The following article originally appeared in the July 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.
While Brexit and its implications globally are still being analyzed and debated, the United Kingdom’s decision to separate itself from the European Union is seen as a positive, and necessary, move. While it will stunt the growth of Europe in the short term, to paraphrase Dr. Bill Gilmer with the Institute for Regional Forecasting, the train wreck is unavoidable so at least they are off the train.
For Houston, now two years beyond the oil price collapse, we are continuing to feel the ripple effects throughout the local economy. While base employment has been most affected to date, non-base employment is increasingly showing signs of softening. The overall unemployment rate for Houston has steadily inched up over the past year and is expected to continue to do so for the remainder of 2016. Mining and Logging employment is down over 22%, and Durable Goods Manufacturing is down 18.5% when compared to their previous peak. Now, rumblings can be heard in the Food Services and Medical sectors as well. The Purchasing Manager’s Index remains well below 50, signifying a contraction in the market, housing prices are expected to fall, with City of Houston residential permits showing an 11% decline year over year as of May. Included in that number is the precipitous drop-off in multifamily, a welcome change as the sector currently has nearly 45,000 units either under construction or vacant. The non-residential permits are down over 18% year over year. Domestic airline travel has decreased year over year and auto sales are down significantly compared to a year ago, providing a glimpse into the minds of consumers, grappling with the slower pace of the economy.
General purpose office space continues to be the weak spot around the city, with vacancy of roughly 15% and that number jumps to nearly 20%, nearly a 20 year high, when you include the sublease space available. It will likely take several years before the market can absorb it and resume expansion.
Bright spots in the Houston construction community, aside from public work, continue to be retail and light industrial space. Hotels, too, have the potential to be steady, if financing eases. The outside perception of Houston is that conditions are still too volatile to invest, though those coming to see the city for themselves, see the opportunities that exist.
