Real Estate Development

The State of Houston Construction

The city of Houston, Texas is known for many things. It’s oil, aerospace and healthcare industries are some of its more popular claims to fame, with each comprising a large amount of the city’s economy. That and the fact that it recently hosted one of the most exhilarating Super Bowls of all time would make it appear as if Bayou City is doing just fine. And while the city is certainly still prosperous, one of its staples seems to be in a bit of trouble: construction.

In 2015, Texas was hit hard by an oil crash that hurt the state badly— barrels went from $100 each in price to just under $35. And while that may sound crippling to a state that deals highly in oil, particularly Houston, the construction industry was able to pick up the oil industry’s slack. Since 2011, construction has seen a serious boom in Houston. According to the Greater Houston Partnership’s 2017 Houston Employment Forecast, “More than $90 billion in commercial, industrial and residential contracts have been awarded since January ’11.”

Unfortunately, as the saying goes, all good things must come to an end. And in 2016, construction saw a major decline in growth and production. The Greater Houston Partnership also released a report with statistics from Dodge Data and Analytics showing Houston’s construction starts through 2016, totaling $766.7 million. That’s almost a 40 percent drop in starts from the whopping $1.269 billion from November of 2015. This is due to the winding down of chemical and refinery plant expansions.

And projections for the future are not exactly promising either. Last year, over 6,500 jobs were cut, and it will only get worse, with a report from the Houston Public Media indicating that an estimated 16,000 additional jobs will be lost in 2017.

So what exactly caused the downturn?

It has to do with the excess of construction. According to the same report from The Greater Houston Partnership, there was a serious excess in the office market, with over 33 million square feet of direct space available as of Q3 of 2016, with an additional 12 million square feet of sublease. And what’s worse, the effective vacancy rate—which is usually in the low teens for balanced markets—exceeds 20 percent. The GHP expects serious stagnation for years due to the lack of job growth in the area.

The multifamily market is even worse, having had 37,000 units added to local inventory by developers since December 2014. And with another 15,000 under construction, that brings the total to 52,000 units in a market that has seen job growth slow down. Houston’s rental housing market has been hit exceptionally hard. This article from BizJournals showcases that, according to studies, Houston ranked 1st nationally as the worst apartment market to invest in. With the city’s apartment rents having contracted for years now, and the worst rent performance since the Great Recession, it is fitting that Houston’s apartment market has earned this title, however unfortunate.

Both the industrial and heavy industrial markets are down as well, with their respective booms having fizzled out, or on the brink of doing so. The only market that seems to have held up is that of housing, particularly Houston’s single-family housing market. In fact, statistics gathered by the Houston Association of Realtors (HAR) found that both houses priced between $500,000 to $750,000 and luxury houses are enjoying tremendous sales. HAR’s latest report shows that 4,080 single-family houses were sold in January of this year compared to January 2016’s 4,011. February’s stats look even better, with sales totaling 4,933 compared to last year’s 4,743—a 4 percent increase; and that’s even after the average single-family house price rose 6.7 percent to $280,175.

HAR’s Chair, Cindy Hamman with Texas Heritage Properties, noted her happiness with the single-family housing market’s current state, saying, “It is especially encouraging to see vitality in the high end of the market, which faltered in response to falling oil prices, but has now registered positive sales for three straight months.”

While there are very small silver linings—nine hospitals under construction, Houston voters having approved $638 million in local construction bonds and the thriving single-family housing market—Houston’s construction industry is hurting. Without the appropriate amount of institutional, remodeling or medical construction, 2017 looks to be a dire year for the industry.

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