A new year is weeks away. It begins with basic optimism. The national economy is projected to remain strong into 2020, perhaps beyond. Houston’s population is growing because it is in a strong job creation period, again. Nothing drives construction more than these three variables: People need residences; companies need space; the city and country need infrastructure. These positive trends are forecasted to continue, perhaps accelerate. Projections for population, employment and GDP growth, over the next 20 years, imply the Greater Houston Area could move from its current level of $26.5 billion per year of total construction put in place to a level of between $45 billion and $50 billion by 2040, a staggering number. Even if these numbers, issued by a highly regarded economic organization, are off by 10 -15%, there will be growth opportunities for the construction firms that prepare.
However, “preparing” will take different strategies than for prior growth periods. The construction industry is changing. There is a surveyed and studied consensus that the industry will change more in the next five years than it has in the past 50! Many things are driving these changes. Perhaps the two primary ones are the skilled labor shortage and the march of job-site-related technologies, but there are other forces as well: the era of “big data”; the retirement of the boomers in senior leadership roles both in construction and client companies with their replacements being younger, technology natives; and talent acquisition and development programs that are creating truly differentiated cultures with teams who outperform by multiples. It is the embrace and effective integration of these real and accelerating trends that will define survivors and create the winners, moving forward. There are three highly relevant forces that require senior leadership focus.
The first force, already in its adolescent stage, is prefabrication. More and more things are being built off-site and installed on-site. Owners see the cost and schedule value of this approach. Some are specifying it, even leasing facilities, to allow multicraft application. Craftworker retention and labor productivity are enhanced in air-conditioned warehouses. Modular units for hospitals, hotels and apartments are increasingly being built this way. Companies are being formed that have no roots in traditional construction. Well-funded by technology investors and well-received by owners with multiple, similar projects. Katerra is a prime example. It has over a billion dollars in revenues and even larger market capitalization. It is only three years old! Full Stack Modular is another. These companies have tapped into the power of robotics and 3D printing for some components. There is growing use of the interesting new term “constructing,” borrowed for the manned space station builders. Surely there are challenges, warranties, inspections and the like, but they are being solved.
The second force is the growing percentage of construction company workforces that are made up of millennial workers. As the baby-boom generation (78 million strong) retires, there are not enough Generation X workers (49 million) to replace them, so Generation Y, the millennials (75 million), are taking up the slack. Demographers state that millennials will make up 50% of the workforce by 2020, and 75% by 2025. Enlightened companies are welcoming their differences and their significant capabilities, especially with technologies. These organizations often partner a tech-savvy millennial with a seasoned field builder, creating a powerful productive team. These same organizations are finding reasonable ways to accommodate this cohort’s desire for more work-life balance, developing specific deliverables with deadlines for key roles, monitoring performance over presence. How companies integrate the millennials will be a key, positive, competitive differentiator. Remember, there will be millennials in key roles on the client side too.
The final force is an amalgam of torrents that, together, are reforming the senior executive teams, now frequently with three generations as members. They are leveraging the myriad technology-enabled devices to collect more data than ever before. They are increasingly data-driven, making well-researched and analyzed decisions and challenging traditional approaches to hiring decisions, strategy development and workforce management. They want real data on the talent they hire and the markets they serve. Résumés are becoming passé; internet information searches, more prevalent. They know where to play and how to win, because they have gathered data on their truly assessable markets, customer behavior and competition. These winning C-suite teams develop and live a talent-magnetizing, empowering culture. They are quick in eliminating culture killers, but invest heavily in tailored coaching, mentoring and leadership development programs for their high potentials. They manage by metrics and seek comparatives and road maps to the future through peer groups, boards and strategic hires to guide them to their growth milestones. This exciting future will belong to those leadership teams willing to make the investment in talent, training, technology and research. They will navigate these Level 5 rapids of change that are just beginning to rock our traditional boat.
The picture in Houston remains the same. Residential construction, particularly single-family dwellings, is having a banner year while nonresidential building is basically stagnant. The chart below reflects The city of Houston permits through September 2018, compared to the same period a year earlier.
Third Quarter 2018
CITY OF HOUSTON PERMITS – August 2018 YTD vs. August 2017 YTD
|Sept 2018 YTD||Sept 2017 YTD||% Change|
This second chart is the new contract awards for the nine-county Houston MSA, with the same comparison. This broader picture is better for the nonresidential sector, though still negative.
Greater Houston MSA New Contract Awards
CITY OF HOUSTON PERMITS – September 2018 YTD vs. August 2017 YTD
|Sept 2018 YTD||Sept 2017 YTD||% Change|
There is a positive change in the sublease general purpose office space market as of the end of the third quarter, according to NAI Partners. Over-vacancy decreased to 21.5% versus 22.1% a year ago. There was positive absorption of 789,303 square feet, the most since the oil downturn in the second half of 2014. Sublease space represented 180, 622 of the positive absorption.
Thera are other signals that the economy is improving for Houston. The rig count, new car and truck sales, hotel occupancy and revenue per available room are all improved on a year-over-year comparison. So are retail sales, Port of Houston shipments and air passengers. Oil prices too, well above $60 per barrel for WTI for several months now, allow exploration companies to make money in all fields. And we have had significant job growth in the last 12 months, over 100,000 new jobs. Absent any dramatic slowdown in the national economy, not expected until 2020, things should be positive for Houston construction firms; there should be growth, incremental not explosive.
Challenges remain, however. The skilled labor shortage is real for most firms, and wage pressures are building. Integrating millennials, a growing percentage of the overall workforce, has become a focus
of senior management. Some companies are far ahead and are reaping tangible, differentiating rewards, especially in using technology solutions in the building process. Tariffs make pricing work extremely difficult; escalation clause proposals are still resisted. Succession planning is occurring in many firms. It is causing senior executive teams to strengthen their cultures and reinvent their approach to executive development.