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Blog/April 24, 2018

The Urgency to Prepare for Disruptive Change Builds

Monthly Metrics

There are exciting projections for the Greater Houston Area Economy. The most recent Perryman Group projections for 2040, revised slightly downward in 2017, still put the area GDP at $998.2 trillion, which will create a construction volume, using the conservative historical 5% number, of about $50 billion, double the current annual level. Currently, the Houston commercial construction market remains in a bit of a malaise. There is limited big work as office and medical remain slower. These conditions could last through most of next year, with more robust markets in 2020. So the question is, what are executive teams doing with fewer day-to-day imperatives.

Strategic, data-driven senior leaders are using these calmer market waters for thoughtful reflection about trends and facts, opportunities and challenges. They are not wasting this time bemoaning the lower volume, lower margins and millennial attitudes. Right now, they are asking themselves tough questions to frame a vision for their organizations both in the next three to five years and in 2040. They are setting in motion well-researched initiatives to capture a future where the prevailing value chain is on the cusp of being disrupted and rearranged, with new players and current parties in different roles. They are acting with an urgency; 2040 is only one generation of leadership away.

There are similar initiatives in most of these well-led companies. If they have not already executed their senior leader succession plan, they are intensely focused on this area, which often involves the CEO and two or three C-suite executives. Plus, there are impending exits at all other levels. Choosing replacements requires some vision of the strategic roles necessary to compete in this new reality. In addition to different technical competencies, these roles will require coping with an accelerated rate of change. This often forces difficult talent decisions; a millennial may need to be chosen over a Generation X member. Role requirement clarity, current competency assessments and tailored leadership development training are major imperatives in most of these companies.

Most are seeking an in-depth insight into the right strategy, “where to play and how to win.” They choose to rely on comprehensive, data-rich evaluations of their markets, customers, competitors, employee engagement, leadership and systems to evaluate whether they can profitably execute the requisite value proposition. In addition, these companies are monitoring technology to see how it may provide true value and competitive differentiation. They seek to understand, no matter their role, general or sub, prefabrication, modularization, 3-D printing, how they position their companies in this expanding reality, and its bearing on their risk profiles and partner selection. Which entity will be the primary leader of this building process is a relevant question.

These observations are not intended to alarm, but rather to stimulate thinking and generate excitement. Serious industry think tanks are asking questions: “What is the cost of redundancies?” Insurance, contingencies, retainage? EPC projects are the primary focus now. Experimental, disruptive delivery models are being created. Technology investors are salivating over industry productivity challenges. Innovators, like Elon Musk, are building their facilities nontraditionally. More radical changes appear imminent. The leaders of tomorrow are moving today with studied actions; they use “big data”; they seek input from peer groups, boards and consultants; and they act with increasing urgency.


Houston’s Monthly Metrics

As CBRE’s first-quarter numbers begin to roll in, we can see that Houston is continuing its gradual recovery toward historical averages. Houston posted nearly 95,000 new residents in 2017, the second-largest increase in the U.S., with one-third of those coming from net in-migration – meaning people still see opportunity in Houston and are moving here. While our employment numbers are still below our long-term average, the population growth is helping to drive growth and demand in our area.

The light industrial market’s strong demand persists. In addition to years of online retailer expansions driving growth, the healthier oil prices are also heating up demand from the downstream energy markets. With a 5.2% vacancy rate, and compressed even further in some submarkets, a sizable 8.3 million square feet is currently under construction, 2.1 million of which broke ground this quarter. As shown in the chart, our vacancy rate has remained tight as millions of square feet have been delivered over the last few years. If the first quarter is any indication, 2018 will be another strong year for the light industrial segment.

Despite bankruptcy announcements, the retail segment demand remains healthy, with grocery-anchored centers continuing to dominate. Kroger recently announced expected hiring in Houston, and the Fiesta grocery chain was recently acquired by Grupo Comercial Chedraui, a Mexican grocer looking to strengthen its influence with Mexican-American shoppers. Retail occupancy is a robust 94.4%, above its eight-year average, and over 3.3 million square feet, mostly preleased, is under construction as retailers struggle to find the right space. Retailers continue to find ways to draw consumers into their stores or to offer more online/delivery services for shoppers, which reinforces the light industrial market.

The office market remains the exception to the recovery across the city. With a vast amount of sublease space still available, tenants are vacating their Class B spaces for more favorable Class A terms. Additionally, the first wave of sublease contracts signed after oil’s downturn in 2014 are expiring, causing some additional move-outs. Furthermore, the oil industry continues to restructure, which has continued the trend of shedding space. As such, total available space rose again in the first quarter to 22.2%, making it the highest vacancy level since 1995. We are hearing reports that some office submarkets plagued by vacancies are planning renovations to compete with Class A, which should provide interiors companies with opportunities this year.

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