The following article originally appeared in the August 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.
While optimism surrounding the price of oil may be waning from the beginning of 2017, the Houston construction market continues to hum along at a surprisingly steady pace – down a bit, but not as bad as expected. City of Houston permits, while not reflective of the entire metro area, show a significant drop in dollar volume for residential permits. Digging deeper, the culprit is the additions/alterations segment, down 55% from a year ago, and likely due to the drop off in the multifamily sector. In fact, Metrostudy recently revised its new home starts for 2017 up to 26,950, with another 27,500 expected in 2018. This increase is due to the higher number of starts experienced in the first half of the year and the strong demand for entry-level homes. Lawrence Dean, regional director at Metrostudy, expects Houston to retain its Number Two spot behind Dallas for the most housing starts this year. Bruce McClenny, president at Apartment Data Services, confirmed that multifamily construction is down significantly, with 7,900 under construction compared to 30,000 a few years ago. Mr. McClenny expects about 12,000-13,000 units delivered this year and another 4,000-5,000 in 2018.
On the commercial side, we have seen city of Houston nonresidential permit dollar volume drop 9.9% compared to a year ago, primarily due to a drop-off in new nonresidential construction, suggesting there are more renovation-type projects compared to a year ago. The Purchasing Manager’s Index remains slightly above 50, signaling an expansion in the market, and the AIA Consensus Construction Forecast panel has predicted slower growth for the remainder of 2017 and through 2018. However, other indicators are more positive. Dodge Data & Analytics is trending 2017 to be a slightly stronger year for nonresidential than this time in 2016. The Architecture Billings Index rose to 54.2 (anything above 50 signifies expansion), with the southern region, where Texas is located, posting 54.8. Additionally, the American Institute of Architects (AIA) conducted a survey and found that nearly 60% of responding firms were hiring, signaling the architecture community’s optimism for work on the horizon.
CBRE recently released its second quarter findings for the Houston markets. The light industrial segment is fairing best, with 5.5% vacancy and positive net absorption, keeping the market relatively stable. The retail market is seeing some slowdown, but primarily due to the lack of quality space for tenants and a decrease in grocery-anchored shopping centers. Vacancy remains under 6% and 1.2 million square feet of retail space in under construction to help alleviate the pent-up demand. The office market is seeing a number of expired subleases driving up vacancy numbers and producing negative absorption. As the subleases expire, tenants are finding great deals on better quality space and leasing activity has risen significantly. Vacancy is now at 17.4% with 2 million square feet under construction. Dr. Bill Gilmer, director of the Institute for Regional Forecasting at the University of Houston, stated the business cycle index may show, once revised numbers are in, a very mild recession in 2015-2016 – the mildest on record in Houston – but it is still too early to tell for sure. Economists, overall, feel the worst is in the rearview mirror for Houston, which likely means another slow year for construction, before we see the recovery Houston is beginning to experience.
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