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Houston’s Monthly Metrics: August 2016

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.

A tale of two market segments. As the second quarter numbers begin to role in, the precipitous drop of Class A general purpose office space construction and the rocketing growth of retail construction become increasingly clear. While the office market is breaking records in the amount of sublease space available (a 20 year high according to CBRE), and experiencing its first quarter of negative absorption in over five years, retail is thriving, with the strongest single quarter absorption since 2007 – nearly 1.5 msf, a record high occupancy rate and over 3 msf under construction, of which 85% is preleased.

Light industrial construction, while still weak in those areas catering to oil field services, remains an overall, healthy market. This strength is, in part, to the growth generated by the Petrochemical plants and the Port of Houston, but also the “medical tech-related manufacturing”, according to CBRE. The vacancy rate is at 5%, with over 1.7 msf absorbed and 11.2 msf under construction in the second quarter. While not reaching the peaks seen in the past two years, this market still has plenty of activity at a more measured pace.

And while the second quarter results for multifamily have yet to be released, early estimates are more of the same. The overbuilt market is seeing greater concessions offered as properties try to fill the vacant units that were built for a different economy. Like office, it may take multiple years before space can be absorbed and the next construction upcycle can begin.

In the residential market, Metrostudy shows that sales are only down about 3.5% from a year ago, which is less of a decline than projected, and Centerpoint is reporting a strong growth in residential customers (single and multifamily combined) year over year. But with the latest employment numbers putting Houston at -22,600 jobs for the year, based on December 2015’s employment numbers, and with the second half of the year typically showing less growth than the first half, how well these construction segments will continue to fare is increasingly gloomy. Auto sales have already seen a significant drop and the Purchasing Manager’s Index continues to hover in the mid-40’s (anything below 50 signifies a contraction in the market), both indicating the rougher road that lay ahead. Staying lean is prudent.

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