The Houston Picture for 2013

Editor’s note:  The following condensed version of Kiley Advisors 2013 Forecast was written by Pat Kiley and Candace Hernandez, co-founders of Kiley Advisors, LLC, and is published here with their permission.

Looking Back

• We totally recovered all jobs lost in the downturn and added another 95,000.
• We experienced net positive absorption in all major market segments: office, industrial, retail and multifamily.  Vacancy rates are now under 10% for all these segments.
• Houston returned as a preferred market for real estate investment.
• The new contract awards for non-residential construction in the 10 County Greater Houston Primary Metropolitan Statistical Area (MSA) rose to an estimated $3.9 billion, still far from the peak of 2008, but, none-the-less, a healthy increase.
• Best of all, the entire industry was feeling a sense of surge: Developers and Real Estate Professionals, Architects and Engineers, General and Specialty Contractors.  Smiles became more prevalent as activity levels increased.

Looking Ahead

The International Picture is better than a year ago:

• There is positive GDP growth in all regions, although there are individual countries that will continue to suffer; Western Europe, Greece and Spain being the most problematic areas.  China (8.6%) and India (6.5%) will lead the major economies.  Double digit growth will occur in Mongolia, Macau and Libya.  A strong international economy benefits Houston.

The National Picture is better too:

• The fiscal cliff has been averted; tax policy clarified some, but rancorous debates begin soon on the spending and debt ceiling crises.
• The overall economy will remain sluggish but growing.  US GDP is expected to average 2-2.5% in 2013; there should be another 2 million jobs created; unemployment will remain in the 7.5% range.
• Overall construction starts in the US are projected to increase by 6% according to publisher, McGraw Hill, and by 8% according to consulting firm, FMI. Both organizations expect an increase of 5% in non-residential building starts on a national basis.

Texas and Houston, the place to be:

• Both population and employment are growing throughout the state.
• The shale “boom” is projected to last many years. It is creating much cheaper domestic energy costs and is expected to generate a revival in American manufacturing over the coming 20 years. There are many shale operations in Texas, as well as throughout the United States. They all benefit Houston and Texas companies.
• The cost of living and lack of state income tax, combined with the sensible business regulatory environment, remains a beacon to companies for relocation or expansion.
• All Texas markets will experience an increase in construction activity in 2013.

What will drive Construction in Houston in 2013:

• Job and Population Growth; Houston should add another 76,000-85,000 jobs and 115,000 more people in 2013. The construction industry is expected to lead job growth with an additional 16,200 jobs.
• Oil and natural gas prices will remain favorable enough to maintain drilling at current levels; the Energy Information Agency (EIA) projects West Texas Intermediate to average $88.29 and Henry Hub (natural gas) to average $3.49 in 2013.
• Vacancy levels are low; rental rates are improving in all product types.
• Companies, in their war for talent, and in their search to lower overall occupancy costs, are demanding a different office building product. Some developers call it the “quick delivery/value building”: lower rise, wider footprint, raised flooring throughout. It allows much greater flexibility and lowers overall costs. Many current multi and single tenant buildings are obsolete by this measure, and the cost to convert them would not be recoverable.
• Financing is more available than a few years ago, but still restrictive in its requirements. 35% equity and 50% pre-leased are standard for commercial projects to attract affordable loans.
• The Port of Houston is expanding to accommodate the expansion of the Panama Canal, which will be complete in 2015. This will bring much larger ships into Houston with much larger containers.

Sector and Segment Highlights:

• Residential: There is projected to be 21-25,000 single family dwellings and another 10,000 apartment units built in 2013.
• Heavy Industrial: There is $10 billion of chemical plant expansion in the greater Houston Area over the next 3 years, and about triple that amount in the overall Gulf Coast Area
• Highway and Civil: The TxDOT (region) will have significantly more work with $1.39B in 6 counties, nearly 4x the dollar volume in 2012; the cities and counties in the Houston area will be flat to slightly down with the other types of civil work (streets, utilities, water and sewer).
• Commercial and Light Industrial: The office, light industrial, and retail markets will flourish. The university, religious, hospitality and medical markets should be flat or slightly up from 2012, and K-12 and other public building construction could drop slightly.
• Overall New Contract Awards in the 10 County Greater Houston Primary MSA should be at least $4 billion

Industry Issues Remain:

• Immigration reform is still a major priority; the prospects are much improved.
• Margins and fees remain very low. Companies loaded with cheap work could run into working capital problems as they try to serve the expanding market. Some bonding lines are being cut.
• There is already a shortage of skilled craft workers. The support for the Construction Career Collaborative (C³) needs to be broadened and accelerated.
• Talent management is a critical focus for all companies.

See also: Kiley Advisors 2012 Fall Briefing