The Houston Picture in 2014

Editor’s note:  The following condensed version of Kiley Advisors 2014 Forecast was written by Pat Kiley and Candace Hernandez, co-founders of Kiley Advisors, LLC, and is published here with their permission.

Looking Back

• Houston was a major job creator once more in 2013, adding 86,000 new jobs.
• Houston again had population growth of approximately 125,000 people.
• There was positive absorption in all major commercial market segments (office, light industrial, retail and multifamily) again, with the vacancy rate for Class A office space remaining well under 10%.  Rental rates continued to increase in all segments as well.  Single family new home contracts increased by 20+ percent; spec houses were selling at custom prices.
• Non-residential new contract awards should exceed $4 billion, (as they did in 2012) when McGraw- Hill adjusts their numbers.
• The K-12 and medical markets began to awaken as the year ended.

Looking Ahead

The International Picture – Changes are brewing

• Global GDP growth is projected to be 3.6%. Asia will be the leading region (5.7%).
• BRIC (Brazil (2.5%), Russia (3.3%), India (6.1%) and China (7.3%)) will experience slower growth in 2014.
• Western Europe will be better (1.1%), above 1% for the first time in years, but still rather anemic.
• Double digit GDP growth will occur in South Sudan (35%); Mongolia (15.3%); Macau (13.6%) and Sierra Leone (11.2 %).

The National Picture – The modest rate of recovery will continue

• US GDP growth is projected to be 2.6%, although some forecasters project as high as 3.5%.
• The unemployment rate will continue easing down from the year-end 7% to 6.3% (per the Federal Reserve)
• Political battles loom on key financial issues, but hopefully the pending mid-term elections and recent bite-size compromise on the budget will help avoid any disruptive economic impact.
• It will be the end of the first quarter before the trajectory of the plague-ridden Affordable Care Act is known further.

Texas and Houston- all metrics are positive

• Most Texas cities are experiencing both population and employment growth.  Time magazine says four of the top seven job-creating cities in the US in 2014 are in Texas (McAllen, Austin, Houston and Fort Worth.  Unemployment rates in Texas are well below the US rate (Texas 5.8%, Houston 5.6%, Dallas 5.6% and Austin 4.7%).
• The shale boom, while moderating because of more efficient drilling and production methods, will continue for several more years.  This is driving office, light industrial, infrastructure, and power plant and manufacturing facility construction.  Shale exploration anywhere in the world benefits Houston companies.
• The Port’s continuing expansion, the exciting plans at the Texas Medical Center and its member institutions, and the expanding residential developments’ needs for retail and educational facilities all portend construction, too.

What Will Drive Construction in Houston in 2014

• The Greater Houston Partnership (GHP) is forecasting another 125,000 residents and the creation of 69,800 new jobs this year.  Additionally, the GHP feels the “new normal” for Houston going forward is 125,000 new people and 65,000 jobs per year!

• Favorable metrics (vacancy, occupancy, rental rates, absorption) in all market segments and a measureable pulse-beat again in K-12 and medical.
• Financing is available at favorable rates for the right project.  Equity requirements are in the 30-35% range (down slightly); personal guarantees or corporate loans with heavy covenants as to balance sheet minimums or pre-leasing are still required.  The interest is in the LIBOR plus 2.75 – 3.5% range.  Experienced, quality project sponsors are the most determining factor.
• The Energy Information Agency (EIA) pricing forecasts are favorable to continuing high levels of exploration and drilling.  West Texas Intermediate (WTI) crude is projected to average $95 per barrel in 2014, and the natural gas (Henry Hub) price is expected to average $3.78 per MMBtu in 2014.
• The war for talent, specifically the need to attract the Science Technology, Engineering, Arts and Math (STEAM) millennial generation graduates, will drive both new facilities and revisions to existing facilities.  They want top-flight space with smaller individual offices and larger collaborative areas and many amenities (gyms, food options, yoga classes and childcare).
• Architects, serving all market segments, are continuing to hire.

Sector and Segment Highlights

• Residential will be a very strong sector again this year - an additional 30,000 single family dwellings and 12,000 multi-family units are projected.
• The heavy industrial sector will also be extremely strong.  This is the market place that is benefiting from the cheaper energy provided by shale gas.  There will be new construction, expansion and conversion projects in the chemical, power and manufacturing segments in particular.  This sector is estimated at $200 billion over the next 3-5 years from Corpus Christi, Texas to Pensacola, Florida; $70 billion in Texas in 2014.  This surge is projected to require additional 35-50,000 craft workers in Louisiana alone.
• The highway/civil sector will once again be driven by TXDOT, which will have over $900 million in the 6 counties around Houston.  When you add in all the city and county budgets, this will be a healthy marketplace again in 2014.
• The commercial and light industrial sectors will experience growth in all segments with the rate moderating slightly in some.  Office may ease from its torrid pace of the past two years, but the metrics are positive – vacancy for Class A space is 7.3% and rental rates are rising.  Light commercial may see only a slightly slower pace as the vacancy rate is 5.3% and rental rates continue to rise, and the Port continues to grow as do the oilfield service companies.  Retail has a vacancy of 7.4%, which ought to promote construction at the 2013 level (2 million sf) or greater.  Higher education, hospitality and entertainment, churches and public building works will all see similar or expanded growth to 2014.  Two market segments, medical and K-12, will begin to thrive again.  All major health care systems have significant work, and the Texas Medical Center has some exciting plans for future years.  The K-12 market will climb steadily in 2014, with 2015 and 2016 looking even stronger.
• New non-residential construction contract awards should be in the $4.3 - $4.7 billion range again in 2014.

Industry Issues Remain

• The looming shortage of skilled craft workers trumps every other issue.  It is critical that we get immigration reform and the Construction Career Collaborative (C³) principles specified on as many jobs as possible.
• The war for talent is escalating.  Competent people in all positions are in great demand.
• Labor shortages will lead to innovation and modularization.
• Margins remain unrealistically low.  Working capital issues can still cause job problems and losses.  “Know your project partners” remains a wise mantra.

For further information, listen to Scott Braddock’s interview with Pat Kiley in the January 16 Construction Citizen podcast.

See also: The War for Talent: It Is Time to Up Our Game