The following article originally appeared in the April newsletter to clients of Kiley Advisors, now a part of FMI Corporation, for the purpose of providing the latest leading indicators and industry issues to those clients. Reprinted with permission.
The latest benchmark revisions to the Houston MSA employment numbers show a significantly lower net gain of 200 jobs in 2015 and a more robust 18,700 in 2016, signaling that 2015 may have been slower than originally thought, but that momentum began to increase at a more rapid pace in 2016.
For construction, which lags behind the overall Houston economy, public work continues to dominate. The Texas Department of Transportation and Harris County Toll Road Authority have unveiled over $2 billion in freeway improvements over the next five years, with the hopes of dramatically improving mobility across the city. The city’s permit dollar volumes are up year-over-year for both January and February – with most monies allocated to school construction, retail, and parking garages. Medical construction, which has a large amount in the pipeline, may see some delays as Washington, D.C. attempts to make changes to the Affordable Care Act (ACA). Much like when the ACA was first implemented, the medical institutions will want to ensure they have a clear picture of the medical coverage of tomorrow, the number of people covered by that insurance, and the reimbursements within that program before making any non-urgent construction plans. While some projects will move forward regardless, we do expect to see a pause.
The office market continues to be awash in sublease space, hovering around 11 million square feet. The market is in one of its slowest periods in recent memory, yet there are at least three build-to-suit projects underway as tenants are not finding what they are looking for in the market. Bank of America is taking a strong look at Capitol Tower, which would kick-start its construction downtown, and HP is setting up in Springwoods Village. CBRE continues to feel that the office market will take approximately five to seven years to fully absorb and recover.
The hotel market is expected to be relatively flat this year. The temporary bump from the Super Bowl helped, but revenue per available room (RevPAR) and occupancy rates are already back at pre-Super Bowl levels. While the overall impact to the city is still being evaluated, it is estimated that the city of Houston will see $6.4 million and Metro will see $7.1 million from the sales tax allocations directly tied back to the event.
The Institute for Supply Management’s Purchasing Managers Index for our region has remained above 50 for the past few months (anything above 50 is considered expansion). The uptick has been due to more optimistic responses from the oil and gas industry survey respondents, though a recent dip in oil prices may have taken the wind from their sails. The construction and engineering responses were more subdued, with reports that some east Houston industrial projects are slowing down their schedules due to higher than expected costs. Ken Simonson, chief economist for the Associated General Contractors of America, tracks the producer price indexes for construction each month, and there has been a significant increase in year-over-year costs of diesel fuel, steel, iron, and asphalt, to name a few. With the inputs to construction index outpacing the finished nonresidential index, it implies, in Simonson’s words, “a squeeze on profits unless contractors can pass on cost increases or improve productivity.”
