The following article originally appeared in the June 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.
When will the positive trends in Houston end?
That is the question being asked by Houston economists as we continue to see positive growth across our area. Home builders are experiencing the best margins they have ever seen (perhaps commercial builders should take a page from their book) as the red hot residential market keeps absorbing homes as fast as they can be built. Home inventories continue to be very low, and the trend of rising home prices is expected to continue for the next 18 months as builders try to catch up to the demand.
The commercial construction market is also on fire. According to CBRE, 17.5 million square feet (msf) of office space currently under construction, with nearly two-thirds of that already pre-leased or owner occupied. Some Class A spaces have rates that rival new construction! Industrial has over 7 msf under construction with 70 percent of those buildings being larger than 100,000 sf and designed for distribution/fulfillment needs. Retail is strengthening with 2.5 msf under construction (up from 1.6 msf in late 2013) and multi-family, with occupancy over 91 percent and rates that have risen 7 percent Year-Over-Year of 1st quarter 2014, and has 22k units under construction.
It is no surprise that Dr. Bill Gilmer, Director of the Institute for Regional Forecasting at the University of Houston, announced a 21,000 revision upward in his job growth projections for 2014, now placing the expected job growth at 86,000 by year end. Dr. Gilmer also noted that Houston has added 590k jobs from December 2003 to December 2013, which is basically the equivalent of adding Oklahoma City to Houston in the past 10 years. Going forward, if you adhere to the forecasts going forward, Houston (MSA) is expected to grow from 3.8 million jobs to 6.2 million by 2040, which is like adding Pittsburgh to our area.
The American Institute of Architects Billings Index, a leading indicator for construction, remained below 50 nationally (anything below 50 signals a contraction of the market while anything above 50 signifies expansion). However, the Southern region, which includes Texas, leads the nation with 57.5, signaling the continued expansion seen in our area.
So when will these trends end? In talking to industry experts, our good times are expected to continue, for the next few years, barring any negative impact to oil and gas, if not longer. Housing is not expected to keep up the unsustainable conditions and hopes to equalize by the end of next year while avoiding overbuilding. On the commercial side, the signs of overbuilding have yet to be seen.
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