Houston’s Monthly Metrics: December

The following article originally appeared in the December 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.

As the year comes to a close, Houston did significantly better than we expected.  We started the year by telling you to expect the “new normal,” the Greater Houston Partnership’s forecast of 69,800 new jobs, 30,000 new home starts and 12,000 multi-family units to be built in 2014.  And eleven months later, we are expecting over 100,000 new jobs, 18,000 multi-family units delivered thus far with another 24,500 under construction and an estimated 30,000 new homes.  This year was a much better “normal” than anyone expected, so will this be the “normal” in 2015?

This year has taught us that we are still primarily an energy-driven city.  The shale boom has kept Houston out of the recession that so many other areas have experienced over the last several years, and has boosted our city’s profile on a global scale.  And as long as the price of oil stays above $75 and, as Dr. Bill Gilmer warned in his bi-annual forecast, OPEC does not drive the US into a swing producer of oil – thus creating a cyclical economy for oil and gas – Houston will continue to thrive in 2015.

Absent a decline in the price of oil below $70, which then takes an estimated four months to hit the Houston’s economy according to the Houston Branch of the Federal Reserve Bank, there will still enough projects in the different market segments to keep contractors very busy next year.  Hospitals and schools are expected to pick up steam in 2015, as they have lagged until now.  Office, light industrial and retail are all expected to remain strong – helped by the new segments of the Grand Parkway opening up and creating access to undeveloped land.  Residential construction is expected to start 35,000 new homes and finally catch up to the demand they have been lagging behind for the last two years, while multi-family may see a return to a more “normal” market, as they are at risk of becoming oversaturated.

The continued bottlenecks will be the materials and labor.  The Grand Parkway, a 212 mile long freeway, is currently 2.2% of the total concrete in the U.S. – meaning these prices are not likely to stabilize until the road construction is completed, which currently has the segments from 290 to 59N slated to open at the end of 2015.  And labor shortages will persist across all markets.  An executive from Zachry Construction was noted as saying they are 65% short of their workforce needs and have been increasing wages 8% a year, with the expectation of increasing that by double digit percentages going forward.  With the per diems offered and the overtime on top of that, the average industrial construction worker can expect an annual salary in the $100k range!  This will only tighten the commercial market further as we struggle to compete for the skilled worker.

So are we back to normal in 2015?  I would expect that 2015 will be closer to the “normal” predicted by the Greater Houston Partnership than we saw in 2014, but still a bit busier and not without its hurdles.