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Second quarter 2010

SouthwestEconomy
FEDERAL RESERVE BANK OF DALLAS

In This Issue
Cloud Over Commercial
Real Estate Is Slowly
Lifting in Texas
On the Record:
Tapping Technology For
Immigration Enforcement
Spotlight: New Data
Confirm Pickup in
Juárez Factory Jobs

Eleventh District
Banking Industry
Weathers Financial Storms

President’sPerspective
Thealth
he financial crisis put a spotlight on the
of the largest financial institutions and

Given the reach and
impact of community
banks, it is essential
for the formulation of
sound monetary policy
that we understand the
ins and outs of their
industry.

their impact on the economy. While these
enormous entities dominate the financial
system, they are by no means the only game
in town. Often overlooked is the economic
impact of the relatively small banks on Main
Street—community banks.
These institutions—locally owned and
operated banks with total assets of less than
$10 billion—have stepped in to support, and
in many cases even become, the local banking system.
Since they do not answer to distant directors, community banks can make decisions quickly, giving them the flexibility to
extend credit in places larger institutions may
miss. Community banks are an important
source of credit for local enterprises, holding
close to 60 percent of small business loans
outstanding. Most important, community
bankers truly “know their customers,” as the
old banking adage goes—not just from interactions in the office but from contacts at civic
clubs, restaurants and churches.
Community banks have a fairly large national presence—despite holding
only about a quarter of total industry deposits, they account for about 99 percent of all U.S. banking institutions.
Community banks have a substantial presence in the Eleventh District,
matching the nation’s 99 percent of banking institutions. In contrast to the nation, community banks hold close to 40 percent of the district’s total deposits
and almost two-thirds of its outstanding small-business loans. This extensive
community bank presence—when combined with the larger regional banks
that call the district home—adds to the diversity of our banking industry.
Given the reach and impact of these banks, it is essential for the formulation of sound monetary policy that we understand the ins and outs of their
industry. To gain that insight, I rely heavily on input from the local bankers on
the Dallas Fed’s board of directors, our regional research team and our bank
supervision staff, which interacts with community and regional banks on a
routine basis.
Regular, in-depth assessments of our smaller, local banks—a sample of
which Southwest Economy readers will see in the pages that follow—better
prepare me to participate in Federal Open Market Committee deliberations on
national monetary policy.

Richard W. Fisher
President and CEO
Federal Reserve Bank of Dallas

Eleventh District Banking Industry
Weathers Financial Storms
By Kenneth J. Robinson

Eleventh District banks
were roughly “twice as
good and half as bad”
as their counterparts
across the nation.

n 2009, the banking industry continued to
feel the fallout from the financial crisis that
began in mid-2007. Profitability declined
while asset-quality problems continued to
mount at banks across the nation and at
those based in the Eleventh Federal Reserve
District.1 Some good news was revealed in
recently available first-quarter data, however,
which showed profitability rebounding and
increases in asset-quality problems slowing
down. Whether measured by profits or problems, Eleventh District banks were roughly
“twice as good and half as bad” as their counterparts across the nation. Most likely, this
reflects the fact that the economic downturn
was less severe in the district than in other
parts of the nation.
Another noticeable difference emerges
when comparing district banks’ recent performance with an earlier period when the economy turned south and the industry suffered
significant damage—the mid- to late 1980s.
At that time, students of banking history may

recall, a sharp decline in oil prices triggered a
deep regional recession. Bank failures soared,
and the financial landscape in Texas and other
parts of the Southwest changed considerably.
This raises the question of why the district’s
banking industry has been able to weather the
current downturn—so far—with less damage
than in the 1980s. The answer likely can be
found in the changing nature of the district’s
economic environment since then.

Basic Performance
Bank profitability, as measured by return
on assets (ROA), continued to decline in 2009
but rebounded in the first quarter of 2010.
U.S. banks earned an annualized return of
0.53 percent in the first quarter, up from 0.08
percent for all of 2009. Eleventh District banks
recorded an annualized ROA of 0.91 percent in
the first quarter, compared with 0.52 percent in
2009 (Chart 1).
Reflecting the tough economic environment, almost one-third of all banks nationwide

Chart 1
Recent Bank Profitability Stronger in the 11th District
Return on average assets (percent)
1.6
11th District

1.4

U.S.
1.2
1
.8
.6
.4
.2
0
2005

2006

2007

2008

*Data are through March 31, annualized.
SOURCE: Report of Condition and Income from the Federal Financial Institutions Examination Council.

FEDERAL RESERVE BANK OF DALL AS • SE COND QUARTER 2010

SouthwestEconomy

2009

2010*

Chart 2
Noncurrent Loans Differ Between U.S. and 11th District Banks
Percent of loans
6

Other

Other consumer

Credit card

Commercial and industrial

Commercial real estate

Residential real estate

Mar. June Sept. Dec. Mar. June Sept.
2008
2009
U.S. banks

Dec.

Mar.
2010

Mar. June Sept. Dec. Mar. June Sept.
2008
2009
11th District banks

Dec.

Mar.
2010

SOURCE: Report of Condition and Income from the Federal Financial Institutions Examination Council.

The proportion of assets in
commercial real estate loans
was 24 percent at district
banks, almost double
the 13 percent at
banks nationwide.

were unprofitable in 2009, while 14 percent
in the district suffered losses. For the first
quarter, those numbers improved to 19 percent of banks nationwide and 11 percent of
district banks that were unprofitable.
The biggest contributor to profitability
was net interest income, or the difference
between what banks earn on loans and what
they pay on deposits. The main factor behind
banks’ deteriorating performance was a result
of increased provisions for loan loss reserves.
This “provision expense” is the amount banks
set aside out of income to cover estimated
future loan losses. Increases in provision expense imply that banks have been attempting
to build larger cushions to protect themselves
from loans that go bad.
Provision expense at U.S. banks rose to
a record annual high of 2 percent of average
assets in 2009 but fell back a bit to 1.6 percent (annualized) in first quarter 2010.2 In the
district, provision expense was 1.2 percent in
2009 and declined to an annualized 0.72 percent in the first quarter.
As the economy continued to exhibit
weakness, asset-quality problems mounted,
mostly in the form of delinquent loans. For
U.S. banks, the percentage of loans that were
noncurrent—those with payments 90 days or
more past-due plus those not accruing interest—increased to slightly more than 5.5 percent in the first quarter, the highest on record.
The district noncurrent loan rate also rose
but, at 2.7 percent, was much lower than the
national figure.

SouthwestEconomy 4

The composition of loans that were
noncurrent, though, differed between U.S.
and Eleventh District banks (Chart 2). At
banks nationwide, residential real estate
loans represented the bulk of noncurrent
loans, followed by commercial real estate
loans. In the district, commercial real estate
loans were the dominant source of noncurrent loans. A factor in this pattern was district banks’ making fewer residential loans
and more commercial real estate loans than
their national counterparts.
According to the Federal Housing
Finance Agency house price index, Texas’
annual housing price appreciation peaked at
6.3 percent in early 2007, far below the nationwide peak of almost 12 percent in 2005.
Before the onset of the housing bubble, in
2000, residential mortgages accounted for
10 percent of Eleventh District banks’ assets,
compared with 14.5 percent at U.S. banks. In
2005, residential mortgages accounted for 9.4
percent of district banks’ assets, compared
with 18.2 percent at U.S. banks. The reduced
proportion of residential mortgages at Eleventh District banks could be due to the fact
that the housing bubble didn’t inflate as
much in the district.
At the end of first quarter 2010, the proportion of assets in commercial real estate
loans was 24 percent at district banks, almost
double the 13 percent at banks nationwide.
Within the category, banks report their lending across three main segments—loans secured by nonfarm nonresidential properties,

FEDERAL RESERVE BANK OF DALL AS •SE COND QUARTER 2010

saw further declines in the reserve coverage
ratio of noncurrent loans, that is, the cumulative amount of reserves that banks have
to cover their bad loans relative to the total
amount of bad loans on their books.
For U.S. banks the reserve coverage ratio stood at 67 percent at the end of the first
quarter, down from the year-ago level of 71
percent, and at Eleventh District banks the
ratio was 59 percent, down from 82 percent
a year ago. In other words, banks added
more and more to their cushions to protect
them from bad loans and continued to write
off bad loans; yet, the total amount of loans
becoming noncurrent increased even faster.
How do today’s banking troubles compare with past ones? One frequently used
gauge of overall banking-sector distress is
the so-called Texas ratio, which attempts to
assess banks’ ability to withstand losses. It
measures a bank’s noncurrent loans and repossessed real estate as a percentage of loan
loss reserves and stockholders’ capital, including retained earnings but not intangibles
such as goodwill. A Texas ratio above 100
percent suggests the potential for troubled
assets to wipe out a bank’s capital base.
In the 1980s, almost 20 percent of Eleventh District banks had a Texas ratio exceeding 100 percent—thus the origin of its name.
In first quarter 2010, though, 0.6 percent of
Eleventh District banks were at this danger
threshold (Chart 4). The percentage of U.S.

Chart 3
Bank Performance on Loan Guidance Varies
(Construction and land development loans)
Percent*
45
40

District

Nationwide

35
30
25
20
15
10
5
0
Boston

New
York

Philadelphia Cleveland Richmond

Atlanta

Chicago

St. Minneapolis Kansas
Louis
City

Dallas

San
Francisco

*Banks with construction and land development loans greater than total risk-based capital as of March 31, 2010.
SOURCE: Report of Condition and Income from the Federal Financial Institutions Examination Council.

loans secured by multifamily residential properties, and loans for construction and land
development.
As its name implies, the third loan segment finances land improvements prior to
building new structures or the construction
of industrial, commercial or residential buildings. This is generally considered the riskiest
type of commercial real estate lending and
has thus been of concern to bank supervisors. In fact, federal regulators issued guidelines in 2007 for banks regarding the extent
of their construction and land development
lending. The guidance provides a principlebased discussion of supervisory expectations for sound risk-management practices
for banks with loans of this type exceeding
100 percent of total capital (adjusted for the
riskiness of their assets and off-balance-sheet
exposures).3
At the end of the first quarter, the percentage of banks that exceeded the guideline varied considerably across the nation.
The Richmond, Atlanta and San Francisco
districts were well above the U.S. average of
17 percent (Chart 3). At 16 percent, the Dallas district was slightly below average. However, the Eleventh District’s noncurrent rate
for construction and land development loans
was roughly half that of banks nationwide.
Banks nationwide and in the Eleventh
District have taken steps to deal with their
asset-quality problems by writing off bad
loans. For U.S. banks, charge-offs net of any

recoveries that have occurred reached an annual record of 2.6 percent of average loans
last year, while Eleventh District net loan
charge-offs stood at 1.2 percent.
Banks have set aside a record amount
of provision expense to try to cover their
bad loans. Despite increases in both loan
charge-offs and provision expenses, banks

Chart 4
The Texas Ratio Is not About Texas Anymore
(Percentage of banks with a Texas ratio* ≥100%)
Percent
20
18
16
14
12
10

11th District

8
U.S.

6
4
2
0
1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

*The Texas ratio is defined as noncurrent loans plus other real estate owned as a percentage of tangible equity capital plus loan loss reserves.
SOURCE: Report of Condition and Income from the Federal Financial Institutions Examination Council.

FEDERAL RESERVE BANK OF DALL AS • SE COND QUARTER 2010

SouthwestEconomy

Chart 5
Pace of Lending Declines at Banks in District and Nationwide
Year-over-year growth (percent)
20

11th District
U.S.

–5

–10
2005

2006

2007

2008

2009

2010

SOURCE: Report of Condition and Income from the Federal Financial Institutions Examination Council.

Increased lending at
community banks is an
encouraging sign, especially
for small businesses that tend
to rely on these institutions
for their financing needs.

banks in danger is approaching national levels of the late 1980s, the last period of major
banking-sector difficulties.

businesses that tend to rely on these institutions for their financing needs.

Lending Activity

Whether measured by profitability or
asset quality, banks based in the Eleventh
District have been outperforming their counterparts nationwide, even in the midst of
a deep recession. This leads to the first of
two interesting questions: Why have district
banks been doing better?
The most plausible answer is the regional economy’s performance relative to
the U.S. as a whole. The Eleventh District
entered the recession later than other parts
of the country, and its decline in economic
activity was by some measures less severe.
For example, since the recession’s start
in December 2007, Eleventh District employment has fallen about 2 percent, the smallest
job-loss rate among all 12 Federal Reserve
Districts and substantially below the nation’s
5.3 percent decline. More recently, the Eleventh District’s economy has been showing
signs of improving, along with the overall
U.S. economy.5
What’s more, the Texas housing market
hasn’t had the kind of wrenching correction
experienced elsewhere—for two reasons.
First, the district’s housing-price appreciation was relatively muted when compared
with other parts of the nation. Second, it
was generally more difficult for Texans to
use their houses as collateral to leverage up
their balance sheets.

Declines in profitability and continued
asset-quality problems make it difficult for
banks to provide the economy much-needed
credit. Banks don’t report the amount or
number of new loans, only the total amount
of loans outstanding, net of any charge-offs
and loans paid down or paid off. By this
measure, lending has been slowing for some
time at both U.S. and Eleventh District banks
(Chart 5).
The willingness or ability of banks to
make loans has likely been affected by the recession that began in December 2007. But the
demand for bank loans should fall as well.
In fact, according to the Federal Reserve’s
“Senior Loan Officer Opinion Survey on Bank
Lending Practices,” banks have been reporting
weak loan demand from both businesses and
households for several years.4
It should be stressed, though, that some
banks are lending. More than half of all U.S.
community banks—defined here as those
with assets less than $1 billion—reported increased lending from first quarter 2009 to first
quarter 2010, while 38 percent of larger banks
reported increases. The comparable numbers
were even higher for Eleventh District banks
(Chart 6).
Increased lending at community banks
is an encouraging sign, especially for small

SouthwestEconomy 6

Banks and the Economy

FEDERAL RESERVE BANK OF DALL AS •SE COND QUARTER 2010

These loans account for almost onefourth of district banks’ assets—far exceeding
the national average of 13 percent and at
the upper end of exposures across Federal
Reserve districts. During the 1980s, Eleventh
District banks’ peak exposure to commercial
real estate was 16 percent in mid-1986.
Difficulties in the commercial real estate
sector in the aftermath of the oil bust contributed appreciably to the deterioration of
the Eleventh District banking industry in the
1980s. For example, the office vacancy rate
in Dallas hit a high of slightly over 28 percent in 1988; in Houston, it peaked at over
30 percent in 1987.
If the commercial real estate sector weakens further, the performance of Eleventh District banks can be expected to decline—both
in absolute terms and relative to banks nationwide. The article titled “Cloud Over Commercial Real Estate Is Slowly Lifting in Texas,”
on page 10 in this issue of Southwest Economy,
investigates the current state and likely prospects for the commercial real estate sector.

Chart 6
Banks Are Lending
Percent increasing lending*
80
70
60
50
40
30
20
10
0
< $1 billion in assets, U.S.

> $1 billion in assets, U.S.

< $1 billion in assets, 11th District

> $1 billion in assets, 11th District

* March 31, 2009, through March 31, 2010
SOURCE: Report of Condition and Income from the Federal Financial Institutions Examination Council.

Texas has fairly strict standards concerning mortgage lending. For example, a
homeowner’s total mortgage debt—the existing mortgage plus projected home-equity
loans—can’t exceed 80 percent of the home’s
current fair-market value. Such restrictions
provide borrowers and lenders some protection against declines in property values.
In addition to faring better than the nation, the district’s banking industry also avoided a repeat of the troubles that accompanied
the previous banking crisis in the 1980s.
Those were the worst of times for the
region’s banks. Declines in oil prices triggered
two regional recessions, which led to widespread and deep banking-sector difficulties.
Return on assets fell to a low of –3.5 percent
in first quarter 1988, and the noncurrent loan
rate reached an all-time high of 10 percent
in third quarter 1988, far surpassing U.S.
banks’ current record of 5.5 percent. Nine of
Texas’ 10 largest banking organizations failed
or were acquired, and the casualty rate for
Eleventh District banks peaked at about 10
percent in 1989.
Which prompts the second interesting
question: Why have Eleventh District banks
fared better in the current recession than in
the 1980s downturn?
It’s not likely a simple matter of a
milder recession. For the Eleventh District,
the current economic downturn is the worst
since the mid-1980s.6 During the worst of the
current recession, from mid-2008 until the

end of 2009, employment plunged 3.7 percent in the Texas economy, which makes
up the major part of the Eleventh District.
During the 1985–87 recession, employment
fell 3 percent.
The Texas Business-Cycle Index fell
almost 4 percent in 2009, compared with a
2.7 percent decline in 1986. According to
the Mortgage Bankers Association, the delinquency rate—the percentage of mortgages 90
days or more past due—climbed to almost 4
percent in Texas at the end of 2009. It rose to
a high of 2.74 percent at the end of 1987.
One explanation for today’s healthier
banking industry is the changing nature
of the regional economy. In the 1980s, the
Eleventh District was a much less diversified
economy. For example, oil and gas production accounted for almost 20 percent of Texas
output. By the early 2000s, that share had
declined to only 6 percent. The move away
from a heavy reliance on the fortunes of the
oil and gas industry gave rise to a more varied regional economy and offered the local
banking industry more opportunities for diversification, potentially contributing to lower
risk profiles.7

Robinson is a research officer in the Financial
Industry Studies Department at the Federal
Reserve Bank of Dallas.

Notes
1
The Eleventh Federal Reserve District consists of all of Texas,
the northern portion of Louisiana and the southern portion of
New Mexico. Data for the Eleventh District banking industry have
been adjusted for structural changes involving recent relocations
of banks into the district.
2
Consistent data for the banking industry are generally available
beginning in 1984. In this article, records are relative to that date.
3
There are other components to the guidance as well. See SR
Letter 07-1, Division of Banking Supervision and Regulation,
Board of Governors of the Federal Reserve System, Jan. 4, 2007,
www.federalreserve.gov/boarddocs/srletters/2007/SR0701.htm.
4
“Senior Loan Officer Opinion Survey on Bank Lending
Practices,” Board of Governors of the Federal Reserve
System, April 2010, www.federalreserve.gov/boarddocs/
SnLoanSurvey/201005/default.htm.
5
See “Texas Economy Shakes Off Rough Ride in 2009,” by
Laila Assanie and Pia Orrenius, Federal Reserve Bank of Dallas
Southwest Economy, First Quarter, 2010.
6
See note 5.
7
See “The Effect of High Oil Prices on Today’s Texas Economy,”
by Stephen P.A. Brown and Mine K. Yücel, Federal Reserve
Bank of Dallas Southwest Economy, no. 5, 2004. Regulatory
changes in the banking industry could also have played a role.
The Riegle–Neal Interstate Banking and Branching Efficiency
Act of 1994 allowed banks to set up branches across state lines,
which was generally forbidden in the 1980s. These changes
provided banks, especially larger organizations, with even more
opportunities for diversification and concomitant declines in risk.

A Closing Caveat
Even though the Eleventh District economy has been showing signs of improvement,
it should be emphasized that banking-sector
difficulties may not be behind us. One area of
concern is commercial real estate exposure.

FEDERAL RESERVE BANK OF DALL AS • SE COND QUARTER 2010

SouthwestEconomy

OnTheRecord

A Conversation with Lisa Roney

Tapping Technology for Immigration Enforcement

Immigration consultant Lisa Roney, former director of Research and Evaluation in the
U.S. Citizenship and Immigration Services’ Office of Policy and Strategy, discusses the
government’s E-Verify program.
Q. What is E-Verify?
A. E-Verify is a free, federally operated electronic program that lets U.S. employers determine whether newly hired employees are
legally authorized to work in this country. It’s
run jointly by the U.S. Citizenship and Immigration Services (USCIS) and the Social
Security Administration (SSA). The employer
enters information from a new worker’s I-9
Employment Eligibility Verification Form and
quickly finds out whether it matches information in federal databases.
Form I-9 has been required of all employers since 1987. Under the I-9 process,
newly hired workers attest to being U.S.
citizens or noncitizens with authorization to
work in this country. Employers must review
specified documentation showing proof of
the worker’s identity and either U.S. citizenship or authorization to work in the U.S.
Repeated analyses found that the I-9 system
alone was vulnerable to fraudulent documents and therefore not sufficiently effective at reducing unauthorized employment.
E-Verify was designed to change that.

Q. What happens when E-Verify cannot
confirm work authorization?

A. When the program turns up a mismatch
with federal information, the employer is to
notify the worker and ask whether he or she
wants to contest the mismatch with SSA or
USCIS. Most data mismatches for employment-authorized workers relate to issues such
as changes of name or citizenship status that
haven’t been reported to SSA or USCIS, but
they can also result from errors or illegible
writing on the Form I-9 and employer input
errors.
If a worker decides to contest the initial
E-Verify finding, the employer is required to
provide instructions on how to proceed. This
includes how to go in person to the SSA or
to call USCIS to resolve the discrepancy. The

worker then has eight business days to take
the required action to correct the record.

Q. And if the worker can’t or won’t do this?
A. If the worker with a mismatch with SSA or
USCIS data doesn’t contest an initial finding
of not being work-authorized—most often because they lack proper work authorization—
the employer is supposed to terminate employment. However, instructions about when
this must occur aren’t specific, and employer
practices vary from firing workers on the spot
to allowing them to finish a particular job or
period of employment to allowing them to
continue working in violation of the law.
Immigration authorities aren’t contacted
because federal enforcement priorities preclude picking up individual workers from
thousands of employer locations. The worker
loses his or her job, and to the extent that
other employers in a given geographic area
or industry are participating in E-Verify, the
unauthorized worker lacks other employment opportunities.

SouthwestEconomy 8

Q. How well is the program working?
A. E-Verify began as a voluntary pilot program established by the Illegal Immigration
Reform and Immigrant Responsibility Act of
1996. The program has been consistently improved over time to be more accurate and
more responsive to employer needs, and it
has grown from a few hundred employers to
the current enrollment of more than 200,000.
In fiscal year 2009, more than 8.7 million queries were run through E-Verify, the equivalent
of about 18 percent of new hires.
During third quarter 2008, almost 97
percent of all verifications were completed
electronically without further effort by the
employee or the employer. Another 0.3 percent of cases were verified as work authorized after the employee contacted SSA or
USCIS to resolve the cause for a data mismatch. The remaining 3 percent involved
cases in which the worker wasn’t authorized
for U.S. employment or the employer or employee didn’t take the steps necessary to resolve discrepancies.

Q. Are all employers required to use E-Verify?
A. Not at present. E-Verify remains voluntary
for most employers, and less than 4 percent
of them now participate. In September 2009,
the program became mandatory for most federal government contractors, who must verify
all new employees and any existing workers
who are directly working on federal contracts. They also have the option of verifying
their entire workforce.
In addition, at least some employers in
13 states are now required to use E-Verify,
and more than half the states are currently
considering legislation relating to the use of
E-Verify. To date, Arizona and Mississippi are
the only states mandating that all employers
within the state use E-Verify, although Mississippi is phasing in participation through
July 1, 2011, based on employer size. Beginning July 1, 2010, Utah will require all state
agencies and contractors as well as all private employers with 15 or more employees
to register with and use E-Verify.
Most, if not all, immigration reform
legislation introduced over the past several

FEDERAL RESERVE BANK OF DALL AS •SE COND QUARTER 2010

“Improving E-Verify’s ability to detect the use of fraudulent documents
will require difficult choices regarding the documentation that’s
acceptable in the employment verification process.”
years has included provisions requiring the
use of E-Verify or a similar program that
would electronically verify the employment
authorization status of new hires. Some legislation would also require employers to verify the status of existing workforces, which is
generally prohibited for currently participating employers other than federal contractors,
who may elect to do so.

Q. Would making it mandatory to use E-Verify

solve the problems with unauthorized workers?

A. Obviously, the program is effective only to
the extent employers participate. If all were
required to participate in E-Verify, we would
expect the number of unauthorized workers
to be reduced substantially. However, we have
seen a longstanding pattern where unauthorized workers and those who assist them adapt
to initiatives designed to keep them out of the
U.S. workplace. Therefore, mandatory E-Verify
as currently designed will not be a panacea.
A recent evaluation by Westat, a research
organization, looked at how effective E-Verify
was at detecting unauthorized workers and
removing them from the workplace. Westat
estimated that the program was detecting approximately half of all unauthorized workers,
with a plausible range from about one-third
to two-thirds.
The remaining unauthorized workers
were able to escape detection by E-Verify
through use of documentation with information that matched federal data, either
because they had borrowed or stolen valid
documents or because they were using counterfeit documents with good information
about work-authorized persons. In addition,
there may be employment possibilities in the
informal sector, where workers are paid off
the books, or through self-employment.
It’s also worth noting that E-Verify, even
if not a complete deterrent, is more effective
than the Form I-9 process alone. Furthermore, E-Verify is an important part of an overall federal strategy designed to reduce illegal
immigration. The collective impact of the programs—including Border Patrol operations
and Immigration and Customs Enforcement
worksite investigations—is greater than any
of the programs alone.

Q. Does using E-Verify result in

discrimination against foreigners
in general and certain minorities in
particular, such as Hispanics?

A. Westat evaluation results indicate
that most employers report that their
participation in E-Verify makes them
no more or less likely to hire foreignborn workers. When employers do
report a difference due to E-Verify, it’s
almost always in the direction of making them more willing to take on immigrants.
While data aren’t available by minority group, Westat evaluation findings show
that based on their Form I-9 citizenship attestation, noncitizen workers are considerably more likely than U.S. citizens to have
mismatches in their data during the E-Verify
check. In part, this is because noncitizens go
though both SSA and USCIS checks, whereas
citizens are in most cases verified through
only SSA.
For the second quarter 2008, for example, 0.3 percent of persons attesting to U.S.
citizenship had mismatches, compared with
2.1 percent among those saying they were
work-authorized noncitizens.
Within the noncitizen group, 5.3 percent of workers claiming they had temporary
employment authorization had mismatches,
well above the 1 percent of lawful permanent residents, usually green card holders,
with mismatches. A series of USCIS database
and system enhancements reduced these
percentages considerably from the previous evaluation and are expected to reduce
the discrepancy in mismatch rates between
citizen and noncitizen workers further in the
future.

The issues surrounding a national ID
card in particular are huge, and moving in
that direction would alter our basic tenets
and way of life. Even if it were desirable, it
would be extremely difficult to implement
politically. Every immigration bill that has
addressed verification has specifically prohibited creation of a national ID card.
The development of an identity card
with readable biometrics is also difficult,
not only in making such a highly counterfeit-proof card and issuing it to millions of
lawful workers, but also in ensuring that all
employers can easily read it.

Q. Do you think the government will extend
the use of E-Verify in the near future?

A. There are big ifs here. I think that inclusion
of a mandatory electronic employment verification program is almost a certainty in any serious immigration reform legislation that will
be considered in the near future. The question, of course, is whether major immigration
reform legislation will be enacted.
In recent years, it has taken several attempts to get legislation through both houses
of Congress, and the U.S. population seems
even more divided than ever on the direction and desirability of immigration reform.

Q. Can E-Verify be made more effective?
A. Improving E-Verify’s ability to detect the
use of fraudulent documents will require difficult choices regarding the documentation
that’s acceptable in the employment verification process and the possible use of biometric identifiers in E-Verify. These choices,
of course, have both fiscal and civil liberties
costs that will have to be considered.

FEDERAL RESERVE BANK OF DALL AS • SE COND QUARTER 2010

SouthwestEconomy

Cloud Over Commercial Real Estate
Is Slowly Lifting in Texas
By D’Ann Petersen

Tcommercial
he year 2009 was a terrible one for Texas
real estate. With the U.S. and
Texas economies mired in recession and
credit markets still reeling from the global
financial freeze-up, every segment of the
state’s commercial property sector suffered.
Demand withered for space in offices,
warehouses and retail centers, pushing up
vacancy rates and lowering rental rates.
Private nonresidential construction dropped
sharply, reaching near-record lows.
Texas’ commercial real estate (CRE)
sector has been through booms and busts
before—most notably, leading up to and
following the state’s deep recession in the
mid- to late 1980s.1 What differed in the
current down cycle was a global financial
crisis that temporarily brought lending to
a halt.
Problems began on the residential side
but soon spread to CRE financing. Commercial-mortgage-backed securities (CMBS)
lending dried up in Texas and the U.S. as
it became clear that repackaging suspect
loans didn’t lower risk. Banks also became
wary of adding CRE loans to their books,
especially in Texas, where the share of
these assets exceeded the national average.
By 2009, no one wanted to touch CRE.
Commercial real estate impacts the
region’s economy through several channels. For example, construction activity
contributes to state output and employment
growth, and CRE lending is important to
the state’s banking sector.
While the recession appears to be
over, commercial activity is a trailing
indicator and, given still-tight credit conditions, remains a potential drag on economic recovery.
Significant declines in property values
and rents have raised concerns about impending defaults and foreclosures as loans
come due, posing risks to the banking sector and the economy as a whole. Indeed,
the share of nonperforming CRE loans at
Texas banks is rising.
In a positive sign, the lower rents and

prices are beginning to stir demand for
space as well as investor interest. In addition,
sectors of the economy that drive real estate
demand have turned the corner, suggesting
the bottom is near.

Construction Hits a Wall
Texas private commercial construction
surged during the state’s expansion, picking up steam as the economy shook off the
jobless recovery that followed the 2001 tech
bust. Growing demand for Texas-produced
goods boosted construction of industrial
space, and more office space was built as
service-sector firms expanded. Construction of retail space was also strong. By
2006, the inflation-adjusted value of CRE
construction had almost reached the high
of the previous economic boom.
Just as the construction cycle was
gaining steam in Texas, the global finan
cial collapse put an abrupt halt to activity.

Construction faltered in 2007 and plunged in
2008 and 2009 (Chart 1). Currently, private
CRE construction levels are near lows last
seen after the Texas oil and real estate bust
of the mid- to late 1980s.
The Dallas Beige Book, the Dallas
Fed’s anecdotal survey of economic conditions, regularly includes comments from
executives at construction and buildingrelated product companies. In late 2008
and early 2009, contacts said private construction activity came to a virtual standstill
as credit dried up. Since then, reports on
building activity have remained grim.
With construction of warehouses, office and bank buildings, and stores and
restaurants in the doldrums, public construction accounted for a larger share of
the pie. The little nonresidential construction that occurred in 2009 was partly the
result of the federal government’s economic
stimulus programs.

Chart 1
Texas Private Nonresidential Construction Plunges
Millions of dollars*
1,500

1,250

1,000

750

500

250

0
1992

1997

2002

2007

*Real dollars; five-month moving average.
NOTES: Shaded areas represent Texas recessions as defined by the Texas Business-Cycle Index. Private nonresidential construction is nonresidential contract values minus government buildings and schools.
SOURCES: F.W. Dodge; calculations and adjustments by the Federal Reserve Bank of Dallas.

SouthwestEconomy 10

FEDERAL RESERVE BANK OF DALL AS • SE COND QUARTER 2010

Chart 2
Public Projects Account for Most Construction Activity in 2009
Percent*
40
2006

2007
30

2008
2009

25
20
15
10
5
0

Warehouses

Office and
bank buildings

Stores and
restaurants

Hotels

Hospitals and
related

Schools,
libraries
and labs

Government

Other**

*Real dollars
**Includes churches, dormitories, parking garages and recreational facilities.
SOURCES: F.W. Dodge; calculations and adjustments by the Federal Reserve Bank of Dallas.

Compared with previous years, public projects like schools and government
buildings made up a larger chunk of Texas
building activity in 2009 (Chart 2). Hospital
construction was boosted by strong population growth and a thriving health care
sector. While hotel construction is largely
private, building activity picked up in 2009
with the start of the Dallas Convention Center hotel, mostly funded by public dollars.

Leasing Markets Suffer
The recession and the financial fallout
took a toll on rental markets in Texas. As
demand for space dropped off, vacancy
rates climbed in the major property markets—
retail, industrial and office.
Retail. Demand for retail space was
strong from 2002 through 2004, thanks to
the state’s housing boom and retail sales
growth. Even with new retail construction
at high levels, vacancy rates edged downward in Texas metros. Texas’ housing and
retail boom lasted longer than the nation’s.
However, consumer confidence began to
wane in 2006 as the U.S. housing problems
spread to the state, and demand for retail
space began to slow.
Already weakened by the housing
drop-off, retail markets took another hit
from the national recession in 2008. Store
and restaurant closings—including Circuit
City and some Starbucks locations, as well
as Texas’ own Bombay Company—were

commonplace. In real estate circles, demand is usually measured by net absorption, or the net change in square feet for
competitively leased space, including new
construction. The widespread business
closings and slack demand for retail space
led to weak absorption from mid-2008 to
early 2009, pushing up vacancy rates in
Texas’ major metros (Chart 3A).2
Overall, Texas had positive absorption
of 873,000 square feet in 2009, an improvement over 2008 but still well below the 3.2
million in 2004. Conditions worsened in
first quarter 2010, and the Texas population-adjusted retail vacancy rate edged up.
In a spot of good news, recent industry
reports suggest grocers, discount clothiers,
wholesale clubs and electronics stores are
expanding in Texas markets.3
Industrial. Before the recession, rising exports and imports and strong growth
in industrial production played large roles
in Texas’ expansion, leading to robust demand for warehouse and industrial space.
However, the state’s industrial real estate market deteriorated sharply as global
demand for goods dropped off and Texas
exports and production fell precipitously.
The Port of Houston, for example, reported
value declines of 15.9 percent for exports
and 39.6 percent for imports during 2009.
Throughout the recession, Dallas Fed
contacts reported almost no industrial leasing activity. Not surprisingly, the major

FEDERAL RESERVE BANK OF DALL AS • SE COND QUARTER 2010

metros had six consecutive quarters of
negative net absorption totaling just over
26 million square feet as of first quarter
2010—more than half of which occurred in
Dallas–Fort Worth, which houses the state’s
largest share of industrial space (Chart 3B).
Texas’ population-adjusted industrial
vacancy rate increased from 8.5 percent in
third quarter 2007 to 13.5 percent in first
quarter 2010, exceeding the highs of past
recessions.
More recently, the Dallas Beige Book
notes that some deals are being made
after landlords took a realistic look at
market conditions and drastically reduced
rents. Contacts report a pickup in leasing
transactions and firms scouting sites for
distribution hubs. Still, the large amount of
available space suggests it will be a slow
recovery, and construction probably won’t
resume soon.
Office. Texas office markets weakened
during the recession as firms in finance,
energy, real estate and other sectors put
leasing and expansion decisions on hold
amid credit uncertainty, cost cutting and
downsizing.
As a result, the Texas populationadjusted office vacancy rate began to rise
in 2008 and stood at 18.2 percent as of
first quarter 2010 (Chart 3C). Despite the
increase, the rate remains below the levels
seen in the previous two Texas recessions.
However, absorption was negative in the
first quarter of this year, suggesting vacancy
rates may continue to edge up.
Dallas and Austin have the highest metro vacancy rates, although several
downtown lease deals led Austin to a
marked improvement in the first quarter.
Because of the popularity of Austin’s downtown location, several developers plan to
build commercial properties with an office
component once credit restrictions ease,
according to C.B. Richard Ellis (CBRE).4
Houston’s vacancy rate is below the national average, but it may move up as construction wraps up on several large projects
started before the recession took hold.
Dallas Fed business contacts report
building owners are aggressively reducing
office rental rates and making concessions.
For instance, first quarter office rents are
down $1.87 per square foot in Austin and
$1.48 per square foot in Dallas from the
highs reached in 2008, according to CBRE.
The lower rental rates are encouraging
some recent leasing activity, according to
the Dallas Beige Book.

11 SouthwestEconomy

Prospects for recovery. A rebound in
the retail, industrial and office leasing markets depends on broad economic improvement. Recent data give reason for optimism.
Renewed growth in Texas and U.S. retail sales bodes well for the retail property
sector (Chart 4). Moreover, Texas exports
have recovered from record lows, following
improving trends in U.S. industrial production—an encouraging sign for the Texas
industrial market. Finally, data point to a
brewing recovery in Texas employment in
service industries that typically drive office
demand—notably, professional and business services and finance.

Chart 3
Commercial Real Estate Vacancy Rates Edge Up in Texas
A. Retail
Thousands of square feet
4,000

Percent
24

3,500
3,000

Fort Worth

Texas

U.S.

Dallas

Houston

Austin

20
16

Vacancy rates

2,500

2,000
8
1,500
4

Texas absorption

1,000

500

Signs of Life

–4

–8

–500
–1,000

–12
2002

2003

2004

2005

2006

2007

2008

2009

2010

B. Industrial
Thousands of square feet

Percent

50,000

42,500

Fort Worth

Texas

U.S.

Dallas

Houston

Austin

35,000

20
16

Vacancy rates

27,500

8
20,000
4
12,500

Texas absorption
5,000

–4

–2,500

–8
–12

–10,000
2002

2003

2004

2005

2006

2007

2008

2009

2010

C. Office
Thousands of square feet

Percent

12,000
10,500

Fort Worth

Texas

Dallas

Houston

30
U.S.
Austin

Vacancy rates

9,000

20
7,500
15

6,000
4,500

Texas absorption

3,000

1,500
0

–5

–1,500
–3,000

–10
2002

2003

2004

2005

2006

2007

2008

2009

2010

NOTES: The Texas vacancy rate is population-adjusted by the Dallas Fed. Texas absorption is the sum of the major Texas metros.
SOURCES: CB Richard Ellis Econometric Advisors; calculations and adjustments by the Federal Reserve Bank of Dallas.

FEDERAL RESERVE BANK OF DALL AS • SE COND QUARTER 2010

The analysis of conditions in Texas’
retail, industrial and office property markets
finds a common theme—a sharp decline
during the recession that gives way in the
most recent reports to a few glimmers of
hope. A similar scenario emerges from data
and reports on investment property sales.
Credit crisis halts investment. In
the years leading up to the credit crunch,
financial innovations that repackaged risk—
most notably, securitized lending—surged
not only in the residential mortgage market
but also in CRE and other investments. This
led to large increases in the share of mortgages held by investors. CMBS issuers that
held commercial and multifamily mortgages
spiked from about 4 percent in 1990 to just
over 25 percent by 2009 (Chart 5).
Commercial banks still hold the largest
amount of CRE debt, with their share rising
to 45 percent over the past two decades.
Life insurance companies, savings institutions and other investors saw their shares
decline. Researchers suggest that CMBS
issuers’ rising share made the overall commercial market more vulnerable to financial
market disturbances.5
Texas’ commercial investment market
was jolted when financial markets panicked
in 2007. CMBS lending was virtually shut
down, and banks halted most CRE lending, too, putting stringent standards on
new loans. The Dallas Beige Book noted
that virtually no loans were being made for
large commercial deals as banks tried to
reduce their exposure to CRE.
Sales low but starting to stir. When
credit dried up in 2008, Texas commercial
property sales plummeted. Early 2009 was
even worse, with Texas transactions falling
to almost zero. Later in the year, business
picked up, but the full-year sales volume

12 SouthwestEconomy

of its headquarters in The Woodlands, near
Houston. Anecdotal reports from Dallas
Fed contacts concur that investor interest is
growing, with scattered instances of bidding
wars bumping up sales prices.
Financial hurdles lie ahead. Texas
has its fair share of the nation’s growing volume of distressed assets—defaults, foreclosures or bankruptcies. While rising distress
may mean bargains for investors, it’s a concern for the banking industry.
The large number of CRE loans maturing over the next several years is another
worry for banks, given today’s tighter lending standards and lower property values.
This can leave borrowers who are current
on their payments with a refinancing gap
that may be hard to fund with new loans.
This is why banks have preferred to extend
maturing loans in hopes that conditions will
improve.
Most Texas CRE loans are concentrated
at smaller regional and community banks,
which depend on CRE lending as a major
source of business. Texas banks have almost
double the commercial real estate exposure
as the national average, although the Texas
share has come down considerably from
almost 30 percent in third quarter 2008 to
26 percent as of first quarter 2010. The good
news is that Texas’ share of nonperforming—or troubled—CRE loans has remained
well below the national average throughout
the downturn.
(Continued on back page)

Chart 4
Drivers of Rental Demand Show Improvement
Index, January 2000 = 100

200

180

Texas real exports

Texas real retail sales

Texas professional and financial
services employment

U.S. industrial production

160

140

120

100

80
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

NOTE: Retail sales are estimated and based on quarterly data; exports and retail sales are in real dollars.
SOURCES: WISERTrade; Census Bureau; Bureau of Labor Statistics; Texas Workforce Commission; Federal Reserve Board; calculations and
adjustments by the Federal Reserve Bank of Dallas.

of office, industrial, retail and apartment
properties totaled just $3.8 billion, down 68
percent from 2008 (Chart 6).6
Sales activity for all property types was
hampered not only by a lack of available
credit but by sellers unwilling to sell at very
low prices. Nationally, commercial property
prices plunged 44 percent from their peak in
late 2007 before bottoming out in October
2009, according to Moody’s/REAL commercial

property price index. Texas price statistics are
difficult to obtain, but anecdotal reports and
rough figures reflect the U.S. trend.
More recently, competition for good
deals has spurred some property sales.
Data from Real Capital Analytics show firstquarter property sales volumes inched up
from year-ago levels in the U.S. and Texas.
The largest transaction nationally in February was Anadarko’s $215 million purchase

Chart 5
Composition of Commercial Mortgage Holders Shifts

Chart 6
Commercial Real Estate Sales Volumes Inch Up

Percent

Billions of real dollars (U.S. in tens of billions)

50
1990

2009

40
35

2007

2008
2009

2010 annualized

5
0

Commercial
banks

CMBS
issuers

Life insurance
companies

Savings
institutions

GSEs

Others

NOTE: CMBS stands for commercial-mortgage-backed securities, and GSEs are governmentsponsored enterprises.
SOURCES: Flow of funds data; Federal Reserve Board; Compendium of Statistics; Commercial
Mortgage Securities Association.

5
0
U.S.

Texas

Dallas

San Antonio

Austin

Houston

SOURCES: Real Capital Analytics; calculations and adjustments by the Federal Reserve Bank of
Dallas.

FEDERAL RESERVE BANK OF DALL AS • SE COND QUARTER 2010

13 SouthwestEconomy

SpotLight

Maquiladora Employment

New Data Confirm Pickup in Juárez Factory Jobs

or decades, Mexico’s maquiladoras have
been a major growth engine in the Rio Grande
region, and monthly reports on the industry’s
employment, wages and production were key
barometers for the border region’s economy.
These valuable indicators were lost in December 2006, when Mexico’s Instituto Nacional de Estadística y Geografía (INEGI) ceased
publishing maquiladora data. New rules on
export-oriented industries merged the maquiladora industry and a program for homegrown
exporters into the Maquiladora Manufacturing
Industry and Export Services, or IMMEX.1
In January, INEGI began releasing
IMMEX data going back to July 2007 and including monthly employment, establishments
and wages for 17 states and 33 municipalities.2
In addition to providing a portrait of exportrelated manufacturing in Mexico, the new data
allow us to resurrect an important economic
indicator for the El Paso–Juárez region.
Mexico had more than 1.6 million IMMEX
jobs as of December 2009, with Juárez, Tijuana
and Reynosa representing 23 percent of the total (Table 1). Given that IMMEX combines maquiladoras with other exporters, interior cities
such as Apodaca and the Distrito Federal now
rank in the top five in terms of number of jobs.
In December 2006, maquiladoras accounted for 22.4 percent of manufacturing jobs

in Mexico; IMMEX firms currently make up 33
percent.
While maquiladora data were unavailable
for three years, an alternative barometer of the
El Paso–Juárez region’s economic conditions
was needed. We developed a model to estimate Juárez’s monthly maquiladora employment. It uses three indicators:3
• U.S. industrial production: Once U.S.
industrial production picks up, orders are sent
to Mexican plants within one or two months.
• Real peso–dollar exchange rate: Maquiladora plants have peso-denominated
costs and dollar-denominated revenues—so
changes in the exchange rate are crucial.
• Manufacturing employment: Since
Juárez is the major manufacturing city in Chihuahua, changes in state manufacturing employment can be used as a proxy for changes
in factory jobs at the city level.4
Our model reasonably tracks historical
turning points in Juárez’s maquiladora employment—for example, the onset of the downturn
in October 2000 and the beginning of the recovery in November 2001. Regarding the recent business cycle, our model indicates the
employment peak was in October 2007 and
the trough was July 2009 (Chart 1).
The model matches closely the turning
points in the recently released IMMEX Juárez

Table 1
Top Cities for Mexico’s Export-Related Jobs

Maquiladora Manufacturing Industry and Export Services Employment
(January–December 2009 average)
Rank

City

Employment

Share (percent)

Juárez, Chihuahua

164,613

10.2

Tijuana, Baja California

137,580

8.5

Reynosa, Tamaulipas

72,372

4.5

Apodaca, Nuevo León

55,969

3.5

Distrito Federal

52,812

3.3

Mexicali, Baja California

45,145

2.8

Matamoros, Tamaulipas

39,953

2.5

Chihuahua, Chihuahua

37,800

2.3

Aguascalientes, Aguascalientes

35,408

2.2

San Luis Potosí, San Luis Potosí

32,461

2.0

SOURCE: Instituto Nacional de Estadística y Geografía.

SouthwestEconomy 14

employment data. According to our model,
Juárez maquiladoras have been expanding
their payrolls since August 2009 and employment levels are now above year-ago levels.
This model will continue to be a timely
indicator of El Paso–Juárez area manufacturing activity, given its track record and Mexico’s
two-month lag in reporting IMMEX data.
—Roberto Coronado and Jesus Cañas

Notes
See “Mexico Regulatory Change Redefines Maquiladora,”
by Jesus Cañas and Robert W. Gilmer, Federal Reserve Bank
of Dallas Crossroads, Issue 1, 2007, www.dallasfed.org/
research/crossroads/2007/cross0701b.html. IMMEX stands
for Industria manufacturera, maquiladora y de servicios de
exportación.
2
For data series, see http://dgcnesyp.inegi.org.mx/cgi-win/
bdieintsi.exe/NIVJ200035#ARBOL.
3
For more details on the methodology, see “Short-Run
Maquiladora Employment Dynamics in Tijuana,” by Roberto
A. Coronado, Thomas M. Fullerton Jr. and Don P. Clark,
Annals of Regional Science, vol. 38, no. 4, 2004, pp. 751–63;
and “Maquiladora Employment Dynamics in Nuevo Laredo,”
by Jesus Cañas, Thomas M. Fullerton Jr. and William Doyle
Smith, Growth and Change, vol. 38, no. 1, 2007, pp. 23–38.
4
Formal-sector manufacturing employment for Juárez is no
longer available through the Instituto Mexicano del Seguro
Social. Therefore, we have to rely on the state-level data.
1

Chart 1
Model Tracks Turning Point in Maquiladora Employment
Index, July 2007 = 100
105
100
95
90

Juárez—FRB estimate

85
80

Juárez—IMMEX

75
70

2007

2008

2009

2010

SOURCES: Instituto Nacional de Estadística y Geografía; Federal Reserve Board; Banco de México;
Instituto Mexicano del Seguro Social; authors’ calculations.

FEDERAL RESERVE BANK OF DALL AS •SE COND QUARTER 2010

NoteWorthy

QUOTABLE: “Regional conditions have firmed up this year, and recent
data suggest a recovery is taking hold in the Eleventh District. Despite the
improvement, several risks to the budding recovery remain.”
—Laila Assanie, Associate Economist

NATURAL GAS: Glitches Point to Inflated Output Data
Natural gas production and consumption data have
been drifting apart. The difference grew from 6 percent of
natural gas consumption in December 2009 to 10 percent a
year later.
Production should equal consumption plus increases or
decreases in storage, but sampling and estimation errors typically result in slight discrepancies. Seeing these gaps rise,
the Energy Information Administration (EIA) implemented a
new methodology with the release of February’s production
data that should ensure greater accuracy. Estimates for the
prior 12 months were revised as well.
The changes revealed lower production for some states—
namely Texas and Louisiana—plus the Gulf of Mexico. While
natural gas production was lower than initially thought, the

downward revisions were smaller than expected—as evidenced by a drop in the price of natural gas coinciding with
the data release.
The estimation errors were traced to an outdated sampling methodology. The EIA had used data from big producers to estimate smaller companies’ production. Estimates
based on long-run data became less accurate as many smaller producers started using newer drilling technology to tap
shale gas.
The EIA will now update the list of companies surveyed monthly and base estimates of nonsampled companies’ production on data that are six to 18 months old rather
than the two to seven years used previously.
—Jackson Thies

TEXAS AGRICULTURE: Drought’s End Brings Optimism
The outlook for Texas agriculture is brighter for 2010—
welcome news after severe drought and a weakened global
economy caused distress in 2009.
The El Niño weather pattern brought a wet autumn and
winter to Texas, ending one of the worst droughts the state
has ever suffered. Prices for livestock and commodities have
firmed with economic recovery, and the Department of Agriculture is forecasting a 12 percent increase in U.S. net farm
income over last year.
The outlook for the Texas cattle industry—largest among
the states—improved in recent months as ample rainfall
boosted pasture growth and market prices strengthened.

Livestock producers were hit hard in 2009. Prices fell
as global demand retreated and drought conditions caused
ranchers to cull herds and implement costly supplemental
feeding. Texas cattle and calf inventory at the start of 2010
was the lowest in 20 years.
Rain restored soil moisture in time for the spring planting
season, and Texas farmers anticipate a strong 2010 crop. Wet
conditions delayed corn planting in some parts of the state,
but overall crop progress is good. Cotton prices are expected to increase this year after a relatively low global harvest,
which bodes well for Texas, the nation’s top cotton producer.
—Emily Kerr

FORTUNE 500: Texas Ties California for National Lead
More of the nation’s largest companies call the Lone Star
state home.
According to the 2010 Fortune 500, released in April,
Texas hosts the headquarters of 57 of the nation’s 500 largest companies, ranked by gross revenues. These include
three of the top 10: Irving-based Exxon Mobil (second
behind Wal-Mart), Houston’s ConocoPhillips (sixth) and
Dallas-based AT&T (seventh).
Texas tied California as the national leader in Fortune
500 firms, ahead of New York (56) and Illinois (31). Houston is home to 24 of these companies, more than any other U.S. city outside New York. Twelve are headquartered in

Dallas, and an additional 12 are based in the greater Dallas–
Fort Worth area.
Texas secured its place as a Fortune 500 leader through
its position as focal point of the domestic energy industry, its
relatively strong economic growth over the past decade, and
its relatively low tax rates and living costs.
In 2000, Texas was home to 43 Fortune 500 corporations
and trailed New York and California by substantial margins.
Houston had 18 companies and Dallas eight. Both cities have
grown in importance as Fortune 500 hubs, with Dallas rising
over the past decade from seventh to third in the nation.
—Mike Nicholson

FEDERAL RESERVE BANK OF DALL AS • SE COND QUARTER 2010

15 SouthwestEconomy

PRSRT STD
U.S. POSTAGE

Federal Reserve Bank of Dallas
P.O. Box 655906
Dallas, TX 75265-5906

PAID

DALLAS, TEXAS
PERMIT NO. 151

SouthwestEconomy

Cloud Over Commercial Real Estate Is
Slowly Lifting in Texas
(Continued from page 13)

is published
quarterly by the Federal Reserve Bank of Dallas. The
views expressed are those of the authors and should
not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.
Articles may be reprinted on the condition that
the source is credited and a copy is provided to the
Research Department of the Federal Reserve Bank of
Dallas.
Southwest Economy is available free of charge
by writing the Public Affairs Department, Federal
Reserve Bank of Dallas, P.O. Box 655906, Dallas,
TX 75265-5906; by fax at 214-922-5268; or by telephone at 214-922-5254. This publication is available
on the Dallas Fed website, www.dallasfed.org.
Executive Vice President and Director of Research

Harvey Rosenblum
Director of Research Publications

What the Future Holds
The outlook for CRE may not yet be
optimistic, but it is less gloomy. With the
national and Texas economies turning a
corner and demand in the rental and investment markets stirring, a bottom may be
within sight.
It will take time for the Texas CRE sector as a whole to heal, and it will likely be
quite a while before private commercial
construction activity picks up. Asset devaluations and weakness in rental markets
remain challenges for CRE loans on banks’
books. CRE lending will likely remain subdued while banks address these concerns.
Demand for new space will depend on
sustained employment growth and business
expansion, and the Texas economy remains
fragile, having just entered recovery. Nevertheless, the state’s business activity does
appear to be moving in the right direction.
Petersen is a business economist in the Research
Department at the Federal Reserve Bank of Dallas.

Notes
1
See “Office Real Estate Cycles in Texas: Some History,” by
D’Ann Petersen, Federal Reserve Bank of Dallas Southwest
Economy, March/April 2005, www.dallasfed.org/research/
swe/2005/swe0502a.pdf.
2
Data for all metro property markets provided by CBRE
Econometric Advisors.
3
Grubb and Ellis 2010 Forecast Reports.
4
From first-quarter Austin office MarketView research report,
CB Richard Ellis.
5
See “Is Commercial Real Estate Reliving the 1980s and
Early 1990s?” by C. Alan Garner, Federal Reserve Bank of
Kansas City Economic Review, Third Quarter 2008.
6
Apartments are included as commercial real estate
properties in sales data because they are income-generating.
For the same reason, apartment properties are included in
banking statistics for commercial real estate.

Mine Yücel
Executive Editor

Pia Orrenius
Associate Editors

Jennifer Afflerbach
Kathy Thacker
Graphic Designers

Samantha Coplen
Ellah Piña

Full text of The Southwest Economy : Second Quarter 2010

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