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Houston’s Monthly Metrics: August 2015

The following article originally appeared in the August newsletter to clients of Kiley Advisors, LLC for the purpose of providing the latest leading indicators and industry issues to those clients. Reprinted with permission.

With oil prices again on a bit of a roller coaster, the outlook for Houston becomes cloudier.

Well permits and rig counts have hit bottom, total production has been declining since April, and is expected to continue to decline, potentially at a faster pace, according to Jesse Thompson with the Houston Branch of the Federal Reserve Bank. With developing countries reducing their demand for oil, through efficiencies, and domestic GDP growth underperforming its 2015 target through the first two quarters, lower oil demand and lower oil prices over the next year or two are an increasing possibility. If Iran’s energy sanctions are lifted in December, it can only hurt Houston more, extending the lull in oil prices, and most likely dragging these depressed market conditions out for much longer than originally expected – feasibly causing a period of sustained non-energy slow growth for Houston, similar to the nineties, said Patrick Jankowski, with the Greater Houston Partnership. With the Purchasing Manager’s Index contracting, and metros across the U.S. improving, Houston is no longer the bright star it has been the last few years, and will probably normalize to the U.S. growth rate for the next few years.

The industrial construction market remains strong the next two to three years, in spite of these facts. The residential construction market, however, looks to be hitting a snag in two years when they will potentially run out of developed lots, thus driving up demand (and cost) for existing homes and reducing Houston’s affordability, while forcing potential homeowners into apartments due to lack of supply. Metrostudy expects around 28,000 starts and roughly 26,000 closings by year end 2015, which is down from a year ago but still puts Houston number one in the nation. 2016 is not forecasted to be as rosy and the 2017 lot shortage will bring a new challenge to our area.

The commercial construction market is a bit mixed. Permits and billings continue to reflect a strong market, though the effects from the oil price slump are growing closer and darker by the month. CBRE’s second quarter report shows light industrial at a low 4.8% vacancy and 10.3 msf under construction. Retail has 6.3% vacancy and 1.36 msf under construction – thanks to continued grocer expansions and the fallout of office and multifamily properties. The office market now has 6.8 msf of sublease space (the highest in at least 30 years), primarily from the energy sector, with no spec buildings currently in the pipeline.

Public work, overall, seems to be holding steady. Schools and hospitals will move forward with their plans to catch up with all the growth Houston has experienced over the last few years. Office, multifamily, which was at risk for overbuilding but is now capturing those unable to get into a home, light industrial that caters to the energy market, and hotels are the most at risk going into the second half of 2015 and into 2016. Nonetheless, Houston is still a great place to be longer range.