Discovering meaningful data can be powerful and provocative. Gaining access to The Perryman Group’s projections for the Greater Houston Partnership (GHP) and the traditional FMI “Construction Put in Place” report provided such an energizing experience. The blend of these insightful documents, which cover the exact same geographic area, unleashes fact-based optimism and stimulates many questions for all contactors and construction-related firms.
The Perryman report, done during summer 2016, projects GDP growth and population and employment growth, in five-year increments, thorough 2040. The projections are staggering! By 2040 GDP is forecast to grow from its current $500 billion to $1.123.4 trillion; population, from the current 6.7 million people to 9.6 million; and employment, from the current 3.2 million jobs to 4.7 million jobs.
The annual FMI report breaks the dollar amounts of construction into three categories: nonresidential buildings (commercial and industrial), nonresidential structures (roads, bridges, utilities) and residential buildings (single family and multifamily dwellings). The revelation occurs when you take the aggregate amount of construction put in place in the Greater Houston area, now about $25 billion to $26 billion a year and divide it by the current level of GDP, $500 billion to $520 billion. The result is that construction put in place is 5% of GDP, a number validated by both the FMI economic team and a report from the Boston Consulting Group. As a matter of fact, it is on the low side from a historical perspective. The amount of construction put in place normally runs 5-6% of GDP.
When you do the math for 2040, ($1.123.4 GDP x 5%), the overall construction market reaches the $55 billion to $56 billion level, an almost incomprehensible number. Even if the Perryman projections are off by 20%, the amount of growth will be enormous and enviable. And it will be available to those companies that begin right now to prepare to prosper by asking the big questions, often hard, but that lead to a strategy that separates the organization positively.
To get started, the senior leadership team, perhaps with outside assistance, might begin regular sessions to think about questions. What do we want 2040 to look like for our organization? What will the industry look like? Will there be the same traditional roles there are today? Or will technology totally disrupt, creating a new value chain? Which firms are our likely competitors then? What about our current strategic direction (markets, customers, delivery methods)? Will this focus and the choices required for this strategic direction still be relevant? What will be driving customer value then?
Once a point of view on the future is formed, then the envisioned future for the organization can begin to develop with an additional set of even tougher questions related to talent, leadership, ownership and many more topics, which will be discussed in coming articles. But with this highly credible data from The Perryman Group and the FMI research team, then the next 22 years, about the active cycle of a CEO and his senior team, can bring exceptional prosperity to those who act now.
Houston’s Monthly Metrics
As the year-end numbers come in, Houston’s economy continues to show that it is improving and accelerating.
CBRE’s fourth quarter report reveals that the office market had its first quarter of positive net absorption in 18 months. Though it is too early to call this a recovery, overall absorption was negative 2 million square feet in 2017, and both direct and sublease space are being absorbed, which is necessary for a recovery to begin. The vacancy rate sits at 17.3% while total availability (direct plus sublease space) hovers at 21.7%. CBRE anticipates the market will have flat absorption through the first half of the year, barring any jump in employment growth projections.
The fourth quarter light industrial report from CBRE shows a hot market becoming even more constricted as availability of space tightens. With vacancy now at 5.4%, the majority of new starts in the fourth quarter were spec buildings as this market tries to catch up with demand. There is currently over 8.4 million square feet under construction, with 3.3 million square feet breaking ground in the last quarter of 2017. In addition to demand related to Harvey, both the Port of Houston and petrochemical demand have remained strong. This market is expected to continue to be solid in 2018.
The retail market ended 2017 on a high note, with the strongest quarter of net absorption of 851,750 square feet, bringing the annual total to almost 2 million square feet, nearly double the 10-year average. Hurricane Harvey, while a blow to those local retailers affected by floodwater, has been a blessing for others as consumer and business spending has improved due to recovery expenditures. There is currently just over 1.5 million square feet under construction and only 5.9% vacancy across our region. With regional retail sales volumes and sales growth forecast to increase over the next five years, our retail market is in a good position for the year ahead.
The multifamily market was overbuilt in 2017, but, like retail and light industrial, has Hurricane Harvey to thank for a strong fourth quarter finish. As displaced residents took on short-term leases, the sector was able to absorb the second-highest number of units in a single quarter, behind 2005’s third quarter which followed Hurricane Katrina. The occupancy rate rose to 89.4%, and absorption exceeded deliveries for the first time since 2013. With 9,751 units currently under construction, we are cautiously optimistic that this market learned from its prior mistakes and will wait for those short-term, Harvey-related leases to expire before ramping up construction again.
Fortunate for all these markets is the projected employment growth by several economists along with the Purchasing Manager’s Index (PMI) staying in positive territory for 10 of the 12 months in 2017. The PMI is a great leading indicator of our city’s economy, and it currently sits at 54.5 (anything above 50 is expansion; anything below 50 is contraction) with the support of downstream energy and a more robust outlook from most of its respondents.