently ranked 62nd out of 77 metropolitan areas surveyed by the Labor Department -- behind Birmingham, Ala., and Oklahoma City. "The reality is, we are a poor city," said Sylvia Romo, a tax collector and assessor. "We don't have a big enough tax base to attract large companies with tremendous [tax incentives]."

Mayor Castro suggested he wouldn't mind seeing the city's economy get a little more frothy. Rapid development in high technology "might leave San Antonio more vulnerable to the ups and downs of the economy," he said, "but the rise in income levels is worth that trade-off."

Castro's vision for San Antonio during the decade to come looks like Rackspace, a blossoming information-technology company that recently set up offices in an abandoned shopping mall on the city's outskirts. Rackspace bought the 1.2-million-square-foot building, gutted it, filled it with inexpensive desks, and turned it into the headquarters of a 3,000-employee server-management company.

"We want to do for San Antonio what Dell did for Austin," said Randy Smith, the company's director of real estate. Even as Rackspace's business grows by 30 percent a year, the company is emphatically a creature of San Antonio. Rackspace frames its mission with the same service-first attitude that underpins the city's twin pillars, the military and medical training. "We're not a technology company," Smith said. "We're a service company. Service is what we're all about."

That's an attitude that has bolstered this city through the lingering recession and may well protect it during the recessions to come.

The author is a staff editor for

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