California Dreamin' No Longer as More Businesses Relocate to Texas

By Suchi Rudra | Wednesday, 24 March 2021 | Feature, Business

Everything's bigger in Texas — except for the costs of living and doing business. Bottom-line considerations are the main reason an increasing number of California businesses are making a run for the Lone Star State.

Although Californians have been slowly relocating to Texas for about a decade (at a rate of about 60,000 to 70,000 a year), the pandemic brought about a noticeable awareness and increase of the trend. 2020 was the first time since 1900 that California did not show a gain in population, according to the Census Bureau.

“This pandemic expedited what was already happening,” said Mitch Jacobson, executive director of Austin Technology Incubator (ATI). “I think more headquarters are moving here. It's less money to build here and to attract talent, which is expensive. So if the talent is in your backyard, it's less expensive.”

Indeed, the California Book of Exoduses, which goes back to 2014, may look like a simple spreadsheet, but this continuously updated list offers a clear picture of companies leaving California for more affordable pastures in Texas and other states.

While Dallas and Houston are also popular with tech firms, the last couple of decades has created a tech hub (known as Silicon Hills) out of Austin, which has long labeled itself as the “live music capital of the world.” Apple, Facebook, Google, Amazon, and now Tesla have set up major campuses or factories in and around the Texan capital, although the headquarters of these firms remain in Silicon Valley — at least for now.

But the most headline-grabbing moves came last year when tech giants Oracle and Hewlett Packard Enterprise (HPE) decided to relocate their headquarters to Texas — an especially dramatic step since the two firms are both founding members of Silicon Valley. While HPE will relocate to a suburb of Houston (Spring, Texas), Oracle is establishing itself in Austin, where it has already had an office campus for several years.

Plenty of other large California firms are staying put for now — but their founders are not. Elon Musk (who will now save billions of dollars in taxes) made his grand departure from California to Austin in December 2020, joining Palantir co-founder Joe Lonsdale, Dropbox CEO Drew Houston, and Jim Breyer of Breyer Venture Capital.

“You have Elon Musk saying that Austin is the next big thing for the next 50 years. When someone like Elon says that, it makes a difference,” said Jacobson, who believes that statements like these will drive solopreneurs and smaller startups to choose Austin's tech community over the pricier Silicon Valley. Already, ATI has seen a greater number of entrepreneurs and startups from outside of Texas reaching out to them after discovering them online during the pandemic.

Although the tech sector dominates this relocation wave, large companies from other industries have also been part of the exodus over the past decade. Toyota Motors North America shifted its headquarters from California to Texas in April 2014, as did Jamba Juice in May 2016 and Charles Schwaab in November 2019. Jacobson adds that the consumer products and goods (CPG) and the biotech sectors are growing rapidly in Texas, increasingly drawing life sciences venture capitalists out to the Lone Star State.

There are also many small- to medium-sized businesses that quietly made their exit over the last few years. “The Teslas and the Oracles get all the press, but smaller companies are also moving here from California,” said Jacobson. Just last year, Fincal and SignEasy, two smaller tech companies with under 40 employees each, left California for Texas.

Why Texas Is So Appealing to Business Owners — and Their Employees

Certainly, the strong talent pool and constant stream of highly educated graduates from Austin, Houston, Dallas, and beyond are appealing for any firm looking to grow, Jacobson pointed out; and the state's central location has its advantages for business travel and distribution. But it's no secret that Californians who have made Texas home have done so largely because of the lower cost of doing business and fewer regulations. Texas is one of seven US states that does not have a state income tax, whereas top earners pay a 13.3% state income tax in California. In terms of business-friendly taxation systems, the Tax Foundation’s State Business Tax Climate Index for 2021 ranked California 49 out of the 50 states, while Texas came in at 11. Making a move to Texas can save businesses as much as 20% on overall costs, including taxes, payroll, and operating costs.

However, access to much less costly real estate in Texas is also a big draw for Californians. Ben Wright, a senior economist at California Economic Forecast, pointed out that California's lack of affordable housing and high real estate costs, both commercial and residential, are the main reasons businesses are heading to Texas and other states like Florida and Arizona.

“Taxes and regulations are certainly a factor, but salaries are often the largest cost for professional services firms, so finding ways to reduce salary expenses is the primary reason that companies relocate out of California. Reducing salary expenses is the main draw, and a lower tax rate is the cherry on top,” Wright explained.

After Hawaii, California is the country's second most expensive state for purchasing real estate.

In an October 2020 report released by the California Association of Realtors, the state’s median home price was forecast to rise 1.3% to $648,760 in 2021. According to Zillow, San Francisco still takes the top prize for the most expensive city in the state to live in, with the average home valued at $1.41 million. San Jose is a close second, with the average home price at $1.06 million. These numbers only continue to rise each month, with RenoFi projecting that by 2030, homes in both cities will average $2.61 and $2.25 million, respectively. However, apartment rental prices in these two major tech hubs have been driven down in the last year by the shift of newly remote employees moving out into the suburbs — and out of state.

On the other hand, the average cost of a home in the city of Austin is valued at $482,766 as of February 2021 — up 15.1% since January 2020 — although the current housing supply is having a hard time keeping up with the growing demand driven by the flood of corporate relocation.

“We’re still very much in a sellers’ market [in Austin]. Across the region, a high quantity of offers, cash offers and requests to waive appraisals or option fees are increasingly commonplace,” said Job Hammond, 2021 secretary/treasurer of the Austin Board of Realtors.

Growth of Remote Work Culture Allows for Relocation

Aside from more obvious financial motives, the success of remote work during the pandemic opened up a world of possibilities for employers and employees. A study from Upwork in October 2020 found that between 14 to 23 million Americans planned to relocate due to the newfound flexibility offered by remote work. And between February and May 2020, apartment search websites like Apartments.com and Zumper.com both reported a sizable spike in searches from the San Francisco Bay area for housing in Austin. Because companies are finding that it's business as usual even without in-office meetings, they are offering employees the chance to work from home permanently or relocate to a more affordable city — which has led to many tech employees bidding farewell to California's skyrocketing real estate prices and embracing the lower cost of living in places like Austin. In filing its corporate headquarters relocation decision in December 2020, Oracle stated that its move meant “many of our employees can choose their office location as well as continue to work from home part-time or all of the time.”

Jacobson is excited about the people moving in to grow, nurture, invest in and give back to the startup ecosystem of Austin and the region but admitted that “we never want to become Silicon Valley because of the things that have happened there, the cost of living, and we do have our challenges as [Austin] grows, like affordability and traffic.”

Read our guide to learn how to start a business in Texas!

About the Author

Suchi Rudra

Suchi Rudra is a freelance writer who is passionate about covering emerging tech, entrepreneurship, and real estate. Her work has appeared in The New York Times, Fast Company, VICE, EdTech Magazine, and many other publications.