The following article originally appeared in the February 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.
Despite the recent dip in oil prices, 2015 continues to look like a good year for the commercial construction market in Houston. And while 2015 is not expected to be the same pace as 2014, a slowdown was already expected as the 2014 levels of construction in some markets were unsustainable. For instance, 2014 saw records broken in light industrial and retail markets, with near records in the office market. To continue at that pace would mean that Houston would run the risk of overbuilding, a scenario no contractor from the 80’s wants to see repeated.
So which markets are the winners and losers of 2015? In short, there are no real losers. All markets, while some will slow, will still post very respectable numbers. Our sister industries, residential and industrial, will continue to be strong, particularly industrial. Residential construction is still trying to catch up with demand, which could cause a drop off in 2016 once they reach that threshold. Multi-family, on the other hand, may have already peaked, as this market is already at risk of overbuilding.
In the commercial sector, schools and medical work will make a strong comeback this year. Having lagged for the past few years, there is a pent-up demand and we expect to see increased building this year. As previously mentioned, retail, light industrial and office are expected to slow from their phenomenal 2014; however this slowdown is really a return to a more “normal” market, not a nose dive.
We expect the Grand Parkway to be the buffer for any impact lower oil prices will have on our region. The sudden accessibility of 39 miles of highway between Highway 290 and Highway 59 North will create a flurry of development and in-fill, from residential to retail to medical and more. Also, the completion of the Panama Canal expansion is expected to positively impact our city, though how much is still unknown.
Supporting our theory, the City of Houston permits at year-end 2014 showed an over 45% increase in nonresidential construction permits from a year ago. Residential was nearly 30% higher than a year ago and the Architecture Billings Index continues to show the southern region (which includes Texas) as having the strongest growth in the nation.
The drop in oil has resulted in lower diesel fuel prices, thus reducing transportation and equipment fuel costs for contractors and suppliers. And the increased money in the consumer’s pocket is expected to be used towards goods and services, which will keep the retail and light industrial sectors humming.
Best case estimates, we will see oil prices recover by year end; worst case estimates are two years before oil prices begin to rise. However, Houston is in an advantageous position, thanks to the Grand Parkway and the Port of Houston, to weather this storm much better in 2015 than it would have been otherwise.
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